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Analysts' Insights

Analysts' Insights

The Bitcoin / Ethereum Ratio is Breaking Out - Why?

1) Readers will recognise our stance in advocating Bitcoin as a core-long position for this year, as we expected US inflation to decline sharply, sparking the animal spirits of a deflationary boom. Tactically, we recommended Bitcoin shorts (at $29,500) and on other occasions.

2) But we also warned in August that the strength of the US dollar could pose a short-term obstacle, and a few days ago, we warned that higher bond yields, combined with a rally in oil prices, could keep Fed Chair Powell on the hawkish side.

3) Over the past few months, we advised shorts in Bitcoin Cash, Axie Infinity, ApeCoin, and Ethereum, among others. For us, this is still a trading market where positive catalysts such as potential Bitcoin ETF launches and macro tailwinds favouring Bitcoin as the primary inflation hedge, coexist.

4) In contrast, the negative catalysts have been more prominent in the altcoin space, with Ethereum’s notably (and shockingly) low revenues (as we pointed out on several occasions), a lack of buzz around EIP-4844, and concerns related to unlock overhang, among others.

5) Given the strength of the US (and weakening on the CNY), which could signal an impending (economic) crisis (as discussed in our previous report), and considering the combination of low volatility prices and high on-chain ‘risk-free’ yields, we recommend the use of Bitcoin call options as a strategy to mitigate risk instead of exposing significant capital.

6) Nevertheless, if the SEC greenlights a Bitcoin ETF, which we assess as having a 70% probability for approval within the next six months, Bitcoin could witness an instant +20% surge in value. Therefore, it remains crucial to maintain upside exposure in anticipation of such an event.

7) The key question revolves around risk management, and how to best manage your risk. This can be achieved either through options, allocating remaining exposure to treasury-linked tokens with high-interest rates, or combining Bitcoin long positions with tactical shorts in altcoins. Despite Ether's higher beta, the Bitcoin / Ethereum ratio is reaching a new one-year high.

8) Bitcoin’s dominance has also risen to +49% of the entire crypto market cap. While there is some talk about Ether ETF applications with the SEC, Bitcoin would likely capture the dominant share of inflows.

9) As we highlighted just two days ago, October has historically been a strong month for Bitcoin, and Q4 represents the most seasonally favourable time to be in crypto. However, it’s essential to acknowledge and manage significant risks.

10) Therefore, the trade is still long Bitcoin against (almost) everything else. You should carefully manage your risk.

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