ETH/BTC ratio is one of the most watched and analyzed metrics in crypto. Mathematically it’s simple. It’s ETH price divided by BTC price. It measures the relative value of the largest altcoin, ETH to the largest digital asset, BTC. As such, it offers good insights into the state of the crypto market. For example, we see that during DeFi Summer in mid-2020 the ratio surged to 0.04. This was accompanied another increase in the metric when a new bull market started in 2021. This reflects the importance of Ethereum DeFi ecosystem during that time. 2022 proved to be the wors year (so far!) for the crypto market which is reflected in ETH/BTC ratio as well. Since September 2022 the ratio is in a gradual and steady decline. We can see a turning point in this metric if ETH ETF gets approved.
What to do?
ETH/BTC is a classic example of pairs trading. Pairs trading is a market-neutral, non-directional strategy seeking to exploit the mispricing between correlated assets. As such, pairs trading involves taking a long and a short position simultaneously in two securities with high correlation.
ETH/BTC ratio offers good trading opportunities to crypto traders. If the ratio starts to diverge from its long-term mean and is trading at a historically high level, it might be a good idea to short it. Conversely, if the ratio trades at historically low levels, you may consider to long it betting that it will revert to its long-term mean.
If you want to understand how pairs trading works in crypto and how to build a trading strategy from scratch in Python, I have written an e-book for you. It’s called “Building a crypto pairs trading strategy in Python” and can be bought on Gumroad. The book teaches the fundamentals of pairs trading without going into theory and shows how to build and backtest a trading strategy in Python. You’ll get both the PDF file and Python code.