When two linked assets diverge, there is a simple call to make. The assets will stay diverged and perhaps diverge further or they will revert at some time in the future. You can use these relationships to try and capture profit from a revision and you can even use a long short strategy to be market neutral while you do so.
Most people expect a re-synchronisation of past ratios of value but that doesn’t have to happen.
Gold versus silver is a good example. Over history Gold has been 5x, 10x, 20x or even 80 times, as it is today, the value of silver.
While there is still a legion of precious metal believers who yearn for the days of Silver and Gold money, the 20:1 ratio of Gold to Silver of the recent good old days is never coming back, even though there are certainly folks who hold the dream that it might.
…but it wont.
In Crypto the similar metaphor is Bitcoin to Ethereum. Since the bottom of the Crypto winter Bitcoin has outperformed.
Here is the chart.
I am positioned in Crypto through Ethereum because historically it runs further and longer than Bitcoin has in the near past but as of now its underperformed.
If you wanted to explain that away, you might suggest that the Ethereum developers keep messing with the blockchain, regularly injecting their new ideas into the system, that may or may not solve the blockchains issues they want to fix and that tinkering deflates the value of Ethereum because it inject uncertainty. A bunch of geniuses fiddling with a crypto financial system, is in a way exactly the sort of thing that governments do with ‘fiat’ and the reason why those that hate ‘fiat’ and love Crypto want out of ‘fiat.’ So Ethereum dev acting like a central bank might just be a drag on its valuation.’ Code as law’ is not so compelling when some young faceless programmers can act like ‘Judge Dredd’ with your Crypto bags.
Bitcoin on the other hand is almost clear of that kind of meddling and there is no upending of the system every time some developers think there is something wrong with it. The very idea of decentralisation still runs strong in Bitcoin and amending its system is simply incredible difficult and its structure about as decentralised as it can be. Sadly the recent proof of stake structure of Ethereum, while cuddly for the environment, leaves all kinds of risk surfaces open, whereas the Bitcoin just grinds on apparently impenetrable from much in the way of human influence.
However, these a simply theoretical nitpicks.
If Bitcoin takes the longed for next leg up, then Ethereum will jump along with it and quite possibly catch up with Bitcoin in percentage terms and perhaps run on further as it did during the last run of Crypto in 2021. An ‘all in’ Ethereum investor would also suggest that Ethereum will dethrone Bitcoin in the future and if Bitcoin were to get over $100,000 that could mean $25,000 a token for Ethereum. I’m not in the camp of wild Ethereum enthusiasts but you can understand the reasoning however optimistic that might be. Another Bitcoin rally over $100,000 would easily see Ethereum at $8000.
Ethereum will do well if Bitcoin does well and does have a chance of catching up if we see that final leg of this Crypto cycle repeat past performances.
Meanwhile an Ethereum ETF will arrive and it will suck in large amounts of Ethereum which should bolster the price. The ETF should appear soon, though the SEC is not exactly enthusiastic about Crypto ETFs.
So the call is not will Ethereum catch up with Bitcoin, but is Crypto going to produce another leg up before the end of this cycle. If you think it is, then Ethereum is sure to perform and has a good potential of outperforming Bitcoin at the bitter end.
Crypto is not for the faint hearted but it is a nice diversifier and it can be a sprinkle of spice for a balanced portfolio. It is also about the only game in town for speculators with a lust for action and of course that is what so many people come to the markets to enjoy. There will be no shortage of firework up to Christmas.