Crypto bounces back

Week by numbers

The last week in the crypto market has seen a slight upward trend. The price of the largest cryptocurrency, Bitcoin, rose by about three percent, and the combined market value of altcoins (excluding ether and the largest stablecoins) increased by about five percent. On the other hand, the price of the second-largest cryptocurrency, Ether, fell by around two percent, contrary to the overall market trend.

There were no significant changes in bitcoin dominance over the week. However, due to ether's notably weak price performance, the ETH/BTC ratio dropped by around four percent.

The week's strongest performers were SUPER (+32%), FET (+27%), and SUI (+26%). On the other hand, the week's notable losers were Litecoin (LTC, -9%), Arweave (AR, -5%), and Maker (MKR, -3%).

Market analysis

In this week's market analysis, we start from a longer-term perspective and then zoom in the events of the past week.

First, we find it important to highlight that the price of the largest cryptocurrency, Bitcoin, is currently below both its 50-day exponential moving average (EMA) and its 200-day EMA. Additionally, both the 50D EMA and the 200D EMA have recently turned downward.

It’s important to recognize that these are not the most typical signs of a rising market. However, it should also be noted that the 50D EMA fluctuates all the time, and the 200D EMA can also change direction rather quickly. The closest example of such a reversal is from a year ago, in September 2023.

We do not rule out the possibility that the recent downward trend could reverse soon. On the other hand, for us to consider a market reversal as the most likely scenario in the near term, we would need some concrete signals indicating its beginning. Next, we will examine whether such signals can be identified.

Some optimism regarding Bitcoin's price could be sparked by the fact that the price has risen strongly since last Friday's drop and has just crossed above its 20D EMA. However, we cannot place significant weight on this, as the 20D EMA itself has recently dropped sharply. Since the beginning of August, it has been moving below the 50D EMA, and it has recently diverged significantly downward. Therefore, we cannot consider the recent rise and the crossing of the 20D EMA as particularly strong signals.

What could be a strong signal then? A trendline drawn from the two previous local highs currently sits at around $61,500. Breaking through this level could be the first glimmer of hope that the current rise might form something other than a new “lower high.”Therefore, we set $61,500 as a key level to watch for Bitcoin, and until it is breached, we remain quite cautious.

The conclusions we draw from Bitcoin's price movement could be supported or challenged by next examining the direction of the EURUSD currency pair, which reflects the strength of the U.S. dollar. EURUSD has recently made both a “lower high” and a “lower low,” and has fallen below its declining 20D EMA. These signals indicate a downward rather than an upward trend.

In case using EURUSD as a market navigation tool is unfamiliar, we will quickly remind you of our view on it.

The relative weakening of the U.S. dollar has traditionally been a favorable condition for cryptocurrency prices, while dollar strengthening is typically unfavorable. One way to monitor the dollar's performance is to compare it to another major currency, such as the euro. In this context, the euro is therefore used merely a “measuring stick” for the dollar.

From the accompanying graph, we can see that when the EURUSD pair is above its 20D EMA (background green), Bitcoin's price development has typically been stronger than during the preceding or following red periods (EURUSD below the 20D EMA).

As mentioned above, EURUSD is currently below its 20D EMA. The graph shows that over the past six months, these periods have been rather weak for Bitcoin's price. This further increases our caution regarding expectations for the coming weeks.

The third factor we examine is the stock market’s performance, using the Nasdaq 100 index (NDX) as a reference.

Like Bitcoin, the NDX has just crossed above its 20-day EMA. As with Bitcoin, we are somewhat skeptical about this signal. The NDX, for the first time in a year, has a lower high behind it, and we are still looking for evidence that this most recent up is not forming another lower high. The first indication of this would be if the NDX were to rise above the trendline drawn from the two previous highs, i.e., above 19,500 points.

In summary, at this time we see more indications of a downward than an upward market. Therefore, our expectations for price movements in the coming weeks remain cautious.

Based on our analysis, we list a few factors that would make us reassess our position and which may be worth keeping an eye on:

- Bitcoin's price rising above $61,500

- EURUSD rising above the 20-day EMA (currently around 1.1047)

- NDX index rising above 19,500 points.

Any of these developments would force us to reassess the situation. Until we see evidence of such changes, our primary assumption is that this week's price increase will form another lower high, continuing the trend of previous lower highs.

Power dynamics of the big three

The year 2024 has been marked by discussions about Bitcoin’s dominance, Solana’s strong performance, and Ether’s weakness. As we approach the end of the third quarter, we feel it is a good time to take a closer look at the dynamics among these “big three.”

We begin our review with a graph that shows the relative performance of Bitcoin, Ether, and Solana's SOL token.

At a quick glance, we can make two observations:

1. Out of the trio, Ether has been the weakest, having weakened by over twenty percent against Bitcoin and slightly less than twenty percent against SOL.

2. The strongest of the trio has been Bitcoin, which since the beginning of the year has strengthened by about six percent against SOL and more than twenty-five percent against Ether.

To put the events of the last eight months into perspective, we will next extend our analysis to about a three-year period. We will start from the end of 2021, which marked the peak of the previous market cycle.

Now we can again make two observations:

1. ETH and SOL are both about forty percent lower relative to Bitcoin than they were at the market peak in 2021. This clearly highlights the Bitcoin-led nature of the 2023-2024 bull market.

2. Compared to the 2021 market peak, SOL has only strengthened by nine percent against Ether over the past three years. This is not an insignificant change, but over a three-year period, we also cannot describe it as particularly dramatic either.

Thirdly, let’s take a closer look at the relative performance of the three cryptocurrencies over the past six weeks.

Again, we can make two observations:

1. Since the end of July, both SOL and ETH have significantly weakened against Bitcoin. This is not entirely surprising, considering that the local peak of the crypto market occurred around the turn of July and August. Bitcoin’s price reached $70,000 at that time, but it has since fallen by about 20 percent.
2. A perhaps more interesting observation lies in the relationship between SOL and ETH. Compared to six weeks ago, the ratio has remained practically unchanged. During this time, it has also made two lower highs and one lower low. This can partly be explained by the general downward market trend, which often favors the larger market caps, in this case ether.

What should we make of all this?

We summarize our conclusions as follows:

1. It seems that over a three-year period, ETH and SOL have performed relatively evenly, while both have weakened against Bitcoin.

2. However, over this three-year period, the tokens have followed very different paths.

Let’s take a moment to revisit the three-year analysis.

When examining individual years within this period, we can see that 2022 was a particularly strong year for ether. During that year, it barely weakened against Bitcoin at all. This can be considered a surprisingly strong performance, given that Bitcoin's dollar value fell by more than 60 percent during 2022. In such a sharp bear market, it wouldn’t have been surprising if the ETH/BTC ratio had dropped by, for example, 40-50 percent (which is roughly the level it’s at now).

For Solana, 2022 was a year of collapse. SOL’s dollar price dropped by about 90 percent, and it weakened by around 80 percent against Bitcoin.

We believe that much of the developments in 2023-2024 for both Ether and SOL have been just a "mean reversion" from their very different performances in 2022. At the beginning of 2023, Ether finally began to weaken against Bitcoin along with the rest of the altcoin market, while SOL, which had crashed faster than other altcoins, began to reclaim some of the relative market share it had lost.

Together, these opposite developments have made SOL appear very strong and Ether very weak.

What should we expect next?

Our hypothesis is that SOL's "easy gains” against Ether, based purely on mean reversion, are nearing their completion, and the relative relationship between the tokens is approaching some form of "fair value." From here on, the relative performance of these tokens will be determined more by the genuine appeal of the protocols and their tokens to developers, users, and traders.

We do not yet see clear signs of a trend reversal, and therefore, we cannot claim that it would be justified to expect Ether to start strengthening directly against SOL. However, our thesis is that this strengthening has slowed in recent months, and instead of a one-way trend, the SOL/ETH ratio has started to oscillate back and forth. 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. This is especially true in situations where the overall market direction is downward and risk appetite is declining, which typically favors the larger market cap of Ether.

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