Over the past two years, Ethereum has experienced a significant decline in performance relative to Bitcoin. What was once considered ultra-sound money has now fallen into the undervaluation territory, as indicated by its current state of underperformance. This decline can be attributed to various factors, including inflationary supply dynamics and weaker network activity compared to Bitcoin.
In September 2022, Ethereum underwent a transition from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism, known as the Merge. Since then, the native token, ether (ETH), has underperformed BTC by 44%. This underperformance is reflected in the ETH/BTC price, which currently sits at 0.0425, 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 only worsened.
One of the major drivers of Ethereum’s underperformance is the declining spot trading volume of ETH relative to BTC. What was once 1.6 times that of Bitcoin has now fallen to 0.76, indicating that investors prefer more exposure to Bitcoin. Additionally, the total transaction fees of Ethereum have continued to decrease compared to Bitcoin, further highlighting the weaker network activity of the former.
The Dencun upgrade, implemented in March, introduced data blobs to the Ethereum network. One of the effects of this upgrade is the reduction in fee burn rate, leading to an inflationary ETH supply. The total ETH supply has been steadily increasing since April, reaching 120.323 million. At this rate, the supply could return to its pre-Merge level in roughly three months.
Another clear indicator of Ethereum’s underperformance relative to Bitcoin is the transaction count. While Bitcoin’s transaction count has reached record highs this year, Ethereum’s count has fallen significantly. From a high of 27 in June 2021, it now stands at 11, one of its lowest levels since July 2020. This decline in transaction count further contributes to Ethereum’s overall underperformance.
Analysts predict that Ethereum could continue to decline further relative to Bitcoin until it reaches the undervaluation territory. Ethereum will officially be considered undervalued against Bitcoin when the ETH/BTC Market Value to Realized Value ratio falls to 0.45. With the current trajectory of Ethereum’s performance, this scenario seems increasingly likely.
The decline of Ethereum relative to Bitcoin is a complex phenomenon influenced by various factors such as inflationary supply dynamics, weaker network activity, and declining transaction count. Unless significant changes are made to address these issues, Ethereum’s underperformance is likely to persist in the foreseeable future.
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