Key Factors Behind Ethereum’s Lagging Performance Compared to Bitcoin Post Merge

September 9, 2024

Ethereum has faced a significant decline in performance relative to Bitcoin since the Merge two years ago. Once considered ultra-sound money, ether (ETH) is now on the brink of entering undervaluation territory as its reputation continues to diminish.

According to insights from blockchain analytics platform CryptoQuant, Ethereum’s underperformance post-Merge can be attributed to inflationary supply dynamics and weaker network activity compared to Bitcoin.

The transition of Ethereum from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism on September 15, 2022, marked the beginning of its underperformance relative to BTC. Since then, ETH has lagged behind BTC by 44%, with the ETH/BTC price currently at 0.0425, the lowest level since April 2021.

Despite the approval of United States spot Ethereum exchange-traded funds (ETFs) over a month ago, Ethereum’s underperformance persisted. In contrast, similar funds for Bitcoin earlier this year led to a surge in demand, propelling BTC to a new all-time high about two months later.

On-chain data reveals a preference among crypto investors for more exposure to Bitcoin than Ethereum, evident in the decline of ETH’s spot trading volume relative to BTC. Initially at 1.6 times that of Bitcoin, ETH’s spot trading volume dropped to 0.76 last week.

Analysts at CryptoQuant have noted that Ethereum’s underperformance correlates with weaker network activity compared to Bitcoin. The decline in Ethereum’s total transaction fees in comparison to Bitcoin is a result of the Dencun upgrade, which was implemented in March and introduced data blobs to the network.

The Dencun upgrade has also contributed to Ethereum’s inflationary trend due to a reduced fee burn rate. With the total ETH supply now at 120.323 million, steadily increasing since April, the circulating ETH has reached its highest level since May 2023. At this pace, the supply could return to its pre-Merge level in approximately three months.

Furthermore, Ethereum lags behind Bitcoin in terms of transaction count, with Ethereum’s count dropping from a high of 27 in June 2021 to 11, one of its lowest levels since July 2020. Analysts predict that Ethereum’s decline relative to Bitcoin may continue as long as ETH remains above the undervaluation threshold. Ethereum will be considered undervalued against Bitcoin when the ETH/BTC Market Value to Realized Value ratio falls to 0.45.