The Ethereum-Bitcoin Decoupling Debate Explained

In this issue, we’ll take a slightly different approach since the current technical picture isn’t that interesting. Specifically, we’ll discuss the Ethereum/Bitcoin decoupling scenario in light of recent price action.

Let’s dig in.

What is the Bitcoin Taproot Upgrade?

Unlike the name implies, the Bitcoin Taproot upgrade is no turnip, but an update that promises to keep bits of transaction information buried deep underground.

As its originator wrote, “I believe this construction will allow the largest possible anonymity set for fixed party smart contracts by making them look like the simplest possible payments.”

Check out the full article here!

Could Ethereum decouple from Bitcoin?

Over the last couple of months, the Ethereum decoupling or ‘flippening’ narrative has made the rounds in the crypto twitter-sphere, with investors eagerly arguing their respective positions in so many ways.

What do the technicals tell us?

Firstly, the ETH/USD rally was quite a sight to behold and (clout alert) followers of this newsletter were able to catch the entire 550% move from sub-$700 prices. More recently, ETH/USD retraced its multi-week rally in a single candle as it hit sub-$2,000 prices, but ultimately closed above the 20-weekly EMA. Technically, this means that ETH/USD is still within a bull market if we stick to our preferred method of assessing bull markets. This means that there is little high-time frame overhead resistance, which suggests that a rally towards $3,300 is possible in the near term, as previously discussed.

Having tested the ₿0.055 level, ETH/BTC still looks good despite the nuke and could grind higher. This relative strength versus bitcoin has fueled discussions about a potential decoupling. And indeed, Ethereum has certainly provided technical reasons to entertain this possibility in the months following December 2020. If current conditions prevail, the next technical target would be the ₿0.1 level.

What does a ‘decoupling’ mean?

A decoupling scenario implies that ETH/USD will start behaving separately from bitcoin, similar to how bitcoin arguably decoupled versus the S&P 500 last year. In other words, this is an environment where Ethereum could have its own, distinct long-term trends and narratives which aren’t simply an extension of an investor’s bitcoin portfolio (as it is currently treated).

Ethereum showed relative strength as bitcoin traversed sideways for several weeks, but that progress was completely wiped out when the market dropped. In fact, the market behaved as it normally does — retreating into bitcoin and stablecoins. This phenomenon is clear on any altcoin/usd or alt/btc chart.

Such events have consequences, which is to say that as of right now there is no robust evidence to suggest that Ethereum is acting independently of bitcoin. At the same time, ETH/BTC has broken out of a 3-year accumulation range, which has held so far as referenced earlier. This renders the discussion about a potential decoupling subject to speculation, for which investors and traders on the tail-end of the risk curve will deal with.

Still, there is some actionable information. Basically, until the dynamic changes and Ethereum shows long-term signs of decoupling (which may not happen), investors can treat ETH/USD as an ideal parallel trade in order to boost returns. Bitcoin strength reduces the chances of a ‘rug pull’ since BTC/USD would act as a tailwind rather than a headwind.

Long story short, unless Bitcoin is relatively bullish then it’s time to be cautious. This is entirely dependent on your time-frame and where you fall on the risk curve.

You can find out more about the bitcoin and ethereum narratives on my blog.

Catch you next time.

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