The cryptocurrency ecosystem has suffered a meltdown and plunged last week. Bitcoin (BTC-USD) tumbled as much as 50% from its recent highs, and most other cryptocurrencies dropped even more. Ethereum (ETH-USD) hit $2,000 during Wednesday’s crash, after reaching $4,000 not long ago.
The reasons for the meltdown are numerous. Read my Bitcoin Crash Warning piece, published in April, to see how we ended up here.
Specifically, sellers flooded the crypto market after the recent Coinbase (NASDAQ:COIN) IPO. Moreover, China is cracking down on cryptocurrencies again, and the U.S. is issuing harsher regulations and enforcing taxation of crypto transactions more strictly . Adding fuel to the fire, Elon Musk recently turned sharply negative on Bitcoin, warning of the damage it does to the environment.
So when will the selling stop? Although cryptocurrencies are bouncing today, their prices remain down sharply. To get a sense of when things will turn around, let’s look at the relationship between the two leading cryptocurrencies.
The Key Ethereum-Bitcoin Ratio
Most U.S.-based traders tend to think about cryptocurrency prices only in terms of U.S. dollars. That’s understandable. However, comparing trading instruments to each other can provide some key insights, especially during massive price changes.
Arguably, the second-most important metric for Ethereum (after its exchange rate versus the U.S. dollar) is the ratio between Ethereum and Bitcoin. Bitcoin has always been worth far more per unit than Ethereum. However, the ratio between the two cryptos has varied a great deal. These fluctuations are often key to understanding the sentiment of cryptocurrency investors.
For example, back in 2016, when Bitcoin did not fluctuate much, Ethereum was consistently worth 0.01 to 0.02. Bitcoins. In 2017, however, as cryptocurrency went mainstream for the first time, the ratio blasted off to 0.1 by the end of that year, as Ethereum appreciated more than five times as quickly as Bitcoin.
Once 2018 started, however, cryptocurrencies lost strength. Bitcoin went down, as we know, but it fared far better than every other crypto.
Ethereum plummeted back to just 0.02 Bitcoins by the end of 2019. In dollar terms, Ethereum plunged 95% from its 2017 peak to its 2019 bottom, while Bitcoin fell 80%.
So in bullish times for cryptocurrencies, Bitcoin tends to underperform as Ethereum and other leading competitors are accepted more fully by investors. When cryptos are in bear markets, however, money comes flowing back into Bitcoin, which traders view as the true safe haven of cryptocurrencies.
The Ethereum-Bitcoin Ratio in 2021
At the start of this year, Bitcoin was changing hands for $29,000 and Ethereum was trading at $750. Each Ethereum was worth 0.025 Bitcoins. At its recent peak, Bitcoin had doubled, hitting $64,000. However, Ethereum surged far more, soaring from $750 to as much as $4,000.
As a result, the ratio between Bitcoin and Ethereum got up to 0.08, a strong show of support for Ethereum. Although notably, Ethereum has failed to take out its old high of around 0.12 Ethereum per Bitcoin that had been achieved in 2017. From a technical standpoint, if Ethereum had topped that 0.12 target, a huge signal would have been sent to get into Ethereum and other leading, alternative tokens, such as Binance Coin (BNB-USD). Instead, the ratio fizzled around 0.12.
If we’re now entering a full-blown cryptocurrency bear market, it would make sense for Ethereum to fall back to 0.02 Bitcoins, where it has bottomed out in prior bear markets.
Instead, Ethereum is hanging in there. As of this writing, it’s trading at 0.07 per Bitcoin. That’s only down modestly from the 0.08 level that it had reached prior to the crypto crash. That’s a bullish indicator.
Ethereum’s resiliency suggests that many investors are interested in buying it and intrigued by the decentralized finance applications hosted on the Ethereum network.
The Bottom Line
We’ve just witnessed the biggest crash in the cryptocurrency market in quite awhile. And the news keeps coming. On Thursday, the Biden administration announced that it would step up its efforts to catch those seeking to avoid taxes on cryptocurrencies. That’s just another headache for a sector that is already under fire.
From a technical standpoint, Ethereum is showing surprising resilience. That , along with today’s gains, could be a good sign that the cryptocurrency bulls aren’t out of firepower just yet.
On the date of publication, Ian Bezek did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
