Ethereum vs Bitcoin: Why ETH Has Fallen 44% Behind Since The Merge - Read Here

It has been nearly two years since Ethereum underwent one of the most significant upgrades in its history—The Merge, which transitioned the cryptocurrency from a proof-of-work (PoW) to a proof-of-stake (PoS) consensus mechanism. While this event was heralded as a major leap forward for the Ethereum network, the cryptocurrency has struggled to live up to expectations when compared to its older sibling, Bitcoin. According to a recent report by Cryptoquant, Ethereum has underperformed Bitcoin by 44% since The Merge, and this trend shows no signs of reversing anytime soon.

The Merge: A Turning Point for Ethereum

On September 12, 2022, Ethereum completed The Merge, officially transitioning to a PoS blockchain. This upgrade was designed to reduce the network’s energy consumption, increase scalability, and lay the groundwork for future developments such as sharding. Many in the crypto community believed The Merge would bolster Ethereum’s market performance, particularly as it would address the environmental criticisms that plagued PoW blockchains like Bitcoin. However, two years on, Ethereum has not only failed to surpass Bitcoin, but has fallen significantly behind.

According to Cryptoquant’s data, the ETH/BTC price ratio has dropped to 0.0425—its lowest level since April 2021. This 44% underperformance signals that Ethereum’s network upgrades, while technically successful, have not translated into market dominance. In fact, the gap between Bitcoin and Ethereum has widened despite the recent approval of Ethereum spot exchange-traded funds (ETFs) in July 2024.

What’s Holding Ethereum Back?

The data from Cryptoquant highlights several key factors contributing to Ethereum’s underperformance. One of the main concerns is Ethereum’s declining network activity compared to Bitcoin. Total transaction fees on the Ethereum network have significantly decreased following the Dencun upgrade, which was designed to lower transaction costs. While this may benefit users, it has led to a drop in overall network activity. Ethereum’s transaction count has fallen from a peak of 27 transactions per second in June 2021 to just 11, one of the lowest levels since July 2020.

In contrast, Bitcoin has experienced a surge in transaction activity, fueled by innovations such as inscriptions, runes, and layer two (L2) solutions. These developments have revitalized Bitcoin’s network, contributing to its all-time high in transactions and helping it maintain its lead over Ethereum.

Another factor impacting Ethereum’s market position is its supply dynamics. According to Cryptoquant’s research, Ethereum’s total supply has been steadily increasing since April 2024, reaching 120.323 million ETH. This growth reverses the deflationary trends seen immediately after The Merge, when Ethereum’s new PoS system began burning more tokens than it produced. As a result, Ethereum’s supply has expanded rather than contracted, putting downward pressure on its price relative to Bitcoin.

The ETF Effect: A Missed Opportunity?

The approval of Ethereum spot ETFs in July 2024 was widely expected to boost the cryptocurrency’s price, similar to how Bitcoin surged following the launch of its own spot ETFs. However, Ethereum’s ETF debut failed to deliver the anticipated price rally. Instead, ETH saw an 18% decline following the approval, a stark contrast to Bitcoin’s strong performance in the same period. This has raised questions about whether Ethereum’s market fundamentals are strong enough to support long-term growth, even with the introduction of new financial products.

Some analysts point to Ethereum’s ongoing challenges with scalability and network activity as key reasons for its lackluster response to the ETF news. While Bitcoin continues to attract institutional interest, Ethereum’s network upgrades have not translated into the same level of enthusiasm.

What’s Next for Ethereum?

Despite its underperformance, Ethereum still holds a crucial position in the broader cryptocurrency ecosystem. The network powers a wide array of decentralized applications (dApps) and is the foundation for the booming decentralized finance (DeFi) sector. However, Cryptoquant’s researchers suggest that Ethereum may need to fall an additional 50% in value relative to Bitcoin to be considered undervalued. This stark prediction underscores the challenges Ethereum faces in regaining its footing against the market leader.

The question remains: Can Ethereum close the gap with Bitcoin? While the network’s technical upgrades have positioned it for long-term success, the cryptocurrency must overcome its short-term hurdles, including declining network activity and an expanding supply, to reclaim investor confidence.

Ethereum’s journey after The Merge may not have gone as planned, but with upcoming innovations like sharding on the horizon, the cryptocurrency could still surprise the market. For now, however, Bitcoin remains the undisputed leader in the crypto space, and Ethereum will need to work hard to regain ground.