When Ethereum transitioned from a Proof-of-Work to a Proof-of-Stake consensus mechanism in 2022, it was expected to usher in a new era of performance and value. However, two years after the Merge, Ethereum has faced significant challenges in maintaining its position relative to Bitcoin.
One of the major reasons behind Ethereum’s underperformance is the inflationary supply dynamics that have been at play since the transition. The introduction of the Dencun upgrade in March resulted in a decrease in transaction fees, leading to a reduced fee burn rate. This, in turn, has made the ETH supply inflationary, with the total supply steadily increasing since April. As a result, the current amount of ETH in circulation is at its highest level since May 2023, with indications that it could return to its pre-Merge level in the coming months.
Another key factor contributing to Ethereum’s underperformance is its weaker network activity compared to Bitcoin. The total transaction fees on the Ethereum network have continued to decline, highlighting a reduced level of network activity. This decline can be attributed to the effects of the Dencun upgrade, which has impacted the network’s fee structure and overall utility.
The decline in Ethereum’s spot trading volume relative to Bitcoin is another indication of its underperformance. Despite the approval of United States spot Ethereum exchange-traded funds (ETFs), demand for Ethereum has not surged as rapidly as it did for Bitcoin earlier this year. On-chain data reveals that crypto investors are showing a preference for Bitcoin over Ethereum, as evidenced by the decreasing spot trading volume of ETH relative to BTC.
Ethereum’s transaction count has also seen a significant decline, further highlighting its underperformance compared to Bitcoin. While Bitcoin has achieved record highs in transaction count this year, Ethereum has experienced a steady decrease, falling to one of its lowest levels since July 2020. This decline in transaction activity is a concern for analysts, as it suggests a lack of network engagement and utilization.
Analysts predict that Ethereum could continue to decline relative to Bitcoin until it reaches the undervaluation territory. The ETH/BTC Market Value to Realized Value ratio is a key indicator to watch, with Ethereum considered undervalued against Bitcoin when this ratio falls to 0.45. As Ethereum struggles to regain its footing in the market, investors and analysts alike will be closely monitoring its performance relative to Bitcoin to assess its long-term viability.
Ethereum’s underperformance relative to Bitcoin can be attributed to a combination of factors, including inflationary supply dynamics, weaker network activity, declining spot trading volume, and decreasing transaction count. To overcome these challenges, Ethereum will need to address these issues strategically and regain investor confidence in its value proposition against Bitcoin.
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