Three indicators you need to know when trading $ETH / $BTC
Since we just listed the $ETH / $BTC spot trading pair on the WOO X, now is a good time to look at how people trade this pair.
We found a research paper that can provide good food for thought while you take advantage of our competitive fee structure. If you aren't convinced, you can check our execution quality analytics.
We'll discuss key points from the 14-page paper by Erik Norland, Executive Director and Senior Economist at CME Group, but in essence, he said that the price of $ETH / $BTC is influenced by a variety of factors, including macroeconomic factors as well as crypto market-specific factors. Our Sr. Analyst Marek Chajecki also chimed in with his thoughts related to the paper.
Below is Norland’s tl;dr
- Higher tech stocks appear to benefit $ETH relative to $BTC.
- A stronger US dollar appears to be more negative for $ETH than it is for $BTC.
- $ETH / $BTC may react more strongly to changes in $BTC supply than it does to supply in $ETH.
How to use those indicators for your trade
Norland said that higher tech stocks positively impact ETH relative to BTC. For example, the correlation between the movements of technology stocks, such as the Nasdaq 100 and $ETH / $BTC, has been consistently positive since May 2022. On days when tech stocks rally, $ETH / $BTC tends to rise as ETH benefits more than BTC.
Below is Norland’s graph showing the Nasdaq to ETH / BTC correlation.
If his data were to be followed as a guide, you may want to time your crypto trade generally around the quarter earnings report and get a hint of the direction days prior from tech analysts - are they seeing something that can trigger a rally on Nasdaq?
Chajecki cautioned though saying, “It’s also quite tricky as there is often a ‘buy the rumor sell the fact’ situation so putting trades based on analysts is quite often not the best idea, but in general at least you know that around earnings reports there should be big moves on the stock market and $ETH should be reacting more.”
Norland’s next point is that a stronger USD is more negative for $ETH than it is for $BTC. He said $ETH / $BTC shows a negative correlation with the Bloomberg Dollar Index (BBDXY), which measures the USD against major currencies. On days when the BBDXY rises, $ETH / $BTC tends to decline.
To capture this opportunity, you must follow US data on the health of the US economy such as GDP figures, and employment rate, among others. A stronger US economy means a stronger US dollar.
“Inflation is a key driver as carry trades play a big role in currency movements and they are driven primarily by interest rate differentials and expectations of what’s going to happen with them; strength of the economy is rather secondary (at least in case of USD) but it affects inflation and rates hence the currency,” noted Chajecki.
The third and last key observation is that $ETH / $BTC may react more strongly to changes in $BTC supply than to changes in ETH supply. This sensitivity may be rooted in the unique economics of Bitcoin, where supply is perfectly inelastic, halving every four years, and miners' revenue tends to peak before halvings, followed by significant declines in BTC prices. The upcoming halving in April 2024 could potentially influence both BTC and ETH prices.
The $BTC halving is coming up in less than a year, and if Norland’s paper is correct, traders should hold on to $ETH rather than $BTC, which would seem counterintuitive. Maybe those ETH Maxis know something after all.
“In my opinion halving should be more positive for $BTC than $ETH. It will increase the difficulty for miners which should result in higher prices (assuming all other factors like the macro situation etc stay the same) and the effect of scarcity on $BTC should be becoming more augmented, Chajeki noted.
So where to start? Read our weekly macroeconomic calendar as well as our weekly recap!
The research also highlighted that the macroeconomic environment and central bank policies have affected the prices of $BTC and $ETH. For example, during periods of low-interest rates and quantitative easing (in other words, when the Fed printer goes brrrr), both $BTC and $ETH prices soared, with $ETH outperforming. However, as central banks tightened monetary policies and inflation took root, the prices of crypto assets, including BTC and ETH, were impacted.
Hopefully, at this point, you can see why we produce our macroeconomic calendar every week. Here you can find the most recent one and there are trading opportunities identified by our research analysts.
In closing, we want to highlight Norland’s caveat that while certain events like halvings and geopolitical events can impact $BTC and potentially $ETH prices, the future performance of crypto assets remains uncertain, and demand growth has tapered off in recent years.
Maybe what Norland meant was uncertain in terms of the actual price of both $ETH and $BTC as well as $ETh / $BTC.
Chajecki said when trading $ETH / $BTC, you effectively trade the relative strength of one against the other. As both are strongly correlated, it’s in general a more stable product than trading just $BTC or $ETH.
“It is good for traders who look for more stability especially when there are wild moves on crypto (however not these days:)) but even if markets are not directional many people can appreciate it. It’s a liquid pair so good for someone looking not only for stability but liquidity at the same time,” said Chajecki.
Here comes the shameless plug -> Trade our $ETH / $BTC pair on WOO X today.
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