Typically our coverage of cryptocurrencies is more focused on the general state of the asset class and the fundamental outlook. However, since early July, a noteworthy dynamic began to emerge in relative performance between Bitcoin and its distant second-most-popular “crypto cousin” Ethereum, notes Tom Essaye, president of the Sevens Report.
In short, Ethereum, or ETH, the symbol it trades under on crypto exchanges, began to meaningfully outperform Bitcoin, with the Long-ETH/Short-BTC trade accelerating rapidly as both cryptos surged towards record highs.
Upon first assessment, you might say “So What?” But there is a key underlying takeaway sourced in cross-asset analysis as the acceleration higher in ETH/BTC in recent weeks is reminiscent of other rapid advances in the crypto “pair” that emerged.
The correlation observed during those upside sprints in ETH/BTC was that they all coincided with squeezy yet powerful rallies in equity markets – rallies that preceded near-term blowoff tops in the broader stock market, albeit with inconsistent lead times.
Bottom line: In prior cases over the last 10 or so years, every time we have seen such a robust and pronounced rise in the ETH/BTC crypto-pair, stocks have been sprinting higher in lockstep. However, once the upside momentum faded from those ETH/BTC rallies, it would have been prudent for equity investors to put up their guard.
That’s because, more often than not, a rise in broad market volatility with S&P 500 Index (^SPX) drawdowns averaging 10%-20% have followed a peak in ETH/BTC. And the risk of the Long-ETH/Short-BTC trade becoming exhausted appears underappreciated right now.
