Image Source: Pixabay

Typically our coverage of cryptocurrencies is more focused on the general state of the asset class and the fundamental outlook. However, since early July, a noteworthy dynamic began to emerge in relative performance between Bitcoin and its distant second-most-popular “crypto cousin” Ethereum, notes Tom Essaye, president of the Sevens Report.

In short, Ethereum, or ETH, the symbol it trades under on crypto exchanges, began to meaningfully outperform Bitcoin, with the Long-ETH/Short-BTC trade accelerating rapidly as both cryptos surged towards record highs.

Upon first assessment, you might say, “So what?” But there is a key underlying takeaway sourced in cross-asset analysis as the acceleration higher in ETH/BTC in recent weeks is reminiscent of other rapid advances in the crypto “pair” that emerged.
 

The correlation observed during those upside sprints in ETH/BTC was that they all coincided with squeezy yet powerful rallies in equity markets – rallies that preceded near-term blow-off tops in the broader stock market, albeit with inconsistent lead times.

Bottom Line

In prior cases over the last 10 or so years, every time we have seen such a robust and pronounced rise in the ETH/BTC crypto-pair, stocks have been sprinting higher in lockstep. However, once the upside momentum faded from those ETH/BTC rallies, it would have been prudent for equity investors to put up their guard.

That’s because, more often than not, a rise in broad market volatility with S&P 500 Index (SPX) drawdowns averaging 10%-20% have followed a peak in ETH/BTC. And the risk of the Long-ETH/Short-BTC trade becoming exhausted appears underappreciated right now.

About the Author

Tom Essaye is president of the Sevens Report, which he founded in 2012 with a singular mission: To combat the information overload facing financial professionals and provide research that helps them become more efficient and effective. The company began with a single product, The Sevents Report. This is a daily economic report that covers essential market information for stocks, bonds, currencies, commodities, and economic data.

Since 2012, the firm has expanded its research offerings to provide a comprehensive research solution for today's financial professionals. The firm now also offers an investment idea-focused product, Sevens Report Alpha, a client communication solution, Sevens Report Quarterly Letter, and a chart-based product, Sevens Report Technicals. 

Mr. Essaye has earned a national reputation for his straight-forward, plain-English, and accurate market analysis. He has been a frequent guest on CNBC, Fox Business, Bloomberg, and Yahoo Finance and is widely quoted in the Wall Street Journal, Barron's, Morningstar, New York Times, USA Today, Marketwatch, Axios, NASDAQ, and Bloomberg. Tom is a graduate of Vanderbilt University and has an MBA from the University of Florida.

More By This Author:

AI: Is Capex Spending Going Overboard - Or Just Getting Started?
DXCM: A Diabetes Monitoring Company With Robust Growth Prospects
AAP: Turnaround On Track With Help From The Pro Business