Ever since the Merge two years ago, Ethereum has been experiencing a decline in performance compared to Bitcoin. What was once considered ultra-sound money, ether (ETH) is now on the brink of falling into undervalued territory. The reasons behind Ethereum’s underperformance since the Merge have been identified by blockchain analytics platform CryptoQuant. Issues such as inflationary supply dynamics and weaker network activity when compared to Bitcoin have been pointed out as key drivers.
In September 2022, Ethereum transitioned from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism. However, since this transition, the native token has lagged behind BTC by 44%. The current ETH/BTC price stands at 0.0425, marking its lowest level since April 2021. Despite the approval of United States spot Ethereum exchange-traded funds (ETFs) over a month ago, Ethereum’s underperformance has continued to worsen.
On-chain data reveals that crypto investors are showing a preference for Bitcoin over Ethereum, as seen in the decline of ETH’s spot trading volume relative to BTC. Initially, ETH’s spot trading volume was 1.6 times that of Bitcoin, but it fell to 0.76 last week. This shift in investor sentiment is leading to a further underperformance of Ethereum in the market.
One of the effects of the Dencun upgrade on Ethereum has been the decrease in transaction fees. This reduction in transaction fees, combined with the introduction of data blobs to the network, has made the ETH supply inflationary. The total ETH supply now stands at a high of 120.323 million, steadily increasing since April. With the current circulating supply of ETH at its highest level since May 2023, it is projected to return to its pre-Merge level in approximately three months.
In terms of transaction count, Ethereum is also falling behind Bitcoin. While Bitcoin has seen record-high transaction counts this year, fueled by inscriptions, Runes, and layer-2 networks, Ethereum’s transaction count has dropped significantly. From a peak of 27 in June 2021, it now stands at 11, marking one of its lowest levels since July 2020. This decline in transaction count further contributes to Ethereum’s underperformance relative to Bitcoin.
Analysts predict that Ethereum could continue to decline in comparison to Bitcoin, as it currently remains above the undervaluation territory. Ethereum will only be deemed undervalued against Bitcoin when the ETH/BTC Market Value to Realized Value ratio drops to 0.45. Until then, Ethereum may face further challenges in catching up to Bitcoin’s performance in the market.
Ethereum’s underperformance compared to Bitcoin can be attributed to various factors such as inflationary supply dynamics, weakening network activity, and decreasing transaction fees. As the cryptocurrency market continues to evolve, Ethereum will need to address these issues effectively to regain its position and reputation in the industry.