The Merge that Ethereum underwent two years ago has had a significant impact on its performance relative to Bitcoin. Once known for its reputation as ultra-sound money, ether (ETH) is now facing the possibility of falling into undervaluation territory. Blockchain analytics platform CryptoQuant has pinpointed the major drivers behind Ethereum’s underperformance post-Merge, including inflationary supply dynamics and weaker network activity compared to Bitcoin.
On September 15, 2022, Ethereum made the transition from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism. Since then, the native token has lagged behind BTC by 44%. The ETH/BTC price currently stands at 0.0425, marking 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 persists.
On-chain data reveals that a preference for Bitcoin over Ethereum exists among crypto investors. The decline in ETH’s spot trading volume relative to BTC is noticeable, as it has dropped from being 1.6 times that of Bitcoin to just 0.76 in recent weeks. CryptoQuant analysts attribute Ethereum’s underperformance to weaker network activity compared to Bitcoin, particularly in terms of transaction fees and transaction count.
The implementation of the Dencun upgrade in March led to a decrease in Ethereum’s transaction fees. This upgrade also introduced data blobs to the network, resulting in a reduction in fee burn rate and making the ETH supply inflationary. The total ETH supply has been steadily increasing since April, currently standing at 120.323 million. If this trend continues, the supply could return to its pre-Merge level in approximately three months.
While Bitcoin’s transaction count has reached record highs this year, Ethereum’s has dwindled significantly. From a peak of 27 in June 2021, Ethereum’s transaction count has fallen to 11, one of its lowest levels since July 2020. Analysts predict that Ethereum’s underperformance relative to Bitcoin may worsen, pushing ETH further above the undervaluation territory threshold.
If Ethereum’s ETH/BTC Market Value to Realized Value ratio drops to 0.45, it will officially be considered undervalued against Bitcoin. As Ethereum continues to grapple with underperformance post-Merge, its path to recovery may be a challenging one. Meanwhile, Bitcoin’s dominance in the cryptocurrency market remains solid, with investors showing a preference for the leading digital asset over its competitors.
