Ethereum Outperforms Bitcoin as Merger Approaches

Ethereum has recently outperformed Bitcoin. The price ratio between them is at its highest level since December. Ethereum has been outperforming Bitcoin for many weeks now.

ETH/BTC ratio at its highest level

Bitcoin, the queen of cryptocurrencies, lost value on Wednesday morning. At 10:00 a.m., one BTC was worth less than $19,000. This further reduced the already low cost of BTC and lowered the $20,000 support level again. The price of Ethereum dropped $200 in 24 hours, dropping to $1,500 at 10:00 am. Investors have been wary of this scenario for some time now.

Bitcoin and Ethereum are the largest cryptocurrencies by market capitalization. Over time, their prices gradually declined, but this week they hit a new low. At the same time, there has been a significant divergence between the two cryptocurrencies, with Ethereum holding or at least falling far less than Bitcoin.

This discrepancy has become an investment topic. Indeed, this ratio peaked in December 2021 at 0.083 BTC/Ether according to Trading View. But this ratio has risen to 0.08 bitcoins to 1 Ether this week. As the prices of the two coins approach parity, Ethereum becomes stronger against Bitcoin. This proves that Ethereum is at a much better pace than Bitcoin.

The founders of Ethereum launched a blockchain upgrade called Bellatrix on Tuesday. This update is intended to facilitate the migration of Ethereum to a new operating system. This migration, dubbed The Merge, is also an investment topic. The new system is designed to use less power and provide more network bandwidth.

Significant risks in the coming days

Investors have the opportunity to make continuous arbitrage transactions due to the possibility of a “hard fork” after the migration is completed. A hard fork is when older versions of a protocol become available at the same time as a new version of the blockchain. This allows for even more complex forms of arbitrage between old and new versions of the blockchain.

It is possible that the bubble will form before an important event, for example, during the last two weeks of August. This could have a negative impact, especially given that the dollar is currently strengthening against any currency. In this case, cryptocurrencies are especially sensitive to price corrections.

In addition, for several months, the price of the cryptocurrency queen has been correlated with traditional markets, in particular the Nasdaq, the US stock market index dedicated to technology companies such as Google or Meta (formerly Facebook). In fact, technology stocks and cryptocurrencies are among the most sensitive assets for central bank policy, especially the US central bank (Fed).

Overall, in 2020 and 2021, central banks injected significant liquidity into the markets to support the economy amid the pandemic. This led to growth in the crypto and Nasdaq markets, as well as other risky assets.

But 2022 is different and the economic environment has changed. In July, the central bank raised rates by 75 basis points to fight inflation. Investments in the most risky assets declined against the backdrop of the tightening of the monetary policy of the Federal Reserve System. There is less money circulating in the financial markets, which is bad for the Nasdaq and cryptocurrencies.

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