Ethereum bull trap? ETH price signals collapse against Bitcoin

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A recent spike in ether (ETH) prices versus its top rival Bitcoin (BTC) appears to pose a risk of exhaustion, even if analysts view the second largest cryptocurrency as the stronger of the two.

The ETH / BTC exchange rate is up as much as 40.19% after bottoming out at 0.0553 BTC on May 23. The strong recovery movement reflected an increase in the flow of capital from the ETH cash market to the BTC cash market. This also led analysts at Delphi Digital, an independent market research firm, to highlight the “tremendous strength” of ether in the Bitcoin-listed markets. They write:

“If you looked at the YTD ETH / BTC chart in isolation, you probably wouldn’t suspect that the fear in the crypto market is the highest in a year.”

However, a closer look at the ETH / BTC chart provides indications that bullish traders could fall into a bull trap.

Bearish wedge

ETH / BTC formed a pattern that started low down and contracted as prices rose. As a result, the trading margin narrows. In the meantime, volumes decreased as prices rose and the contraction pattern developed.

ETH price increases within a bearish reversal pattern as trading volume decreases. Source: TradingView

Classical Chartists refer to the structure as an ascending wedge. They interpret it as a traditional bearish reversal pattern, largely due to the loss of upward momentum on each subsequent high formation.

Rising wedges ripen when the asset reaches the level where its two trendlines converge. Still, bearish confirmations will not come until the price breaks below the wedge support in a convincing manner. But if it does, there is a risk that the asset will crash to the maximum distance between the top and bottom trendlines of the wedge.

Hence, the rising wedge indicator from ETH / BTC suggests a decline towards 0.0648 BTC on a negative breakout attempt from the apex of the pattern – the point where the trendlines converge. Also, the 0.0648 BTC level served as a support throughout May.

January 2018 fractal

Delphi Digital compared ETH / BTC’s reactions to Bitcoin’s cyclical highs in 2018 and 2021 to explain its bullish outlook for the pair.

The company stressed that ETH / BTC was a comparatively weaker instrument during the 2017 price rally than it was in 2021. The pair peaked mid-cycle – in June 2017 – although Bitcoin continued to climb, reaching USD 20,000 by the end of the year. By then, ETH / BTC had crashed more than 85%.

But a massive correction in Bitcoin prices in January 2018 discharged capital into the altcoin markets, causing a short-term upward correction in BTC-enabled pairs. Ether also benefited from the cash flow of the Bitcoin markets as it rebounded from 0.0231 BTC in December 2017 to 0.1237 BTC in January 2018 – an increase of 435.44%.

ETH / BTC then began correcting downward in the weekly sessions as both Bitcoin and Ether were beaten in the dollar-quoted markets. The pair eventually plummeted from 0.1237 BTC, then an annual high, to 0.0246 BTC in December 2018.

However, with the ongoing ETH / BTC correction, this is not the case, noted Delphi Digital, writing:

“At the top from the beginning of 2018, ETH / BTC has beaten massively and is not recovering nearly as quickly as this time.”

ETH / BTC’s top comparison 2018 and 2021 according to Delphi Digital’s outlook. Source: TradingView

Ether-Bitcoin Correlation

Whether or not ETH / BTC will have a negative breakout seems to depend on how Bitcoin performs in dollar-quoted markets.

The BTC / USD exchange rate fell as much as 53.77% from its record high of nearly $ 65,000 and later began consolidating. Meanwhile, the ETH / USD rate also corrected along with BTC / USD, plunging 60.59% from its all-time high of $ 4,384. This shows a strong linear correlation between the two digital assets.

Nick Spanos, founder of Bitcoin Center NYC, told Cointelegraph that ether would have to break its correlation with Bitcoin in dollar-denominated markets in order to have an independent ETH / BTC trend. Until then, strong downward movements in ETH / USD and BTC / USD would also mean a depressed ETH / BTC trend. He added:

“Although Ethereum has good fundamentals and improvements in the works, its potential growth in the future depends somewhat on the performance of Bitcoin. Ethereum investors are forecasting a breakout of this trend. However, the current trend does not suggest the likelihood of this” briefly- to medium term. “

Yuriy Mazur, head of data analytics at the CEX.IO cryptocurrency exchange, added that the ongoing anti-inflation narrative could allow Bitcoin to resume its uptrend. As a result, the rest of the cryptocurrency market, including ethers, should follow suit. He told Cointelegraph:

“ETH / BTC should benefit from a rising trend in cryptocurrencies, especially as Ethereum goes through London’s hard fork upgrade later in July.”