Joshua Lim – Head of Derivatives at Genesis Trading – recently provided a breakdown of Bitcoin’s late underperformance against the rest of crypto.
He provided 2 metrics indicating that Bitcoin’s price is “heavy” relative to previous market cycles, followed by qualitative reasons for why this is the case.
Ethereum Outperforming Bitcoin
Per a Twitter thread from Lim on Sunday, the first indicator of Bitcoin’s ‘heaviness’ is its performance against Ethereum. The ETH/BTC price ratio is currently about 0.077 – still close to its multi-year high of 0.088 in December 2021.
Typically, Ethereum and altcoins fall much more substantially against Bitcoin during a cyclical bear market. For instance, the ETH/BTC ratio back in August 2018 was just 0.04, despite reaching as high as 0.11 in June 2017.
The point at which Ethereum’s market cap “flippens” Bitcoin is at 0.159 ETH/BTC.
“Sizable positioning in ETH calls reflects the market consensus of continued ETH outperformance,” added Lim. When examining options trades, the put/call ratio for ETH was just 0.24 as of Sunday, compared to Bitcoin’s 0.53.
The asset’s outperformance has been exacerbated by the so-called “merge surge” – a local Ethereum rally triggered by the excitement of its upcoming transition to a proof of stake consensus mechanism. Although ETH/BTC sunk as low as 0.05 in June, it rebounded in July upon the reveal of a preliminary date for the merge.
Ethereum’s strength has contributed to Lim’s second indicator of Bitcoin’s weight: market dominance. Despite the bear market, Bitcoin’s share of the total crypto market cap has remained steady at ~40%.
“Historically, BTC dominance rises in bear markets, but we have yet to see it perform this cycle, likely because of ETH’s increasing share,” the analyst explained.
The Bearish Side of Institutional Adoption
According to Lim, Bitcoin’s “persistent heaviness” is a partial consequence of institutional involvement. Unlike most other cryptos, the asset is now accessible in various forms: CME Futures, exchange-listed products, and direct investment.
The analyst said that BTC has already become a sizable percentage of most TradFi investors’ crypto allocation. Unfortunately for bulls, that means it is also the crypto asset that gets sold during a de-risk market turn and shorted as a beta hedge.
Bitcoin linear derivatives are highly popular for this reason. They still comprise 44% of all crypto open interest, despite the uptick in ETH speculation leading up to the merge. “Going short BTC is the easiest alternative for both TradFi and crypto native investors,” said Lim.
Institutional adoption has also led to Bitcoin trading in lock-step with equities, all of which are down due to macroeconomic pressures.
Finally, Lim posited that Ethereum is starting to claim Bitcoin’s territory as a store-of-value asset in the crypto space.
Bitcoin is often referred to as “digital gold” by long-term bulls due to its fixed supply cap of 21 million coins. However, it failed to track gold or beat inflation this year, despite U.S. CPI running at 40-year highs.
By contrast, Ethereum is set to become a net-deflationary asset after the merge. BitMEX co-founder Arthur Hayes thinks this dynamic will soon rally Ethereum like a cyclical Bitcoin halving, potentially pushing it to $5,000 by March 2023.
Lim noted that long-only funds are now favoring ETH as their entry point into crypto as an asset class and that every crypto native fund is universally positioning around the merge.
“Expect BTC to continue to trade like a funding asset and preferred hedging instrument for the entire asset class,” he concluded.