Evaluating Bitcoin's Relative Trends

Louis Sykes
July 21, 2021

The strongest of assets will not only do well on an absolute basis, but they also tend to outperform their alternatives. In the case of Bitcoin, not only are we pressing against new absolute lows, but we're seeing lower lows relative to other non-crypto-related assets.

This is NOT evidence of a healthy uptrend.

Relative strength is one of our primary tools as technicians.

The easiest way to go about doing this analysis is through relative ratio price charts.

Simply put, it's a measure of a security's performance relative to another. For this example, that's displayed as being long Bitcoin in the numerator, and short an equivalent amount of US Dollars in the denominator.

When the ratio is rising, the numerator is outperforming the denominator.  And when the ratio is falling, the numerator is underperforming the denominator.

Not only does this type of analysis allow us to evaluate the risk appetite of investors, but it also ensures we're always positioned in the right areas.

So let's dive through some of these cross-asset relationships to see how Bitcoin's faring relative to other groups.

Let's take a look at Bitcoin vs the S&P 500. Here, price is at a critical inflection point of the 2017 highs, which could act as a logical area to see an ease of this relative downtrend. We're yet to see that take place, with prices making new marginal lows these last few days.

We'll be keeping an eye on this ratio in the coming weeks to see if buyers can defend this level, which would be constructive for Bitcoin on an intermediate-term basis.

But when compared to Mega-Cap Growth stocks, Bitcoin's relative downtrend looks even worse:

And how about relative to the biggest company in the world, Apple?

The beauty of this analysis is that we can compare any number of assets against each other, which makes allocating to the right areas that much more efficient.

If you're someone only in the business of being long, these relative trends suggest you have no business in owning Bitcoin, at least when compared to its potential alternatives. And if you happen to be focused more on the short side, it's been an environment where cryptocurrencies have been a better place to be looking for opportunities, at least compared to equities.

Moving on, here's the Bitcoin/Gold ratio.

We can either sit on a high horse and make arguments on which one is the "better storer of value", or just simply evaluate what the market's telling us. In this case, there's no competition...

Seeing this critical ratio meet overhead supply was one of the many reasons we flipped the book earlier in the year. Here's what we outlined in a post in May relating to this ratio:

One more chart that I think is interesting is the Bitcoin / Gold ratio hitting its upside objective and reversing hard.

How many people are telling you to sell Bitcoin to buy Gold?

I don’t hear any at all….

If we’re below 36:1 in the ratio between Bitcoin and Gold, then we prefer Gold.

And if you thought that all these ratios look the same, look no further than the Bitcoin/Lumber ratio.

If your Bitcoin longs are bumming you out, just change the denominator from USD to Lumber, because the ratio just resolved higher from its 2017 highs!

Long story short, we can evaluate as many cross-asset ratios as we like, but the overriding theme is that there's still plenty of work for Bitcoin to do relative to its peers.

But on the other hand, there's a handful of key metrics nearing important levels. The ability for buyers to step in and hold here would prove constructive for Bitcoin in the coming weeks and months.

If you want to try your hand at plotting some of these cross-asset ratios yourself, you can do so on Koyfin. Simply type in BTCUSD or any other security on the left-hand side, go to 'Historical Chart' and add a 'Relative Strength' data series to your chart.

And as for our premium crypto members, we'll be keeping you up to date on the most important relative themes we're taking advantage of around here.

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team

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