Week by numbers
The past week has seen a strong surge in the cryptocurrency market. The price of the largest cryptocurrency, Bitcoin, rose by about ten percent. The price of the second-largest cryptocurrency, Ether, increased by around nine percent, and the total market cap of the rest of the cryptocurrency market (excluding major stablecoins) rose by approximately seven percent.
Within the cryptocurrency market, the week was notably dominated by Bitcoin, which was reflected in an increase of about 1.5% in Bitcoin dominance (roughly one percentage point). Meanwhile, the ETH/BTC ratio dropped by about one percent.
Among the tokens of Kvarn X trading service, the strongest weekly gains were seen in Celestia's TIA token (+23%), Aptos' APT (+22%), and the meme coin BONK (+16%). The steepest declines were observed in Helium's HNT token (-12%), Uniswap's UNI token (-9%), and MakerDAO's MKR token (-8%).
Local top soon?
Earlier this week, in our Kvarn X Pro weekly report, we discussed the market strong gains of the past week and presented various ways to detect a potential reversal of the upward trend. Our view was that there have been some signs in the market this week that may suggest a local peak could be reached soon.
The market's development over the past couple of days has further supported this interpretation.
In recent days, we have seen the upward movement in the cryptocurrency market slow down, which is reflected in the "bearish divergence" of the Relative Strength Index (see graph point 1).
This slowdown in the rise is often one of the early signs that the upward movement may be nearing its end. However, RSI should of course not be relied upon alone, as in a long upward trend, a "bearish divergence" can also occur when prices are merely "catching their breath" between moves up. A "bearish divergence" does not necessarily indicate the end of the upward trend, but it can be a reason to start closely monitor other factors.
Additional evidence pointing to the potential end of the uptrend was observed on Tuesday, as the price of Bitcoin and the total value of smaller altcoins (OTHERS) began to diverge (see graph point 2). While Bitcoin's price continued to rise, the total value of smaller altcoins started to decrease. This kind of divergence often suggests that cryptocurrency investors are reducing their risk by shifting capital from smaller crypto tokens to larger ones, particularly to the largest cryptocurrency, Bitcoin.
At local tops, the divergence between Bitcoin and smaller crypto tokens is often followed by Bitcoin's price turning downward, which serves as the final confirmation of the end of the uptrend. Over the past 24 hours, we have seen some hints of this (graph point 3).
It is still too early to say with certainty whether this is a genuine trend reversal or just noise. A drop in Bitcoin's price below $66,000 would reinforce the interpretation of the end of the upward trend. At the time of writing (Thursday, 2:00 PM), Bitcoin is about $1,000 away from this level, which is roughly 1.5 percent. On the other hand, if Bitcoin's price rises above Wednesday's peak of $68,400 (about two percent higher than the current price of $67,000), it would confirm the continuation of the upward trend.
Bitcoin, Ether, and Solana
Over the past couple of weeks, cryptocurrency investors have once again been discussing the Bitcoin-driven nature of the market. This interest has been fueled by the rise in Bitcoin dominance, which has reached a new high. Bitcoin dominance has been rising for over two years and is now at its highest point since spring 2021.
In our view, it is somewhat ironic that attention is being paid to this topic now, after this consistent trend has already lasted for two years. Betting on Bitcoin's strength was an excellent move two years ago, and still a good one a year ago. However, in our view, Bitcoin's long-term relative strengthening is likely nearing its end, and with Bitcoin dominance already this high, the expected value of betting on its continued rise is somewhat modest. The best move for a cryptocurrency investor could actually be to start preparing for trend reversal and to plan how to allocate their crypto portfolio if altcoins as a whole were to begin to outperform Bitcoin.
Another phenomenon that has been discussed in the cryptocurrency market is the relative weakness of the second-largest cryptocurrency, Ether. This observation has been mainly driven by the ETH/BTC ratio, which seems to keep falling, whether cryptocurrency prices in dollar terms are going up or down.
We would like to offer a couple of observations on this otherwise solid fact.
First, we do not consider the ETH/BTC ratio to be a particularly good short-term indicator of Ether's relative strength. Its short-term fluctuations are strongly influenced by the overall dynamics between Bitcoin and altcoins. In other words, in a Bitcoin-driven market, Ether weakens against Bitcoin, but so do altcoins as a whole. This has been the case in recent weeks, and for example, the SOL/BTC ratio has fallen almost identically with the ETH/BTC ratio.
For short-term tracking, we recommend monitoring the SOL/ETH ratio instead of the ETH/BTC ratio. This removes the biggest noise factor, which is the market's fluctuation between Bitcoin and altcoins.
We covered the relationship between Ether and SOL in our Kvarn Pulse newsletter on September 12, 2024. At that time, we concluded our analysis with the statement:
“Our conclusion is that moving forward, it’s no longer safe to assume SOL’s continued strengthening as a given, and it’s important to keep an open mind about the potential for a trend reversal.”
Five weeks later, the situation looks very similar. After reaching the levels of late 2021, the SOL/ETH ratio has risen only very slowly, which is visible on the weekly chart as a "bearish divergence" in the Relative Strength Index.
The purpose of this commentary is to highlight that while both Bitcoin's relative strength and Ether's relative weakness are undeniable facts and the focus of considerable attention, betting on them at this stage should be considered with some caution. The best time to bet on Bitcoin was in 2022, as was the time to bet against Ether. While anything is of course can happen, we believe that there is not much left to gain from these trends from investing perspective. We think there is more value in starting to plan how to take advantage of the possible reversal of these trends.
For clarity, we conclude by stating that of the two trends in recent years – the strengthening of Bitcoin and the weakening of Ether – we see the reversal of the first as almost certain, while the second is subject to much more uncertainty.
We believe that Bitcoin reaching a new all-time high, especially combined low interest rates (as opposed to the high interest rate ATH in spring 2024), would likely trigger a clear "alt-season," where smaller crypto tokens significantly outperform Bitcoin.
As for Ether, we believe there is a stronger possibility that it could never reach the over 20% market cap share it had in 2023. Therefore we do not suggest jumping into Ether right now, as its relative weakening is still continuing, albeit more slowly. Instead, we would recommend monitoring the situation and planning the criteria and extent to which ont would be willing to allocate to Ether, if its long-term relative downtrend were to begin to reverse into a "mean reversion" sometime next year.
We will continue to monitor the relative power dynamics between the "big three" in the cryptocurrency market and keep you informed, so stay tuned!
The material contained in the Kvarn Pulse is produced solely for the purpose of marketing communication. Any information conveyed through Kvarn Pulse should not be construed as an offer or an invitation to make any purchase or sale decisions, or as an encouragement to make investment decisions about any investment object. Copying or borrowing the content of the newsletter without Kvarn's express permission is prohibited. The information presented in the newsletter pertains to the situation prevailing at the time of writing, and the information may or may not have changed. Kvarn Capital Oy does not guarantee the accuracy or completeness of the information contained in the newsletter or referred to in the newsletter.
