On-Chain Analysis of Bitcoin (BTC) and Ether (ETH) – Uncertainty Favors the Queen of Cryptocurrencies

Bitcoin crosses $31,000, Ether below $2,000

Bitcoin (BTC) price crosses above the levels of 30,000 dollars, offering a breath of fresh air to investors plagued by uncertainty. The price of ether (ETH) close to $2,000butting under its EMA21.

Figure 1: Daily price of Bitcoin (BTC)

Given the uncertain macroeconomic environment and the ongoing bear market within the cryptocurrency industry, investors seem to limit their exposure to risk.

ETHUSD 010622

Figure 2: Daily price of Ether (ETH)

This approach results in a capital rotation from ETH to BTCthe traces of which are visible on both chains.

This week, we will study the close relationship that Ether has had with Bitcoin since its arrival on the market through various metrics relating to their valuations and speculations in the derivatives market.

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Capital is migrating from Ether (ETH) to Bitcoin (BTC)

We begin our study by highlighting the growing correlation between the two market leading assets.

The graph below represents the history of the correlation between BTC and ETH over the past six years and reads as follows:

  • A value close to 1 means that Ether is positively correlated to Bitcoin and tends to follow the trajectory taken by the latter;
  • A value close to 0 indicates that the two assets have zero correlation: they each act independently;
  • A value close to -1 means that Ether is negatively correlated to Bitcoin and follows an opposite trajectory.

Correlation BTC ETH 010622

Figure 3: Correlation between BTC and ETH prices

After a quick read, it appears that despite erratic beginnings, Ether tends to positively correlate with Bitcoin as it matures. With a current correlation of 0.97, the price of ETH follows the price of BTC diligently, although its amplitudes are greater, both up and down.

In terms of profitability, the youth of the Ether market, which appeared at the end of 2015, is reflected in the number of Ethereum addresses in profit, presented below.

Reaching a low point of 3.2% during the capitulation of the first quarter of 2019, the Ethereum network then covered a vast majority of addresses in loss (96.8%), compared to 54% for the Bitcoin network.

Ethereum Address Return Volatility Seems To Be Easing Over Time, gradually embracing the same dynamic as the Bitcoin network. While a potential low point was reached two weeks ago, a majority of Ethereum (61.33%) and Bitcoin (51.04%) addresses are still in profit.

BTC/ETH Profitability Addresses 010622

Figure 4: Profitability of Bitcoin and Ethereum Addresses

In terms of the monthly returns of the two assets, a lag of a few weeks is observable for ETH, although the charts tend to align with the increasing correlation mentioned above.

Note, however, that Ether outperforms Bitcoin on both the upside and the downside, indicative of its higher volatility.

BTC/ETH Monthly returns 010622

Figure 5: Monthly returns of BTC and ETH

Finally, we can observe a sector rotation between the two largest market caps according to the different market phases.

The following graph represents the dominance ratio between the market capitalizations of Bitcoin and Ether (in purple).

BTC/ETH Dominance Market Cap

Figure 6: BTC and ETH market cap dominance

Two opposing tendencies appear here:

  • At the end of bullish markets/beginnings of bearish markets, capital leaves Ethereum and migrates to Bitcoin in a defensive move (orange arrow).
  • At the end of bullish markets/beginnings of bearish markets, investors expose themselves to Ether’s bullish volatility and increase their risk-takingdropping bitcoin dominance (blue arrow).

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Speculative divergences for the two market leaders

This behavior is palpable within the derivatives markets: by modeling the dominance of Open Interest (IO) towards ETH and BTC, we can note a noticeable change in strategy from December 8at the beginning of the current correction phase.

Indeed, while speculators had been favoring Ether for over a year, the market’s unattractive price action caused them to turn to Bitcoin, growing its IO’s dominance, a sign that more capital is now allocated to BTC derivatives.

BTC/ETH Dominance IO 010622

Figure 7: Dominance of open interest on BTC and ETH

Regarding the financing rates of the futures contracts of the two market leaders, no notable disparity can be observed, a sign that speculators trade both assets using similar strategies.

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Figure 6: Funding rate of future contracts on BTC and ETH

Currently, this indicator signals the presence of a slightly bullish bias regarding future contracts for ETH and BTC.

However, an opposite dynamic is present on the side of the options market, presenting the put (sell options) and call (call options) ratio of the two assets.

BTC/ETH Ratio Put/Call 010622

Figure 5: Put/Call Ratio of Options on BTC and ETH

The graph above shows a notable divergence:

  • speculators predict a decline for Bitcoin and protect themselves by accumulating put options;
  • the market shows a more mixed bias towards Ether and favors a slight upside in the short term.

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Summary of this on-chain analysis

In sum, the Bitcoin (BTC) and Ether (ETH) markets are now more linked than ever with a very strong correlation.

While ETH tends to behave similarly to BTC despite its young age, its volatility persists and creates a performance asymmetry that speculators happily exploit.

In effect, a sector rotation between the two market-leading assets is once again at workfavoring Bitcoin, given the prevailing uncertainty.

This phenomenon is visible in the derivatives markets where speculators are allocating more capital to bitcoin, while preparing for a future drop in its price.

Sources – Figures 1 to 6: Glassnode

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About the Author : Teacher. Chain

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On-chain analyst, fervent fighter of informational asymmetry.

My goal is to inform everyone about the state of Bitcoin (as an asset and a distributed network) through the prism of on-chain analysis.
All articles by Prof. Chain.

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