Ethereum, once hailed as a revolutionary platform in the world of cryptocurrencies, has seen a significant decline in performance relative to Bitcoin since the Merge two years ago. This decline has sparked concerns about the future of ether (ETH) and its potential fall into undervaluation territory.
Blockchain analytics platform CryptoQuant has identified several key factors contributing to Ethereum’s underperformance compared to Bitcoin since the transition to a Proof-of-Stake (PoS) consensus mechanism in September 2022. One major driver is the inflationary supply dynamics that have emerged, leading to a decrease in the network’s activity levels.
The transition from Proof-of-Work to Proof-of-Stake marked a turning point for Ethereum, but it also signaled the beginning of its underperformance relative to Bitcoin. The ETH/BTC price currently stands at 0.0425, its lowest level since April 2021, highlighting the extent of this decline. Even the recent approval of United States spot Ethereum exchange-traded funds (ETFs) failed to reverse this trend, unlike the rapid surge in demand seen for Bitcoin ETFs earlier this year.
On-chain data reveals a striking decline in Ethereum’s network activity compared to Bitcoin. The spot trading volume of ETH relative to BTC has plummeted from 1.6 to 0.76, indicating a clear preference among crypto investors for Bitcoin over Ethereum. This shift has been fueled by a decrease in Ethereum’s total transaction fees and a corresponding reduction in transaction count, reflecting a broader trend of weakening network activity.
One of the key factors contributing to Ethereum’s underperformance is the Dencun upgrade, which introduced data blobs to the network and resulted in a reduced fee burn rate. This has led to a steady increase in the total ETH supply, which now stands at 120.323 million, the highest level since April 2023. With the supply continuing to rise, Ethereum is facing the prospect of returning to its pre-Merge level in a matter of months.
Analysts warn that Ethereum’s underperformance relative to Bitcoin could worsen in the coming months, as ETH is still considered above the undervaluation territory. The ETH/BTC Market Value to Realized Value ratio, which currently sits above 0.45, indicates that Ethereum has not yet reached the point of being deemed undervalued against Bitcoin. If this ratio continues to decline, Ethereum could face further challenges in the market.
Ethereum’s decline in performance relative to Bitcoin since the Merge highlights the challenges facing the platform as it navigates a changing landscape in the world of cryptocurrencies. With key indicators pointing towards continued underperformance, it is clear that Ethereum must address these issues proactively to regain its competitive edge in the market.
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