Why is Ethereum outperforming Bitcoin? Historical pattern changes in 2023

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Key learning points

  • Ethereum has historically outperformed Bitcoin in bull runs
  • The pattern has reversed to start the year, with Bitcoin dominance increasing
  • Our analyst Dan Ashmore jumps on the chain to look through history and show how and why the pattern is changing

Flipping it, huh? Nothing incites such discussion within crypto circles.

Referring to a scenario where Ethereum flips Bitcoin for the number one spot in the cryptocurrency ranks, the Flippening is everything from inevitable to delusional, depending on who you ask.

I’m not sure I want to walk on the eggshells of that debate for fear of my Twitter DMs, but I noticed something pretty interesting today as I dug into the Ethereum versus Bitcoin data.

Ethereum is highly correlated with Bitcoin

First, the obvious. Ethereum is incredibly correlated with Bitcoin because it is a cryptocurrency and the fate of each cryptocurrency is tied to that of the orange coin. We know this by now.

The chart below shows how tight this relationship has been since Ethereum went live in 2015.

But while these two best buddies follow each other on the price charts, there are scenarios where they diverge a bit. The famous ETH/BTC ratio is one that Ether fans in particular keep a close eye on.

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It peaked at nearly 0.15 in June 2017 before free-falling to 0.025 before the end of the year. Today it is trading around 0.07.

Ether is better in bull markets than Bitcoin

You may have noticed that the previous ETH/BTC chart, due to its many ups and downs, resembled the shape of the crypto market in general.

I plotted the price of Bitcoin against this ETH/BTC ratio. Indeed, the ratio rises as Bitcoin rises, and falls and Bitcoin falls. Using the Bitcoin price as an industry-wide proxy suggests that the ETH/BTC ratio is rising in bull markets and falling in bear markets.

This makes sense. Bitcoin is often referred to as the boomer coin. I kinda like it that way, even though it’s meant as an insult by the way. But it’s an understandable nickname, as Bitcoin moves like a retiree during bull markets compared to altcoins.

Ether may be the largest of the altcoins, but it still outperforms Bitcoin when the bulls are out.

On the other hand, Bitcoin performs better when the party ends. And by outperforming I mean it tends to be down 60% instead of 70%. Well, that’s for another day.

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Pattern is reversed in 2023

But the price charts show otherwise. A month into the new year, Bitcoin has soared while the ETH/BTC ratio has fallen – the exact opposite of what has happened in the past.

I charted the ratio to early November when Sam Bankman-Fried’s fun and games were revealed to the world and crypto fell, with Bitcoin dropping to $16,000.

The chart shows that the pattern continued as you would expect, i.e. the ratio dropped as crypto and Bitcoin retreated. But when we turned the page in 2023, the crypto market reversed and Bitcoin soared. The only problem is that ETH did not follow suit, but the ratio has dropped from 0.077 on January 11 to 0.068 currently, despite Bitcoin rising from $17,400 to nearly $23,000 over the same period.

Why? Honestly, I’m not sure. It’s unusual.

Bitcoin is up 36% over the year, while Ether is only up 29%. But looking at the returns of other altcoins, it may have nothing to do with Ether. Many are outperformed by Bitcoin, while even the outperformers don’t do so as often as previously seen (note that I’ve removed Solana for scaling purposes, which is up 125% so far this year, following is decimated through links to Sam Bankman-Fried and multiple projects that fled the blockchain late last year).

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In reality, this has just been a remarkable rise for Bitcoin from the depths of bear market pain. The rest of the market is not quite ready to forget about the 2022 armageddon, with many altcoins down more than 90%.

Ethereum wasn’t that bad, but it still dropped from an all-time high of nearly $5,000. The free money and stimulus packages of the pandemic are over. It is a different climate now and it is proving more challenging to get the hype going for altcoins.

The web3 story is stranded. NFTs are crushed. There is no doubt that the narrative around ETH has broken down. I’ve written about how institutional adoption will prune back in crypto, and how long it will take to restore the industry’s reputation.

That goes for Bitcoin. Perhaps it is even more true for ETH and altcoins, which have more to do to regain investor confidence.

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