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Cryptocurrencies: Is Ethereum catching up?
7h41 ▪ 7 min read ▪ by Laetitia B.
Every bull run in the past has gone through several phases spurred by a rotation of capital. In general, Bitcoin is often the leader of the bull run and the favorite in the early stages. After the weaker performance of Ethereum compared to bitcoin, we will examine the factors favoring a capital rotation towards Ethereum.
The principle of asset rotation
In traditional finance there are different types of asset rotation. This can involve a sector rotation (technology, industrial, financial, healthcare…) or a rotation of asset types (bonds, shares, raw materials, forex…). Capital moves depending on the context and the economy. Rotation can occur from taking profit after a significant performance to moving into another sector or a less valued type of business following the economic environment. This is often the case, for example, in cyclical and defensive sectors.
Let’s also take an example on a very long-term horizon, i.e. over several decades, we can see this cyclical rotation between raw materials and the S&P500 index in the following graph:
This type of graph highlights that in the coming years the performance of raw materials should be more advantageous than the S&P500 index.
The different phases of cryptocurrencies
When we look at the cryptocurrency market, there are different phases in terms of rotation, both between bitcoin, Ethereum, large cap and altcoins. And generally this comes from a progressive rotation.
Phase 1: Bitcoin is the leader, the store of value in the cryptocurrency market. It is the oldest and most democratized in the cryptocurrency sphere. It is on Bitcoin that the first capital inflows arrive at the beginning of a bull market. Since 2024, bitcoin has been available in the form of spot ETFs, which is a boon to stimulate demand. And at the same time, when demand is stimulated, capital inflows increase. During phase 1, Bitcoin tends to outperform Ethereum. And it is only when Ethereum begins to approach the performance of bitcoin that phase 2 will be close. We can possibly see this rotation with the example below which highlights the ETC/BTC ratio:
Phase 2: Ethereum, which is the number 2 cryptocurrency in the crypto sphere, overtakes bitcoin. This can be seen in the chart below with the 2021 bull run.
Phase 3: it is the turn of large capitalizations (Doge, LTC, XRP…) to outperform bitcoin.
Phase 4: The altcoin season begins when there is a large turnover of capital. That is, the money invested in bitcoin at the beginning of the bull run moves to other cryptocurrencies, small and mid-caps or even memes. During altcoin season, we see a reduction in bitcoin dominance. Here is a graph that highlights this:
To better illustrate this in general terms, here is the timeline below:
The economic environment and the different phases in the cryptocurrency markets
The evolution of cryptocurrency is quite cyclical, just like the economy. That is to say, we find cycles of growth and cycles of decline. Like any riskier asset class, it evolves based on a favorable and accommodating environment. A favorable context can be defined in several ways. For example, when growth picks up, we have an acceleration of growth, which is a favorable environment for cryptocurrencies. Consumer sentiment is positive and this encourages capital inflows. Conversely, when we are faced with an economic slowdown, this is often represented by a bear market in cryptocurrencies. Each cycle often lasts an average of one and a half to two years, just like economic cycles. Therefore, if we add a bull market and a bear market, they represent 4 years, just like the halving process:
Another positive element for performance is also liquidity. When liquidity is abundant, cryptocurrencies thrive. For example, injections of liquid assets during COVID has led to greater circulation of capital in the markets. Financial conditions were very relaxed. Therefore, more money in circulation to buy the same good implies an increase in prices.
Regarding liquidity in the current situation, we can see the graph below which highlights the evolution of liquidity and bitcoin:
Remaining in the same context, i.e. that of liquidity, favorable seasons can also be observed (summer and autumn are the best):
Ethereum’s delay explained by several factors
As mentioned above, Ethereum often lags behind bitcoin during the early months of a bull run. This is mainly due to the fact that the capital first flows into bitcoin, the store of value. As for Ethereum, it is no longer the only one well positioned as it is closely followed by Solana. This also implies competition. That said, like Bitcoin, Ethereum should benefit from increased inflows from 2019 approval of ETFs is official. Such products imply greater potential to attract new investors, either for tax reasons (introducing the product into tax-advantaged accounts) or simply because an ETF is an easily accessible product (it is not necessary to open multiple brokerage accounts) and is inexpensive. This is why approval would be a good catalyst for Bitcoin to catch up. Therefore, there are several arguments that support Ethereum’s outperformance, such as a favorable environment, new products available, and the phase timeline (as noted above).
Bitcoin or Ethereum, which one to choose?
Bitcoin and Ethereum have different strengths that can help diversify a cryptocurrency portfolio. One of the peculiarities of bitcoin is that it has a limited supply of 21 million, and its production is halved every 4 years. This can be seen as a safe haven, especially in countries suffering from hyperinflation. Ethereum also has some peculiarities, such as the fact that it can be used to host other cryptocurrencies and decentralized applications.
The more adoption and democratization continues with the same dynamic, the more we will be faced with new products as approvals will become easier and easier. For example, we could have an ETF that brings together bitcoin and Ethereum to simplify the choice. This opens up many possibilities in terms of capital.
Conclusion
We can conclude that the capital rotation system is cyclical and that Ethereum has several reasons to take the lead and outperform bitcoin for the rest of the cycle. One of the main catalysts for this would be, like bitcoin, ETF approval. This will improve liquidity in the coming months.
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Laetitia B.
After working for 7 years in a Canadian bank and 5 years in a management team in Portfeuille as an analyst, I left my duties to be able to dedicate myself fully to the financial markets. But here, it is democratizing the information of the financial markets ahead of the Cointribune audience on different aspects, noting the macro analysis, the technical analysis, the intermarché analysis…
DISCLAIMER
The views, thoughts and opinions expressed in this article are solely those of the author and should not be relied upon as investment advice. Do your research before making any investment decisions.