When two correlated assets diverge, there is a simple call to make. The assets will either remain divergent, possibly even further divergent, or they will recover at some time in the future. You can use these relationships to try to extract profits from the revision, or even use a long-short strategy to remain market neutral.
Most people expect past value ratios to resynchronize, but this does not necessarily happen.
Gold versus silver is a great example. Throughout history, gold has been 5, 10, 20, and even today 80 times more expensive than silver.
While there are still legions of precious metals believers who yearn for the days of silver and gold money, the good old days of the recent 20:1 gold to silver ratio are gone, though some do dream of its return.
but it is not the truth.
In crypto, the analogy is Bitcoin (BTC) and Ethereum (ETH). Bitcoin has been performing well since the crypto winter bottomed out.
Here is the chart:
I invest in crypto through Ethereum because historically it has had a longer and more durable run than Bitcoin, but as of now, it has underperformed.
If you want to explain this, you might say that Ethereum developers are constantly tinkering with the blockchain, regularly injecting their new ideas into the system, which may or may not fix the blockchain problem they want to fix, and that this tinkering reduces the value of Ethereum because it injects uncertainty. A bunch of geniuses tinkering with the crypto-financial system is, in a way, exactly what governments do with fiat currencies, and why people who hate fiat currencies and love crypto want to get rid of them. Therefore, Ethereum developers playing the role of a central bank could be a drag on its valuation. "Code is law" is less compelling when some young, unknown programmer can handle your crypto bag like Judge Dredd.
Bitcoin Bitcoin -3.1% On the other hand, this kind of intervention is almost non-existent in Bitcoin, and the system is not overturned every time some developers think there is something wrong with the system. The concept of decentralization is still popular in Bitcoin, it is simply incredibly difficult to modify the system, and its structure is almost decentralized. Unfortunately, Ethereum's recent proof-of-stake structure, while good for the environment, leaves various risk surfaces, while Bitcoin continues to move forward, seemingly without much human influence.
However, these are just theoretical nitpicks.
If Bitcoin achieves its next much-anticipated rally, then Ethereum will follow suit and will most likely catch up to Bitcoin in percentage terms, and may even continue to rise, as it did during the last cryptocurrency rally in 2021. One investor who is “all in” on Ethereum also believes that Ethereum will replace Bitcoin in the future, which could mean a price of $25,000 for Ethereum if Bitcoin exceeds $100,000. I’m not an avid Ethereum fan, but you can understand my reasoning, no matter how optimistic it is. If Bitcoin breaks $100,000 again, Ethereum could easily reach $8,000.
Ether Ethereum -8% If Bitcoin performs well, it will do well too; if we see a repeat of past performance in the final leg of this crypto cycle, it does have a chance to catch up.
Meanwhile, an Ethereum ETF is coming soon, which will absorb a large amount of Ethereum, which should boost the price. The ETF starts trading today, even though the SEC is not very enthusiastic about cryptocurrency ETFs.
So the question is not whether Ethereum will catch up to Bitcoin, but rather whether cryptocurrencies will rise again before the end of this cycle? If you think so, then Ethereum will definitely outperform and will most likely surpass Bitcoin in the end.
Cryptocurrency is not for the faint of heart, but it is a great diversifier that can add a dash of spice to a balanced portfolio. For speculators hungry for action, it is also the only game in town – which is, of course, why many come to the markets to enjoy. There will be no shortage of fireworks displays before Christmas.
