Ethereum bull trap? ETH price signals breakdown versus Bitcoin

A recent run-up in Ether (ETH) prices against its top rival, Bitcoin (BTC), appears to be at the risk of exhaustion, even as analysts see the second-largest cryptocurrency as the stronger of the two.

The ETH/BTC exchange rate has risen by up to 40.19% after bottoming out at 0.0553 BTC on May 23. The powerful rebound move reflected a spike in the capital flow from the spot ETH to spot BTC market. That also led analysts at Delphi Digital, an independent market research firm, to highlight Ether's "formidable strength" in the Bitcoin-quoted markets. They wrote:

"If you look at the YTD ETH/BTC chart in isolation, you probably wouldn’t guess fear in the crypto market is the highest it’s been in a year."

But a closer look into the ETH/BTC chart returns evidence that bullish traders might be heading into a bull trap.

Bearish wedge

ETH/BTC formed a pattern that began wide at the bottom and contracted as the price moved higher. As a result, the trading range narrowed. Meanwhile, the volumes declined as the prices rose and the contracting pattern evolved.

Classic chartists refer to the structure as a rising wedge. They interpret it as a traditional bearish reversal pattern, primarily because of the loss of the upside momentum on each successive high formation.

Rising wedges mature as the asset reaches the level where its two trendlines converge. Nevertheless, bearish confirmations do not come until the price breaks below the wedge support in a convincing fashion. But if it does, the asset risks crashing by as much as the maximum distance between the wedge's upper and lower trendline.

Therefore, the ETH/BTC rising wedge indicator suggests a decline toward 0.0648 BTC on a negative breakout attempt from the pattern's apex — the point at which the trendlines converge. Also, the 0.0648 BTC level served as support throughout May.

January 2018 fractal

Delphi Digital compared the responses of ETH/BTC to Bitcoin's cyclical tops in 2018 and 2021 to explain its bullish outlook for the pair.

The firm stressed that ETH/BTC was comparatively a weaker instrument during the 2017 price rally than during 2021. The pair topped out mid-cycle — in June 2017 — even as Bitcoin continued climbing and reached $20,000 by year's end. By then, ETH/BTC had crashed by more than 85%.

But a massive correction in Bitcoin prices in January 2018 offloaded capital into the altcoin markets, causing a short-term upside correction in BTC-enabled pairs. Ether also benefited from the money flow from Bitcoin markets, as it rebounded from 0.0231 BTC in December 2017 to 0.1237 BTC in January 2018 — a 435.44% rise.

ETH/BTC then started correcting lower in the weekly sessions as both Bitcoin and Ether took a beating in dollar-quoted markets. The pair eventually crashed from 0.1237 BTC, then a year-to-date top, to as low as 0.0246 BTC in December 2018.

But that is not the case with the ongoing ETH/BTC correction, noted Delphi Digital, writing:

"At the early 2018 top, ETH/BTC took a massive beating and didn’t recover even close to as quickly as it has this time."

Ether–Bitcoin correlation

Whether or not ETH/BTC will undergo a negative breakout appears to depend on how Bitcoin performs in dollar-quoted markets.

The BTC/USD exchange rate declined by up to 53.77% from its record high, near $65,000, and started consolidation later. Meanwhile, the ETH/USD rate also corrected in tandem with BTC/USD, plunging 60.59% from its all-time high of $4,384. That shows a strong linear correlation between the two digital assets.

Nick Spanos, founder of Bitcoin Center NYC, told Cointelegraph that Ether would need to break its correlation with Bitcoin in the dollar-denominated markets to have an independent ETH/BTC trend. Until then, sharp downside moves in ETH/USD and BTC/USD would also mean a depressive ETH/BTC trend. He added:

"While Ethereum has good fundamentals and upgrades in the works, its potential growth in the future is somewhat dependent on the performance of Bitcoin. A breakaway from this trend is being projected by Ethereum investors. However, the current trend does not indicate the likelihood of this in the near to mid term."

Yuriy Mazur, head of the data analysis department at cryptocurrency exchange CEX.IO, added that the ongoing anti-inflation narrative could allow Bitcoin to resume its uptrend. As a result, the rest of the cryptocurrency market, including Ether, should follow suit. He told Cointelegraph:

"ETH/BTC should benefit from a rising trend for cryptocurrencies, especially as Ethereum undergoes the London hard fork upgrade later in July."