As a seasoned researcher with a penchant for blockchain and digital assets, I have witnessed the dynamic evolution of Ethereum since its inception. The Merge was a significant milestone, yet it seems to have marked a turning point in Ethereum’s trajectory relative to Bitcoin.
Over the past two years, since Ethereum completed The Merge, its performance in comparison to Bitcoin has noticeably worsened. Originally seen as an ultra-reliable form of currency, Ether (ETH) now finds itself on the verge of being considered undervalued.
According to the blockchain analysis platform CryptoQuant, several key factors have contributed to Ethereum’s poor performance following The Merge. These include inflationary supply patterns and reduced network activity in comparison to Bitcoin.
Ethereum’s Underperformance Relative to Bitcoin
On September 15th, 2022, Ethereum moved from a Proof-of-Work (mining) to a Proof-of-Stake (staking) system for validation of transactions. Since this transition, the value of its native token has lagged behind Bitcoin by approximately 44%. This is reflected in the current ETH/BTC price at 0.0425, which marks its lowest point since April of 2021.
This year, the poor performance became more pronounced, despite the fact that Ethereum exchange-traded funds (ETFs) from the United States were given approval over a month back. As Bitcoin ETFs were approved earlier this year, demand skyrocketed so rapidly that Bitcoin reached a fresh all-time high approximately two months later.
From my analysis as a crypto analyst, it appears that investors are leaning more towards Bitcoin than Ethereum based on the trends in on-chain data. This is evident in the decrease of the relative spot trading volume for Ethereum compared to Bitcoin over time. Initially, Ethereum’s spot trading volume was about 1.6 times higher than that of Bitcoin, but last week it dropped to 0.76 in comparison.
CryptoQuant analysts noted a correlation between Ethereum’s underperformance and lower network activity compared to Bitcoin. In fact, Ethereum’s overall transaction fee amount has been decreasing relative to Bitcoin’s. This reduction in transaction fees is partially due to the Dencun upgrade that occurred in March, which integrated data blobs into the network.
Ethereum Could Decline Further
As Dencun takes effect, the Ethereum (ETH) supply is trending towards inflation because the burn rate of transaction fees has decreased. At present, the total ETH supply stands at approximately 120.323 million, marking a consistent rise since April. This current level of circulation is the highest it’s been since May 2023, and if this trend continues, the supply could revert back to its pre-Merge level in around three months.
Additionally, it’s worth noting that Ethereum is lagging behind Bitcoin in transaction volume. This year, Bitcoin’s transaction count has soared to unprecedented heights due to inscriptions, Runes, and layer-2 networks, whereas Ethereum’s count has dropped significantly from a peak of 27 in June 2021 down to 11 – one of its lowest points since July 2020.
It’s anticipated by analysts that Ethereum might drop more compared to Bitcoin, as it currently sits above the ‘undervaluation territory’. Ethereum will be deemed truly undervalued when it comes to Bitcoin if the ETH/BTC Market Value to Realized Value ratio drops below 0.45.
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2024-09-08 21:22