Why the Ethereum/Bitcoin ratio will continue to fall

Much has been said about Ethereum reversing Bitcoin in the past, especially during the bull cycle of 2017 when the ETH/BTC ratio peaked at 0.157.

But, fast forward to now, spurred on by the ongoing banking crisis narrative, Glassnode data was analyzed by CryptoSlate hinting at a period of Ethereum underperformance ahead – which appreciates the idea of ​​a “flipping”.

Bitcoin – Ethereum realized cap dominance

Market cap is the most popular way to value and compare cryptocurrencies. It is calculated by multiplying the current price by the circulating supply.

A variant of the market value method is realized cap, which replaces the current price in the calculation above with the price when the coins last moved. Proponents argue that this provides a more accurate valuation due to minimizing the effects of lost and unrecoverable coins.

The chart below documents the Bitcoin and Ethereum market and realized caps since 2016. It shows a tightening between BTC and ETH in June 2017, especially when looking at the realized cap lines.

Around April 2019, the two began to diverge. But by May 2021, a further narrowing of the two bands occurred. However, Ethereum’s realized cap has started to fall in recent weeks, with Bitcoin’s holdings relatively stable.

The chart also plots BTC/ETH dominance, calculated by taking the BTC market cap and dividing by [(BTC market cap + ETH market cap) – 0.765]. The 0.765 figure visualizes the oscillator around a long-term mean value. It shows that the market is starting to leave a two-year period of ETH dominance.

Based on the current situation, markets are preparing for higher interest rates and banks continue to tighten credit availability – a scenario that is generally favorable for risky assets.

Ethereum is considered a riskier, higher beta than Bitcoin, suggesting it will underperform the leading cryptocurrency entering a risk-off environment.

Ethereum basics

Analysis of Ethereum’s fundamentals also suggests underperformance going forward.

A general indicator of ecosystem health is a high/rising spot-to-futures ratio – this indicates an ecosystem where holders dominate traders, whose intention is profit rather than belief in the ecosystem.

Data from the block on the ETH Spot to Futures volume shows a macro downtrend since April 2020. The downtrend accelerated around May 2022 (Terra-LUNA implosion) and has since fallen to an all-time low.

The percentage change in total ETH addresses has declined over the past five years, falling below BTC last month.

Likewise, the percentage change in total LTC addresses began to pull away from ETH (and BTC) around June 2021, and remained consistently higher since then, especially heading into the market peak around November 2021.

On-chain data shows that stablecoin and NFT transactions account for the most significant gas usage on ETH, with the former increasing around December 2022. The latter has remained consistent, relatively flat since April 2021.

In June 2022, stablecoin and NFT transactions accounted for almost half of ETH’s gas usage. Now the percentage is about 35%, indicating a general decline in these applications on the ETH chain.

This can be explained by the growing popularity of Ordinals on BTC, which has somewhat reduced ETH NFT demand. Likewise, stablecoins on exchanges have fallen to a 17-month low – suggesting a general decline in their importance to crypto, likely due to ongoing narratives surrounding their security/redeemability.

The Merge narrative led to bullish price drivers in the transition to Proof-of-Stake and deflationary tokenomics. However, more than six months later, ETH continues to lose ground against Bitcoin. There may be several reasons behind this.

Since the Tornado Cash sanctions, Ethereum’s reputation as an uncensorable, decentralized chain has taken a significant hit. More than half of the blocks are still compliant with the Office of Foreign Asset Control (OFAC), which means that more than half of the network will exclude transactions on instructions from the US government.

Although the developers were transparent in saying that the merger would not directly lower fees, there remains an ongoing, unresolved issue of costly transactions. The chart below shows transaction fees recently shot up to about 5k ETH.

The ETH/BTC ratio is currently at 0.0635, less than half of its 2017 peak. Since the banking crisis, there has been a significant drop in the ratio, suggesting that the market overwhelmingly favors Bitcoin in these uncertain times.