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(Kitco News) – In the world of precious metals, the gold:silver ratio has been used for centuries to gauge the relative value of the two key monetary metals and help investors gain insight into which is favored by investors and which has the most upside potential.
For cryptocurrency traders, the closest comparison to the gold:silver ratio is the Bitcoin (BTC) to Ether (ETH) ratio, which looks at how the top two cryptocurrencies by market capitalization perform relative to each other.
Throughout most of 2023, Ether has lagged behind Bitcoin in terms of price growth as King BTC received the lion’s share of attention from investors due to the filing of multiple spot BTC ETF applications by some of the largest asset managers in the world.
As noted in a recent report from Kaiko, “ETH has struggled to gain momentum over the past year, strongly underperforming BTC and many altcoins. The ETH to BTC ratio, which measures the relative performance of the two assets, has trended downwards ever since The Merge, even though ETH underwent another successful upgrade in April.”
ETH to BTC ratio. Source: Kaiko
But that trend changed last week after BlackRock filed for a spot ETH ETF, which led to a rise in sentiment surrounding Ether that coincided with a reversal of the ETH:BTC ratio.
Kaiko noted that the impact of the announcement on the market was strong, “with ETH prices surging above $2k for the first time since April and daily spot trade volumes hitting $7bn, their highest level since the FTX collapse.”
ETH spot trading volume. Source: Kaiko
“The ETH ETF narrative added legs to the ongoing rally, which has been helped by improved global risk sentiment and falling U.S. Treasury yields,” Kaiko said. “The market share of altcoin + ETH volume relative to BTC has risen to 60%, its highest level in more than a year. Historically, altcoin volume increases relative to BTC during a bull rally.”
BTC vs. Altcoin market share. Source: Kaiko
Ether has also seen an uptick in demand in the derivatives market, with ETH open interest (OI) recovering to its early August levels, while Bitcoin has seen its OI decline over the past month, largely due to a series of large liquidations on Binance.
Perpetual futures open interest. Source: Kaiko
This also resulted in the Chicago Mercantile Exchange (CME) overtaking Binance as the largest BTC futures market.
“ETH funding rates — a gauge of sentiment and bullish demand — have also surged to their highest levels in more than a year, suggesting sentiment has turned,” Kaiko said.
Ether funding rates. Source: Kaiko
The report also noted that November has seen the Bitcoin and Ether 30-day volatility measure rise to 40% and 50%, respectively, after they hit a multi-year low of around 15% in the summer.
“Higher volatility and trade volumes are likely to attract liquidity providers back to the market, helping to repair the ‘Alameda gap’ — the post-FTX gap in order book depth — which has persisted for more than a year,” Kaiko said.
Additional analysis on the ETHBTC ratio was provided by market analyst Negentropic, who said the “ETHBTC-ratio is the key indicator to gauge the optimism in Altcoins.”
“When ETHBTC rallies – altcoins perform well,” Negentropic said. “Why? Because Bitcoin dominates at the beginning of a trend – but at some point, the optimism spreads. From the bottom in 2020, this ratio led the Total Crypto Market 30 times higher until [the] top on Dec. 2021. Since then, we have seen a Correction.”
ETH/BTC 1-week chart. Source: X
The chart provided by Negentropic suggests that the current bull market cycle will see the ETH/BTC ratio climb to 0.127 from its current value of 0.0557, which tells traders that ETH could outperform Bitcoin by a factor of 2.3 in the months ahead.
Altcoin Sherpa also sees now as a good time to flip BTC into ETH for an uncomplicated alpha trade, a move he said can be repeated throughout the bull cycle.
And market analyst McKenna thinks this rally won’t subside until the ETH/BTC ratio is 30-40% off the lows, which equates to a ratio of 0.0722.