Ethereum has outperformed Bitcoin in terms of price performance, especially when looking at time frames since inception, halvings, and bull market periods. However, Ethereum has consistently underperformed since the 2018-2019 and 2022-2023 bear markets. In the 2024 halving, for the first time, Ethereum is significantly lagging behind Bitcoin. In fact, it has underperformed Bitcoin over the past three years.
ETH/BTC Ratio Drops to 3.5-Year Low
Although fractals, a concept where similar patterns repeat over different time frames, are not a surefire way to predict future outcomes, they do provide valuable context for what may lie ahead.
In previous halving years, the ETH/BTC ratio has fallen from its support line in the September-December period, only to start an uptrend in the first quarter of the following bullish year. A similar scenario could unfold in 2024, with Ethereum once again breaking through its support line. However, this time, the situation is more worrying. Unlike previous halving years, where the support line was relatively recent, the current support at 0.05 has held strong for the past three and a half years, indicating a more bearish outlook for Ethereum.
Another point of comparison can be drawn from 2019 when the Fed began cutting interest rates – a move that could be repeated in September 2024. In 2019, from the time the Fed began cutting interest rates until it stopped, the ETH/BTC ratio fell by 22%.
Not only did the ratio fall in all of these cases, but the price of Ethereum itself also performed negatively, with the exception of 2020. However, the crucial issue is not only whether the price rose or fell; it is also whether holding Ethereum was the better investment decision. History has shown that in similar circumstances, holding Bitcoin has proven to be the more profitable option – and this trend may continue in 2024.
Ethereum supply reverses course and turns inflationary.
The supply of Ethereum has been steadily decreasing since the 2022 merger. The reduction in the supply of Ethereum works through a mechanism called “burning,” which was introduced with Ethereum Improvement Proposal (EIP) 1559 in August 2021. Essentially, a portion of transaction fees paid in Ethereum are burned or permanently removed from circulation. This reduces the overall supply of Ethereum over time, especially during periods of high network activity when transaction fees are higher.
The reason behind the decrease in Ethereum supply after the 2022 merger was that the network moved from a Proof-of-Work mechanism to a Proof-of-Stake mechanism. Under the Proof-of-Work mechanism, new Ethereum was continuously issued to miners as rewards for validating transactions, which contributed to an increase in the overall Ethereum supply. However, with the merger and the shift to Proof-of-Stake, the issuance of new Ethereum decreased significantly because validators, who now secure the network, receive much lower rewards compared to miners.
The Dencun update in March 2024 was a turning point, reversing this deflationary trend and making Ethereum’s supply inflationary again. It introduced the initial sharding of dunks and “blobs,” improving data storage and reducing transaction fees on layer 2 networks. While Dencun improved scalability and made transactions more cost-effective, it also led to a significant reduction in the amount of ETH burned, which was a crucial factor in keeping Ethereum’s supply deflationary.
As a result, the supply of Ethereum has started to rise, with over 213,500 ETH added to circulation since the Duncan upgrade. For comparison, the supply of Ethereum is now at the same level it was in May 2023.
Passive ETF Flows Continue
Many expected the adoption of Ethereum ETFs to boost Ethereum by increasing demand and driving prices higher. However, this has not been the case so far. Instead, ETF inflows have become a concern, with total outflows from ETFs reaching $465 million since trading began. The main driver of this trend is Grayscale’s Ethereum Fund, which has seen massive outflows, overshadowing the positive inflows from other Ethereum ETFs. The magnitude of Ethereum outflows is so large that it creates a net negative impact when looking at all Ethereum ETFs collectively.
An Ethereum ETF holds a certain amount of Ethereum, with each share representing a portion of the total Ethereum it holds. When many investors want to buy ETF shares, demand can push the price of the ETF shares above the actual value of the underlying Ethereum. In this case, Authorized Participants (APs), large financial institutions that work closely with the ETF provider, step in. APs buy ETH on the open market and exchange it with the ETF provider for new ETF shares, which they then sell to investors in the market at a higher price, making a profit. This process increases the supply of ETF shares, helping to bring the share price back in line with the value of the underlying assets.
Conversely, when demand for a fund is low, its share price may fall below the underlying Ethereum value. Here, investors buy the undervalued fund shares from the market, return them to the fund provider, and receive Ethereum in return. They can then sell the Ethereum on the open market at a higher price, benefiting from arbitrage. This reduces the supply of fund shares and helps the price align more closely with the underlying Ethereum value.
Simply put, the selling of ETH by APs while ETF shares are recovering could be one of the reasons why the price of ETH is falling and struggling to recover.
conclusion
While current data may indicate a bearish outlook for Ethereum, it remains a fundamentally strong asset. The number of active addresses on both its mainchain and layer 2 networks continues to increase. Ethereum continues to lead the blockchain industry, holding the top spot in total value locked (TVL) across DeFi platforms, with numerous projects developing on its ecosystem. Furthermore, Ethereum continues to see regular development and upgrades.
However, given the current market conditions and ongoing ETF inflows, Ethereum may not be the best investment in the short term, especially during the rest of 2024. However, as we look ahead to 2025, starting in Q1, Ethereum is likely to regain momentum and could once again outperform Bitcoin in terms of returns, just as it has done in previous market cycles.
Disclosure: This article does not constitute investment advice. The content and materials on this page are for educational purposes only.
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