Ethereum, once hailed as the platform for decentralized applications and smart contracts, has been struggling in comparison to Bitcoin since undergoing the Merge two years ago. Its performance has taken a hit, losing its reputation as ultra-sound money and teetering on the edge of undervaluation.
One of the major drivers of Ethereum’s underperformance, as identified by Blockchain analytics platform CryptoQuant, is the inflationary supply dynamics that have come into play since the transition from Proof-of-Work (PoW) to Proof-of-Stake (PoS) consensus mechanism in September 2022. This change has caused the native token to underperform BTC by 44%, with the current ETH/BTC price at its lowest level since April 2021.
In addition to inflationary supply dynamics, Ethereum’s underperformance can be attributed to weaker network activity compared to Bitcoin. The total transaction fees on the Ethereum network have continued to decrease, signaling a decline in network usage. This decline in transaction fees can be linked to the Dencun upgrade, which introduced data blobs to the network and reduced the fee burn rate, making supply inflationary.
The total ETH supply has been steadily increasing since April, reaching 120.323 million, which is the highest level since May 2023. At this rate, the supply could return to its pre-Merge level in roughly three months. Alongside supply dynamics, Ethereum is also underperforming in terms of transaction count, with a significant drop from its peak in June 2021 to one of its lowest levels since July 2020.
Analysts predict that Ethereum’s underperformance relative to Bitcoin could worsen further, as it is still considered above the undervaluation territory. The ETH/BTC Market Value to Realized Value ratio would need to fall to 0.45 for Ethereum to be officially deemed undervalued against Bitcoin.
Ethereum’s underperformance since the Merge can be attributed to various factors, including inflationary supply dynamics, weaker network activity, and a decline in transaction count. As it struggles to regain its footing against Bitcoin, it remains to be seen how Ethereum will navigate these challenges and potentially turn the tide of underperformance.