According to two market indicators, Ethereum appears to be gaining in value vs. Bitcoin on a relative basis.
Despite a recent pullback in the crypto market, both Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) continue to be two of the best-performing cryptos. Bitcoin is up about 80% for the year, while Ethereum is up about 60%.On the surface, it would appear that Bitcoin is clearly the superior investment in 2023.
However, two market indicators paint a different picture of what's happening in the crypto market right now. Here's a closer look at how Ethereum stacks up with Bitcoin on a relative basis.
Bitcoin's correlation with Ethereum
Correlations are incredibly important in the crypto markets. For example, any time the correlation of Bitcoin with gold tightens, it usually signals that investors are about to pile into Bitcoin as a safe-haven investment. Investors also use the correlation of Bitcoin with broad market indexes such as the S&P 500 or the Nasdaq 100 to gauge how the market currently views crypto as a risky asset. The tighter the correlation between Bitcoin and the Nasdaq, the thinking goes, the more that investors are viewing Bitcoin as just a slightly riskier tech stock.
Image source: Getty Images.
But there's another correlation that many investors are not talking about, and that's the correlation between Bitcoin and Ethereum. The conventional wisdom is that the correlation between the two is very close to 1.0, so it's not really worth tracking. However, Coinbase Global (NASDAQ: COIN) made waves earlier this month when it published a report showing how the correlation between Bitcoin and Ethereum appears to be declining, from a level of 0.95 in mid-March to a level of 0.82 in mid-April.That might not seem like a big deal, but it is for institutional investors. It directly impacts risk management and sophisticated hedging techniques.
There are a number of different factors that might be responsible for this shift, including Ethereum's recent tech upgrade in March. If this trend persists, it could signal that Ethereum is finally uncoupling from Bitcoin and going its own way. That would be a net positive for Ethereum because it would fundamentally challenge the simplistic "Bitcoin is gold, Ethereum is silver" investment narrative.
The Ethereum/Bitcoin currency pair
Since both Bitcoin and Ethereum are digital currencies, it makes sense to evaluate them from the perspective of a foreign exchange trader. One way of doing this is by tracking the performance of the Ethereum/Bitcoin currency pair over time. By doing so, you can immediately see when Ethereum is "strengthening" against Bitcoin and when it is "weakening" against Bitcoin. In much the same way, a foreign exchange trader could see when the U.S. dollar is strengthening or weakening against the Euro (or some other currency).
Data by Trading View
As can be seen from the chart above, the current value of the Ethereum/Bitcoin currency pair is approximately 0.066. This is derived from dividing the current price of Ethereum ($1,915) by the current price of Bitcoin ($28,964). The value of the Ethereum/Bitcoin currency pair has traded, by and large, in a relatively narrow range of 0.06 to 0.08 since mid-2021. From a historical perspective, this value is actually quite high. In the period from 2019 to 2021, for example, the value typically ranged from 0.02 to 0.03. The big breakout came during the last crypto bull market rally when the number of possible use cases for Ethereum exploded. On the graph, it's possible to see a huge spike right around March 2021.
Putting all this together, it's possible to create an investment thesis around Ethereum and Bitcoin. Ever since 2021, Ethereum seems to be gaining in value on a relative basis vs. Bitcoin. Another way to think about this is that as Ethereum continues to introduce new technological upgrades and expand its ecosystem, it is "strengthening" against Bitcoin and becoming a better investment. If you think about the Ethereum blockchain ecosystem as an economy, then this becomes intuitively clear. In the same way, one would expect the U.S. dollar to strengthen if the U.S. economy strengthens.
Does the data favor Ethereum?
Overall, a case can be made that Ethereum is not just a better investment than Bitcoin right now, but that it's also becoming a better investment over time. Ethereum clearly has a more diversified blockchain ecosystem than Bitcoin and offers a whole range of products and offerings -- such as NFTs, blockchain gaming, metaverse worlds, and decentralized finance (DeFi) -- that Bitcoin simply can't match. Bitcoin is, first and foremost, a method of payment.
Thus, if you're a Bitcoin maximalist, you might want to take a closer look at the changing relationship between Bitcoin and Ethereum. Right now, it looks like Ethereum after The Merge is stronger, better, and more diversified than it has ever been, and investors are starting to recognize this. At some point, say some crypto investors, Ethereum could eventually "flip" Bitcoin and become the most valuable cryptocurrency in the world.
Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, and Ethereum. The Motley Fool has a disclosure policy.
