One of the great things about technical analysis is the ability to compare assets to one another so we can responsibly judge true value. If you bought some stock in March of 2009 and are thrilled by the fact that you made 30-40% on the investment since then, I’d say you failed. You could have almost bought anything else instead of what you decided to buy and made 200% or 300% during that time if not a lot more. On a relative basis you suck.
When it comes to measuring risk appetite I generally like to measure the more speculative asset to a more conservative risk-averse asset. Many of you who know me already see my Copper/Gold Ratio charts or Small-caps/Large-caps or Consumer Discretionary Stocks vs Consumer Staples. I have a lot of them. When it comes to precious metals specifically, I particularly like the Silver/Gold ratio as a measurement of risk appetite for precious metals. Historically, if metals are doing well, Silver is going to be outperforming Gold because it is the more speculative of the two. On the other hand, when precious metals are selling off, Silver gets destroyed while Gold outperforms the other metals. I wrote about this last week.
In all of my work with Cryptocurrencies, it seems pretty clear that the Ethereum / Bitcoin ratio paints a similar picture about risk. I think if you are an investor of any kind in these decentralized digital currencies, it would be irresponsible not to follow this ratio.
But first, here is the Silver / Gold ratio overlaid with the price of Gold on an absolute basis. I showed everyone this chart during at Stocktoberfest earlier this month (Watch presentation here) and I think it’s worth pointing to here again:
There are many people out there looking for answers about the potential direction for things like Bitcoin and Ethereum, among other cryptocurrencies that are out there. I discussed my thoughts about Bitcoin this week and today I want to talk about some additional observations I’ve made about the asset class. The key to profits in Ethereum has been following the relative strength vs Bitcoin. In the same way that relative outperformance from silver over gold is clear evidence of risk appetite for the precious metals space, and therefore silver, outperformance from Ethereum relative to Bitcoin is giving us eerily similar evidence:
Notice how Ethereum was heading lower on an absolute basis during the second half of 2016 while it also underperformed on a relative basis. Once Ethereum started to outperform Bitcoin, prices took off. When prices of Ethereum stopped rising on a relative basis this June, it has no longer been able to rise on an absolute basis either.
For Ethereum bulls, you want to see a breakout on a relative basis as a signal that any strength in the “Silver of Crypto” is here to stay. That’s how I see it.
Tags: $XBTUSD $BCOIN $BTC.X $BTCUSD $ETHUSD $ETH.X