Demand is one of the most powerful features of the cryptocurrency ecosystem. It supports exchanges even during less productive market cycles, and is a quick and reliable factor that proves the worth of an asset.
Therefore, demand helped bring today’s leading cryptocurrencies, such as Bitcoin, closer to global adoption. As the first cryptocurrency on the market, BTC became popular due to its portability, divisibility, and scarcity. In the long run, BTC has become a reliable asset that people can use as an alternative to fiat currencies.
The same applied to Ethereum, the project focused on high-tech decentralized systems. By introducing smart contracts, supporting the development of NFTs, and enhancing decentralized exchanges, ETH has become a valuable tool for developers.
Together, the two coins merged into the ETH/BTC trading pair, one of the most important ratios in crypto. While it tells how many Bitcoins one Ethereum is worth, this pair can give much more insight into the market, so let’s explore it.
The role of the ETH/BTC ratio
The key metric of ETH/BTC is used by traders in comparing the price of Ethereum to Bitcoin. As a useful tool in bear and bull market cycles, the ratio provides insight into market trends and risk sentiment, as it indicates which asset outperforms the other. Considering the high value of both assets, the leading one could start the trend of either season between BTC and altcoins.
ETH and BTC can move in different ways toward each other and gravitate in specific ways. For example, Ethereum gains power in a high ETH/BTC ratio, but Bitcoin is the leader when the key metric is low. On the other hand, a stable ratio exhibits similar movements, while sudden shifts alert investors to changes in market sentiment.
How does the ratio help users?
In a simplistic example, when Ethereum leads the ratio, it could signify the start of the altcoin season, where the value of all altcoins surpasses that of Bitcoin. This is a time of technology investments and project innovation that pushes the industry forward. However, when Bitcoin leads the way, the market experiences macroeconomic uncertainty, in which prices are driven by factors such as those found in traditional financial markets.
By observing the market preference between the two assets, traders can rebalance their portfolios, while institutional investors can better assess risks. Moreover, the ratio movement also tracks the rotation of ETH/BTC capital.
How do investors use the ratio?
The easiest way to follow the ratio movements is to check data from reliable trading platforms. Market statistics and price shifts are typically closely observed and curated for investor use. For example, if you check data from crypto exchange Binance.com, their Research highlights offer useful information about either of these assets. According to Binance Research, “Ethereum is emerging as the institutional favorite, nearly surpassing Bitcoin in ETF inflows and cementing its role as crypto’s yield-bearing backbone.”
Other ways to analyze the ETH/BTC movement include comparing it with other reliable ratios, such as BTC/USDT or ETH/USDT, to understand their position in relation to the fiat currency, which is the leader on the market. This can also indicate any divergence between the ratio and the total market cap of both coins.
Using support and resistance zones on the chart is also lucrative. Support levels show more demand than the actual supply, while resistance levels reveal the opposite, when the supply of a project’s coins exceeds the demand. Usually, more demand triggers price increases, while a lack of supply suggests a lack of interest from investors and traders.
What is the altcoin season?
All coins, except Bitcoin, are collectively known as altcoins. When they’re gaining traction and their value surpasses Bitcoin’s, investors expect the altcoin season to start, as it presents a great opportunity for portfolio diversification. This occurs when BTC’s dominance over the market slows down, as factors such as technological developments and partnership announcements make altcoins appear more promising.
The signs of the altcoin season include the following:
- A decline in Bitcoin’s prices;
- Sudden increase in market volatility;
- Positive market sentiment;
- News that highlights new altcoin projects;
The altcoin season can last from a few weeks to several months. This can depend on the market cycle at that moment, whether bullish or bearish, which can influence the season. At the same time, the behavior of investors can change based on the effective use of technology by altcoin projects.
What mistakes do investors make during the altcoin season?
Although the altcoin season presents numerous investment opportunities, users may be prone to mistakes due to FOMO (fear of missing out). Being part of communities can further contribute to these feelings, as witnessing others buying or selling in bulk in response to the market’s movements influences others’ opinions.
Moreover, the lack of research leads to:
- Neglecting safety when trading;
- Lacking diversification in the portfolio;
- Ignoring market signals, such as technical indicators;
- Not designing a personalized plan;
- Forgetting about transaction fees;
How should investors diversify their portfolios?
Portfolio diversification is crucial for achieving your financial objectives. This strategy can help ensure loss limits and reduce investment fluctuation returns, but you may need to conduct further research on the most promising crypto projects on the market. Ideally, investing in Bitcoin and Ethereum is non-negotiable due to their large market capitalization that secures safety.
However, when allocating funds to various assets, it’s necessary to spread them across different crypto sectors, including decentralized finance (DeFi), non-fungible tokens (NFTs), blockchain infrastructure, and technology innovation projects. Therefore, you can invest in altcoins, stablecoins, Layer-2 solutions, and even gaming tokens to explore all crypto categories. In the long run, you can expand to crypto derivatives, custodial solutions, and AI-based assets.
Final considerations
The ETH/BTC ratio is an essential factor in determining the supremacy of either of these coins, which are the leading projects in the ecosystem. Investors and traders monitor it to understand how the market can change, as the start of a leading coin, altcoin, or Bitcoin season can be influenced by it. These market cycles can last several months and have the potential to either grow or diminish investment opportunities.
