Even as Bitcoin crashed last week pulling the crypto market lower, the ether-bitcoin (ETH/BTC) ratio rose by nearly 13 percent hitting an over three-year high. This was seen as an anomaly as traditionally the pair has only rallied during bull runs.

A trading pair, like ETH/BTC, is a function that represents two currencies that can be traded for each other on an exchange. For example, when you buy a bitcoin using rupees, the trading pair is BTC/INR. It can be essentially quantified as the price ratio of two currencies. Put simply, it is the amount of BTC required to buy 1 ETH.

Also Read: Why is Ether outperforming Bitcoin?

The prices of Ether and Bitcoin can fluctuate wildly, and often the volatility of one is correlated with the other. The point of ETH/BTC trading is taking advantage of the fluctuations of one cryptocurrency with the fluctuations of another. Crypto pairs can be traded on the spot markets or with derivatives.

The latest ETH/BTC rally may have been caused by rising interest in the Ethereum blockchain. While the second most popular currency dipped on December 4, it has stayed resilient in the past few months.

There are a few reasons why the ETH/BTC pair is seeing a substantial rise, which can be attributed to a few factors.

The increasing popularity of Ethereum: As bitcoin is seeing a significant price drop, Ethereum is acting as a hedge in the ETH/BTC pair. Ether has grown substantially over the last year and is continuing in an upward direction due to significant developments. Ethereum’s move from proof-of-work to the proof-of-stake mechanism, dubbed Ethereum 2.0, is a significant factor that is helping it stay strong.

Another huge factor in Ethereum’s positive outlook is the introduction of EIP-1599, the Ethereum Improvement Proposal implemented on August 5. The proposal has solidified Ethereum as a deflationary asset by introducing a specific mechanism to burn or destroy a portion of fees paid to the miners in the Ethereum blockchain.

Also Read: How are Bitcoin and Ethereum blockchain different

Alex Svanevik, CEO of blockchain data company Nansen, told CoinDesk, “One of Bitcoin’s main value propositions over ETH has been the monetary policy. However, after the London upgrade (and specifically EIP-1559), many perceive ETH as having a sounder monetary policy.” According to watchtheburn.com, the Tthereum blockchain has burned more than a million Ether worth around $4.4 billion. This led to a reduction of 68 percent in supply.

Lately, the Ethereum blockchain has also seen immense growth in crypto sectors like non-fungible tokens (NFT), the game space, and metaverse expansion. Being the largest programmable blockchain, Ethereum is also dominating decentralised finance (DeFi).

Bitcoin’s plunge: Bitcoin’s increased institutional adoption makes it vulnerable to macro risks due to various socio-political factors. These macro risks are causing consistent fluctuation in the price of the token. Stablecoins have also usurped Bitcoin’s roles as a base currency for other cryptocurrencies. Now stable coins like Tether, which are pegged 1:1 with USD, are being used to fund other cryptocurrencies. This is reducing the demand for Bitcoin in the market.

Future of Ethereum: All this progress in the Ethereum blockchain may indicate Ether will be the top token in the future, even surpassing Bitcoin. But at this point, it would be just speculation.

Also Read: Blockchain usage beyond cryptos

(Edited by : Yashi Gupta)

First Published:Dec 8, 2021 9:08 PM IST