Ethereum, once considered a strong competitor to Bitcoin, has seen a significant decline in performance since the Merge two years ago. What was once hailed as a revolutionary platform for decentralized applications and smart contracts is now on the brink of falling into undervaluation territory.
Blockchain analytics platform CryptoQuant has identified several key factors contributing to Ethereum’s underperformance compared to Bitcoin. One major factor is the inflationary supply dynamics that have come into play since Ethereum transitioned from a Proof-of-Work to a Proof-of-Stake consensus mechanism in September 2022. This transition has not been kind to ETH, with the native token now underperforming BTC by 44%.
Another significant driver of underperformance for Ethereum is its weaker network activity compared to Bitcoin. This can be seen in the declining spot trading volume of ETH relative to BTC. While ETH’s spot trading volume was once 1.6 times that of Bitcoin, it has now fallen to 0.76, indicating a clear preference among crypto investors for more exposure to Bitcoin.
The introduction of the Dencun upgrade in March has had further negative effects on Ethereum’s performance. This upgrade, which introduced data blobs to the network, has led to a decrease in transaction fees and a reduction in the fee burn rate. As a result, the total ETH supply has been steadily increasing since April, reaching its highest level since May 2023. At this rate, the supply could return to its pre-Merge level in just three months.
Ethereum’s underperformance is also evident in its transaction count, which has fallen significantly from its peak in June 2021. While Bitcoin’s transaction count has reached record highs this year, Ethereum’s has dropped to one of its lowest levels since July 2020. This disparity may further contribute to Ethereum’s decline relative to Bitcoin in the future.
Analysts predict that Ethereum could continue to decline relative to Bitcoin until it reaches undervaluation territory, marked by the ETH/BTC Market Value to Realized Value ratio falling to 0.45. Unless significant changes are made to improve Ethereum’s network activity, transaction count, and supply dynamics, it may struggle to regain its status as a top contender in the cryptocurrency market.
Ethereum’s decline since the Merge has been significant, with multiple factors contributing to its underperformance relative to Bitcoin. To reverse this trend, Ethereum will need to address its weaker network activity, declining transaction count, and inflationary supply dynamics. Only time will tell if Ethereum can bounce back and reclaim its position as a leading cryptocurrency in the market.
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