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

Blockchain analytics platform CryptoQuant has identified the major drivers of Ethereum’s underperformance since the Merge, including inflationary supply dynamics and weaker network activity compared to Bitcoin.

Ethereum’s Underperformance Relative to Bitcoin

On September 15, 2022, Ethereum transitioned from a Proof-of-Work (PoW) 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 United States spot Ethereum exchange-traded funds (ETFs) were approved over a month ago. Similar funds greenlighted for Bitcoin earlier this year drove demand so rapidly 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 of the spot trading volume of ETH 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 decrease compared to the former. This decline in transaction fees is one of the effects of the Dencun upgrade, which went live in March and introduced data blobs to the network.

Ethereum Could Decline Further

Another effect of Dencun is that the ETH supply is becoming inflationary due to a reduced fee burn rate. The total ETH supply now hovers at 120.323 million, following a steady increase since April. The current amount of ETH in circulation has been at its highest level since May 2023, and at this rate, the supply could return to its pre-Merge level in roughly three months.

Furthermore, Ethereum is underperforming Bitcoin in terms of transaction count. While Bitcoin’s transaction count has reached record highs this year on the back of inscriptions, Runes, and layer-2 networks, Ethereum’s has fallen from a high of 27 in June 2021 to 11, one of its lowest levels since July 2020.

Unfortunately, analysts think Ethereum could decline further relative to Bitcoin because ETH is still above the undervaluation territory. Ethereum will officially be considered undervalued against Bitcoin when the ETH/BTC Market Value to Realized Value ratio falls to 0.45.

The negative streak in terms of flows for the spot Bitcoin ETFs continued in the past week and has now become the longest since those products were greenlighted in mid-January.

At the same time, the Ethereum counterparts still see little activity, with investors’ demand and interest obviously missing.

Bitcoin ETFs’ Negative Streak

CryptoPotato reported last weekend the substantial outflows of $277.2 million registered in the prior five-day trading period. The landscape only worsened in the past week, even though September 2 was a national holiday in the States.

For the four-day trading week, investors pulled out $287.8 million on Tuesday, $37.2 million on Wednesday, $211.1 million on Thursday, and $170 million on Friday. Fidelity’s FBTC was the biggest loser, leading the adverse trend in three out of the four days.

Overall, $706.1 million left the US spot Bitcoin ETFs within this timeframe. Moreover, this extended the negative streak to eight consecutive days in the red, which has now become the longest.

Aside from the previous Monday (August 26), when investors allocated $202.6 million in the ETFs, all subsequent trading days have been in the red. This means that the overall outflows within the past two weeks alone have been close to $900 million.

Consequently, the total AUM has fallen below $50 billion for the first time since May 1. As such, it’s safe to assume that the ETF outflows are among the most probable reasons behind BTC’s price decline of 7% in the past week.

U.S BASED SPOT #BITCOIN ETF AT LOWEST LEVEL SINCE MAY 1.

After a bearish week for the prices of many crypto tokens—only three of the top 50 tokens by market cap gained on the week, the value of U.S.-based spot bitcoin and spot Ethereum exchange-traded funds have hit new… pic.twitter.com/0in9Ogy1XJ

— Karan Singh Arora (@thisisksa) September 8, 2024

ETH ETFs Lack Demand

While the spot Bitcoin ETF flows are quite volatile, the same cannot be said about the Ethereum counterparts. The second-largest cryptocurrency is yet to capture investors’ interest and demand.

Tuesday was the worst day in terms of outflows, with $47.4 million leaving the ETH funds. $37.5 million was pulled out on Wednesday, while Thursday and Friday saw minimal activity, with $0.2 and $6 million in outflows.

Recall that there was zero reported activity last Friday, while the outflows have dominated in 11 out of the last 13 trading days.

Ethereum has been notably bearish, marked by a sharp decline following a pullback to the lower boundary of a broken wedge, coupled with the formation of a death cross.

Despite this, the price is nearing a crucial support level that could lead to a short-term sideways consolidation.

By Shayan

The Daily Chart

Ethereum has been in a strong downtrend, instilling fear and uncertainty among market participants. Low inflows into spot ETH ETFs have further underscored this sentiment, signaling reduced investor interest and the appearance of the death cross, where the 100-day moving average crosses below the 200-day moving average.

Following a rejection at the lower boundary of the multi-month wedge and the 0.5-0.618 Fibonacci levels, Ethereum has continued its decline, confirming the strength of sellers in the market.

However, the price is approaching a critical support zone, defined by the static $2.1K level and the 0.786 Fibonacci retracement level at $2,067. This area is expected to have a substantial demand, which could lead to a short-term pause in the downtrend, with potential sideways consolidation before Ethereum’s next move is determined.

The 4-Hour Chart

On the 4-hour chart, ETH was firmly rejected from the resistance zone between the 0.5 ($2.6K) and 0.618 ($2.7K) Fibonacci levels, resulting in continued bearish momentum toward the $2.1K support. This level has held previously, particularly in early August, suggesting it might attract buyers looking to accumulate at these price points.

If demand resurfaces at the $2.1K mark, Ethereum may experience a temporary consolidation phase, pausing the downward pressure. However, if this crucial support is breached, it could trigger a long-liquidation event, potentially driving the price down toward the $1.8K region.

The coming days will be crucial in determining whether Ethereum can hold this support or if a deeper correction is on the horizon.

By Shayan

Ethereum’s value is fundamentally tied to its decentralized network and the active engagement of its users. One key metric to gauge this engagement is the number of unique active addresses on the network, which can serve as a valuable proxy for Ethereum’s overall market demand and valuation.

The chart showcases the 14-day moving average of Ethereum Active Addresses, which represents the total number of distinct active addresses, including both senders and receivers of ETH transactions. Since late March 2024, this metric has rapidly declined, highlighting a drop in user activity and transaction volumes.

This downward trend reflects a bearish market sentiment, with reduced demand and lower investor participation. For Ethereum to recover and potentially embark on a long-term sustainable rally, this trend must reverse. A resurgence in the number of active addresses would indicate growing interest and accumulation of Ethereum, signaling more robust demand and the possibility of a bullish market reversal.