Since the Merge two years ago, Ethereum has been struggling to maintain its performance relative to Bitcoin. Once hailed as ultra-sound money, the reputation of ether (ETH) has taken a hit, with the coin teetering on the edge of undervaluation. The transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus mechanism on September 15, 2022, marked a turning point for Ethereum. However, since then, ETH has underperformed BTC by a staggering 44%, with the current ETH/BTC price at 0.0425, the lowest since April 2021.
CryptoQuant has pinpointed some key drivers behind Ethereum’s underperformance post-Merge. One of the significant factors is the inflationary supply dynamics within the Ethereum network. With the introduction of the Dencun upgrade in March, the ETH supply has been on a steady increase, currently standing at 120.323 million. This surge in supply has put pressure on the price of ETH and has contributed to its underperformance against BTC.
Additionally, weaker network activity compared to Bitcoin has also played a crucial role in Ethereum’s struggles. The total transaction fees in the Ethereum network have continued to decline, indicating lower network usage and activity. This decline is partially attributed to the Dencun upgrade, which has reduced the fee burn rate in the network. As a result, Ethereum has seen a decrease in total transaction fees, further exacerbating its underperformance relative to Bitcoin.
One of the glaring differences between Ethereum and Bitcoin is the preference of crypto investors towards BTC over ETH. Spot trading volume data shows that the trading volume of ETH relative to BTC has significantly decreased, with the ratio falling from 1.6 to 0.76 in recent weeks. This shift in investor sentiment towards Bitcoin has put additional pressure on Ethereum, causing further underperformance in the market.
Moreover, Ethereum has also been lagging behind Bitcoin in terms of transaction count. While Bitcoin’s transaction count has been reaching record highs fueled by inscriptions, Runes, and layer-2 networks, Ethereum has seen a decline in transaction count. The decrease from a high of 27 in June 2021 to 11, one of the lowest levels since July 2020, is indicative of Ethereum’s struggle to keep up with Bitcoin in terms of network activity.
Analysts are wary of Ethereum’s future prospects relative to Bitcoin, as ETH is still considered to be above the undervaluation territory. Ethereum would officially be deemed undervalued against Bitcoin when the ETH/BTC Market Value to Realized Value ratio falls to 0.45. With the current trends in network activity, supply dynamics, and investor sentiment, it is essential for Ethereum to address these issues to prevent further underperformance against the leading cryptocurrency, Bitcoin.