The Ethereum-Bitcoin Ratio Is Now at Its Lowest Level Since April 2021, Which Could Trigger a Big Rally for Ethereum

Cryptocurrencies like Bitcoin (BTC -0.18%) have absolutely taken off since Election Day. Investors are betting that a lighter and friendlier regulatory environment under the Trump administration will continue to boost the sector to new highs.

Cryptocurrencies have soared since Election Day as investors anticipate a favorable regulatory climate under the Trump administration. Among the top crypto assets, Bitcoin (CRYPTO: BTC) has an interesting relationship with Ethereum (CRYPTO: ETH). The two are linked but distinct, and their relative performance can provide insights.

Recently, the Ethereum-Bitcoin ratio has reached lows not seen since April 2021, potentially signaling a coming move for Ethereum. Here's what to know.

The Ethereum-Bitcoin ratio

Given their history and the difficulty in valuing cryptocurrencies due to their lack of intrinsic value, many investors have used trends between Ethereum's and Bitcoin's prices to gauge their relative value. After all, groups of stocks are often compared to determine their relative valuation. A simple way to track Bitcoin and Ethereum is by looking at the relationship between Ethereum's and Bitcoin's prices, which is done by dividing the price of Ethereum by the price of Bitcoin. Observing where this ratio has moved over time can offer clues as to which cryptocurrency appears undervalued or overvalued relative to the other.

ETH/BTC Ratio data by TradingView. Chart by Daniel Foelber.

As you can see in the chart, the Ethereum-Bitcoin ratio fell toward 0.035 recently, marking the lowest level seen since April 2021. The average ratio since 2020 is 0.0538. Ethereum has risen about 38% since Election Day, compared to Bitcoin's 44%. However, Bitcoin has outperformed significantly this year.

Bitcoin Price data by YCharts

Cryptocurrency has performed admirably during an uncertain period and a high-interest-rate environment where investors have been primarily concerned with inflation and its potential to slow the economy. Bitcoin has held up particularly well as investors have grown more confident in the token's ability to hedge against inflation given its finite supply.

Returning to the Ethereum-Bitcoin ratio, the last time it dropped to these levels, Ethereum went on to rally 120% over the following two months. Notably, Bitcoin and Ethereum trade 24/7, so things can obviously change quickly. The ratio was 0.0380 on Nov. 30, so Ethereum has already begun to close the gap slightly.

Could Ethereum be set for a rally?

Of course, past trends don't always guarantee future success. As you can see in the chart above, the Ethereum-Bitcoin ratio has gone lower before, so it could continue to do so now.

However, I believe recent trends in the Ethereum-Bitcoin ratio bode well for Ethereum, particularly if the crypto rally continues. As we've seen in the stock market this year, markets and sectors tend to broaden over time. A large component of crypto has always been sentiment. Bitcoin and the broader market have rallied significantly, but it typically takes a while for sentiment to peak and then begin to decline again. I don't think we've seen a peak yet in positive sentiment toward crypto. The positive regulatory environment could continue to be a tailwind well into 2025, and the more that crypto rallies, the more larger investors will be forced to chase it.

Ethereum doesn't offer the same inflation hedge as Bitcoin, but it provides value in other ways. Its relatively new proof-of-stake method for validating transactions is far more energy-efficient than Bitcoin. Developers also see Ethereum as the primary network for creating decentralized applications and non-fungible tokens, and its smart contract capabilities will likely have use cases in many industries.

In my view, Bitcoin and Ethereum are both solid long-term crypto assets, so both could continue to perform well. However, given Bitcoin's impressive rally already, it's possible the rally will broaden to other tokens like Ethereum, though it's very difficult to try to predict near-term price movements of cryptocurrencies.