Bitcoin - Ethereum SMT Divergence: What Is It & How to Use It

What Is SMT Divergence in Crypto Trading?

Most traders expect BTC and ETH to move in sync. However, there are times when they diverge, moving in opposite directions or struggling to keep the same pace. These moments are not random and often indicate the activity of “smart money.” So, to better understand SMT divergence, we have to start with the explanation of this term.

What Is “Smart Money”

This term refers to institutional investors, hedge funds, or even big experienced traders whose capital is so significant it can influence market movements when they come into play.  For example, they can create divergences by pushing one asset to a new high or low while leaving another behind. The actions of “smart money” usually create detectable patterns on the price charts, so it becomes possible to analyze the money flow and predict the possibility of price shifts.

What Does SMT Mean

SMT in trading stands for Smart Money Technique. It is a method of analyzing price divergences between correlated assets, such as BTC and ETH. For example, when Bitcoin consistently makes new highs during a certain period of time and Ethereum keeps lagging behind, it may suggest that institutions are favoring Bitcoin.

Traditional Divergence vs SMT Divergence

Traditional divergence is based on comparing an asset’s price with an indicator, for example, with RSI (Relative Strength Index). If the price and the indicator mismatch, it shows a potential reversal or weakening of the current trend because the currency is overbought or oversold.

SMT divergence, on the other hand, compares the prices of two correlated assets directly. Instead of monitoring overbought or oversold conditions, it identifies which asset is currently leading the market: which one is stronger and which one is weaker.

BTC vs ETH: Reading the Divergence

Divergences in a correlated pair, like BTC/ETH, reveal underlying market dynamics. These price discrepancies provide an insight into which asset is currently stronger and how capital is flowing. The classic pattern is when one coin makes a new higher high why another one from the pair makes a lower low. However, there can also be hidden SMT divergence in the crypto market, when one coin is making a higher high and another one reaches a lower high, or a higher or and a lower low, respectively.

There are also two types of SMT divergence in terms of market direction: 

• Bearish: One cryptocurrency reaches a higher high while another one is left behind.
• Bullish: One coin is making a lower low but another one from the pair is not.

So, how to use this? Here are a few examples:

• Bitcoin Makes a New High, Ethereum Fails to Follow: This divergence indicates that BTC is attracting stronger buying interest while ETH is showing relative weakness.
• Ethereum Makes a New High, Bitcoin Lags: Conversely, when this happens, it signals that Ethereum is currently stronger. Traders might seize this moment to go long on ETH or consider shorting BTC.

The “stronger” asset typically attracts capital and represents institutional buying pressure, while the “weaker” asset might be experiencing stagnation or a corrective movement and may indicate hesitation or lack of capital flow. All this, paired with other analytics tools, can help predict where the market is likely to be headed next.

BTC/ETH Divergence Example

One example of BTC/ETH divergence is seen across the year 2024. Before that, both cryptocurrencies were mostly moving in tandem, rising and falling together. However, starting from February 2024, BTC started to pull away from ETH. This resulted in an expanded performance gap, although the pair regained positive correlation and started to move in sync again in a few months. One potential interpretation is that “smart money” were focusing more on Bitcoin, and BTC was setting the trend.

Smart Money Perspective: Who's Leading the Market?

Understandably, money follows the stronger asset. If some coin rises faster or holds up better than another, currently, it’s a stronger cryptocurrency, and institutions tend to allocate capital toward the asset that is already demonstrating strength because it is more likely to continue performing well. In turn, this shapes market sentiment because traders notice favorable conditions for specific investment and increased chances of profitable trades.

SMT divergence in cryptocurrency can also help identify a false breakout (when an asset fails to sustain momentum after moving beyond a significant level). So, if one asset shows strength but its correlated pair does not follow, the breakout may be false, and caution is needed.

How to Use SMT Divergence in Your Strategy

Divergences between major cryptocurrencies provide clues about market sentiment and psychology. During periods of high volatility, strong trends, or when major news events affect the market, it’s easier to spot SMT divergence because the actions of “smart money” are more pronounced.

When BTC and ETH move differently, it can signal that one asset is attracting more institutional attention. Observing and analyzing such divergences helps better identify false breakouts, reduce risk, and find optimal trading opportunities. Here are a few examples of how traders typically apply this information:

• Adjusted Buying and Selling Scenarios: SMT divergence can guide both entries and exits. When it comes to buying scenarios, traders may choose to enter a long position in the stronger cryptocurrency. As for the selling scenarios, one may decide to enter a short position in the weaker asset.
• Additional Risk Management Measures: If the divergence persists, the likelihood of a significant market movement increases. So, using risk management tools like stop loss can help protect positions during uncertain periods.

Using Platforms Like Bitsgap for SMT Analysis

Many exchanges and crypto trading platforms provide interactive charts and comparative tools for pairs like BTC and ETH. You can monitor charts, track relative highs and lows, and instantly see when assets are out of sync.

In addition, it’s convenient to use automation to respond to SMT signals better. Bitsgap allows traders to automate responses to SMT signals. Trading bots can execute buy or sell orders when divergences occur - although there is no one “SMT divergence” signal, bots can track the price ratio between BTC/ETH and other pairs, monitor technical indicators like RSI or MACD, and help manage risk through tools like take profit and stop. Your actions upon possible divergences become more consistent, and you can make informed decisions before the wider market reacts, even without constant monitoring of the charts and patterns.

Conclusion: Using SMT and Automation to Trade Smarter 

Knowing how to spot SMT divergence helps traders better analyze market behavior and create or adjust their strategies accordingly. By comparing BTC and ETH, for instance, one can identify the potentially stronger coin. This leads to making informed decisions about entry and exit points based on the market sentiment and reducing exposure to risk. 

With Bitsgap, you can automate market monitoring and trades. Due to visual analysis, different types of bots, extensive bot customization options, and other features, you can respond to changes in the BTC/ETH relationship promptly. Start by launching a bot in the demo mode, use backtesting to explore how your strategy could have performed during the SMT divergence periods, and you’ll get better prepared for future similar events.