These factors have caused Ethereum to underperform Bitcoin since the merger

Since Ethereum underwent the merger two years ago, its performance relative to Bitcoin has declined significantly. From gradually losing its reputation as ultra-sonic money, ether (ETH) is currently a few steps away from falling into undervalued territory.

Blockchain analytics platform CryptoQuant has identified the main factors behind Ethereum’s underperformance since the merger, including inflationary supply dynamics and weaker network activity compared to Bitcoin.

Ethereum’s underperformance relative to Bitcoin

On September 15, 2022, Ethereum switched from a Proof-of-Work (PoW) consensus mechanism to a Proof-of-Stake (PoS) consensus mechanism. Since then, the native token has underperformed BTC by 44%. This is evident in the ETH/BTC price currently sitting at 0.0425, its lowest level since April 2021.

The underperformance worsened this year, even after the U.S. approved Ethereum exchange-traded funds (ETFs) more than a month ago. Similar funds given the green light to Bitcoin earlier this year fueled demand so quickly that BTC surged to a new all-time high about two months later.

On-chain data indicates that crypto investors prefer more exposure to Bitcoin than Ethereum, which can be seen in the decline in ETH spot trading volume relative to BTC. The figure, which showed that ETH’s spot trading volume was initially 1.6 times that of Bitcoin, fell to 0.76 last week.

CryptoQuant analysts found that Ethereum’s underperformance correlates with weaker network activity than Bitcoin. The former’s total transaction fees have continued to decline compared to the former. This decrease in transaction fees is one of the effects of Dencun’s upgrade, which went live in March and introduced data blobs to the network.

Ethereum could decline further

Another effect of Dencun is that the supply of ETH is becoming inflationary due to a reduced consumption rate of fees. The total supply of ETH now stands at 120.323 million, after a steady increase since April. The current amount of ETH in circulation is at its highest level since May 2023, and at this rate, the supply could return to its pre-merger level in about three months.

Also, Ethereum underperforms Bitcoin in terms of transaction count. While Bitcoin’s transaction count has hit record highs this year thanks to signups, runes and Layer 2 networks, Ethereum’s has fallen from a peak of 27 in June 2021 to 11, a from their lowest levels since July 2020.

Unfortunately, analysts think Ethereum could decline further relative to Bitcoin because ETH is still above undervalued territory. Ethereum will be officially considered undervalued against Bitcoin when the ratio of ETH/BTC market value to realized value falls to 0.45.

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