Bitcoin
Crypto: Is Ethereum Recovering?
7:41 am ▪ 7 min read ▪ by Laetitia B.
Each bull run in the past has gone through different phases spurred by a rotation of capital. In general, bitcoin tends to be the leader of the bull run and the favorite in the early stages. Following Ethereum’s weaker performance compared to bitcoin, we will analyze the factors favorable to a rotation of capital towards Ethereum.
The Principle of Asset Rotation
In traditional finance, there are several types of asset rotation. This may involve a sector rotation (technology, industrial, financial, healthcare…) or a rotation of asset types (bonds, shares, commodities, forex…). Capital moves according to the context and economy. Rotation can come from taking profits after significant performance to move to another less valued sector or type of asset, following the economic context. This is often the case between cyclical and defensive sectors, for example.
Let’s also take an example over a very long-term horizon, that is, over several decades, we can see this cyclical rotation between commodities and the S&P500 index in the chart below:
This type of chart highlights that in the coming years the performance of commodities should be more advantageous than that of the S&P500.
The different phases of encryption
When we look at the cryptocurrency market, there are several phases in terms of rotation, whether between bitcoin, Ethereum, large caps and altcoins. And usually this comes from a progressive rotation.
Phase 1: Bitcoin is the leader, the store of value in the crypto market. It is the oldest and most democratized in the cryptocurrency sphere. It is in bitcoin that the first capital flows arrive at the beginning of a bull market. Since 2024, bitcoin has been available in the form of a spot ETF, which is an advantage 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 starts to approach Bitcoin’s performance that phase 2 is near. We can possibly see this rotation with the example below that highlights the ETC/BTC relationship:
Phase 2: Ethereum, which is the number 2 cryptocurrency in the cryptosphere, surpasses 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 surpass bitcoin.
Phase 4: The altcoin season begins when there is a large rotation 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 chart that highlights this:
To better illustrate this in general terms, here is the chronology below:
The economic environment and different phases of cryptocurrency markets
The evolution of cryptocurrency is quite cyclical, just like the economy. In other words, we find cycles of growth and cycles of decline. Like any higher risk asset class, it evolves according to a favorable and accommodating context. A favorable context can be defined in several ways. For example, when growth recovers, we see an acceleration in growth, which is a favorable environment for cryptocurrencies. Consumer sentiment is positive and this encourages capital inflows. On the other hand, when we face an economic downturn, it is often represented by a bear market in cryptocurrencies. Each cycle usually 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, that represents 4 years, as well as the halving process:
Another positive element for performance is also liquidity. When liquidity is abundant, cryptocurrencies thrive. For example, injections of liquidity during COVID led to more capital flowing into the markets. Financial conditions were highly relaxed. Therefore, more money in circulation to buy the same good implies an increase in price.
Regarding liquidity in the current situation, we can observe the graph below highlighting the evolution of liquidity and bitcoin:
Staying in the same context, that is, liquidity, we can also observe favorable times (summer and autumn being the best):
Ethereum’s delay explained by several factors
As mentioned earlier, Ethereum often lags behind Bitcoin during the first few months of a bull run. This is mainly because 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 more inflows since the approval of ETFs is official. Such products imply greater potential to attract new investors, whether for tax reasons (introduction of the product into tax-advantaged accounts) or simply because an ETF is an easily accessible product (no need to open multiple brokerage accounts) and is cheap. This is why the approval would be a good catalyst to catch up with bitcoin. Therefore, there are several arguments that line up in favor of Ethereum’s superior performance, such as a favorable context, new products available, and the timing of the phase (as indicated above).
Bitcoin or Ethereum, which one to choose?
Bitcoin and Ethereum have different strengths that can help diversify a crypto 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 certain peculiarities, such as the fact that it can be used to host other cryptocurrencies and decentralized applications.
The more adoption and democratization continue with the same dynamics, the more we will face new products, as approvals will become easier and easier. For example, we could have an ETF that combines 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, the approval of the ETF. This will improve liquidity in the coming months.
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Leticia B.
After working for 7 years in a Canadian bank and 5 years in a portfolio management team as an analyst, I gave up my duties to become a financial advisor. Mon, but here, it is to democratize information on financial markets among the public. Co-contribute on different aspects, notably macro analysis, technical analysis, inter-market analysis…
DISCLAIMER
The views, thoughts and opinions expressed in this article belong solely to the author and should not be considered investment advice. Do your own research before making any investment decisions.