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Where are we in the Ethereum market cycle?

Understanding the flow of funds into Bitcoin and Ethereum can be a major advantage in trading these cryptos.
Image: Shutterstock

In a previous article, we looked at bitcoin (BTC) dominance as a measure of where we are in the crypto cycle. Bitcoin dominance is the percentage of total crypto market cap made up of BTC relative to the rest of the crypto assets.

BTC’s dominance has been as low as 40% in recent weeks, but now appears to be moving back towards 50% – which is still a long way from the 90-95% dominance it exerted in 2017.

Historically, we have seen BTC as the front-runner in the crypto race. The first wave of money pours into bitcoin which pushes up the BTC price, leaving the smaller altcoins lagging behind. As the BTC price move starts to cool off after a period of weeks or months, many investors switch into larger cap altcoins like Ethereum (ETH), Cardano (ADA) and Polkadot (DOT).

The recent run-up in prices of BTC, ETH and other altcoins looks surprisingly similar to the bull rally on cryptos in late 2020, with BTC again leading the way.

However, there are fundamental differences in the economics behind BTC, ETH and other crypto assets.

Ethereum remains the second-largest crypto by market cap.

A year ago, ETH was trading on local exchanges at around R6 000. This week, it traded at about R57 000 – a nearly 10-fold jump in price.

We asked Brett Hope Robertson, investment analyst at Revix, to explain the ETH market cycle and the fundamental case for investing in this cryptocurrency.

What do we know about the flow of funds into BTC and ETH, and the other smaller crypto assets?

BHR: BTC is the dominant crypto asset and in the early stages of the bull cycle we start to see it attract the lion’s share of new crypto funds being invested into the market. This is primarily because BTC is the gateway into the crypto space, and when positive sentiment comes into the space many investors’ natural first buy is BTC. As we previously discussed, that pushes up the price of BTC at a rate faster than the other, smaller crypto assets, known as altcoins.

When BTC starts to slow down, we have traditionally seen a move from BTC into ETH and other large cap altcoins, so you get the altcoin wave. This is primarily driven by the fact that many have made profits on BTC and now look to deploy these profits elsewhere. So where do they put these funds? Well, they move further along the risk curve to large cap altcoins – such as ETH. This leads us into a period called ‘alt season’ where altcoins start to outpace BTC for a period, which can last several months, before they too start to slow down and we see a switch back into BTC.

Where are we in the current cycle?

BHR: ETH is up 27% since the end of September, while BTC is up 39% over the same period. This is characteristic of previous bull cycles, particularly the early phases, where BTC tended to move at a faster pace than other crypto assets. I would expect this trend to continue for the next few weeks.

You must remember that Bitcoin and Ethereum have entirely different business cases behind them. Bitcoin is regarded as ‘digital gold’ or a store of value. Investors are attracted to Bitcoin because it is seen as a secure method of storing wealth, particularly now that the US Securities and Exchange Commission has approved the country’s first futures-based cryptocurrency ETF [exchange-traded fund]. BTC has rallied this last week on this news. As we discussed previously, big institutional investors have been waiting for a regulated way to gain exposure to bitcoin for a while. Research has shown that a relatively small investment of say 1% or 5% in a portfolio has historically had an outsized effect on overall portfolio performance.

Ethereum is more of a function-built network, which can be applied to a wide range of uses like building decentralised applications (dApps) – which are basically just blockchain-based versions of regular apps, like the ones you get on your phone.

These applications allow users to lend, borrow and earn interest on your crypto. To do this you have to pay ‘gas’ fees, for which you need ETH. There are inefficiencies in the Ethereum network in terms of relatively slow transaction speeds, which in turn makes transacting on it exorbitantly expensive. Sending relatively small amounts of money across the Ethereum network can make it uneconomic, which is why other networks such as Cardano (ADA), Polkadot (DOT) and Solana (SOL) are competing with it for dominance in this space.

From an investors’ point of view, the important thing to understand is that the flow of funds traditionally benefits BTC in the early stages of a bull cycle, followed by the large cap altcoins a short while later, and then onto the smaller cap altcoins. As ETH is the second largest crypto asset by market cap, we tend to see a progressive move from BTC to ETH, and then the smaller altcoins, as the bull cycle matures.

How can investors use this knowledge to their advantage?

BHR: For those trading cryptos, they can achieve market outperformance by knowing where we are in the cycle and playing this money flow cycle from BTC to ETH and on to smaller altcoins.

At Revix, we are currently running a zero buying fees promotion on Bitcoin between the 15th and 21st of October.

But in line with the money flow cycle discussed above, we will be offering a ‘zero buying fees’ promotion on Ethereum between the 22nd and 28th of October.

Those who are ‘hodlers’ [those who buy and hold] can also use this knowledge by dollar-cost averaging more effectively – in other words, adding to existing positions of BTC or ETH [or other altcoins] at the early stages of the bull cycle, before prices have moved up aggressively.

Of course, it should also be pointed out that cryptos are highly volatile, so trying to time the market is not always the best idea. Dollar-cost averaging has been proven over time to be a highly effective way of building crypto portfolio wealth. By following this strategy, you are adding to you position of BTC every week or month regardless of price. The same goes for ETH or the other crypto assets. Making regular flows into cryptos, even when markets are falling, allows you to build up positions over time at a range of different prices.

Remember that with Revix, you can always refer a friend and be rewarded for it. If you refer one or multiple persons using your referral code, you will receive Revix rewards to the value of R300 per referral.

About Revix

Revix brings simplicity, trust and great customer service to investing. Its easy-to-use online platform enables anyone to securely own the world’s top investments in just a few clicks.

Revix guides new clients through the sign-up process to their first deposit and first investment. Once set up, most customers manage their own portfolio but can access support from the Revix team at any time.

For more information, please visit www.revix.com

This article is intended for informational purposes only. The views expressed are not and should not be construed as investment advice or recommendations. This article is not an offer, nor the solicitation of an offer, to buy or sell any of the assets or securities mentioned herein. You should not invest more than you can afford to lose, and before investing, please take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

Brought to you by Revix.

Moneyweb does not endorse any product or service being advertised in sponsored articles on our platform.

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