Ethereum has outperformed Bitcoin in terms of price performance, especially when considering the time frame since its inception, halving years, and bull market periods. However, ETH has consistently underperformed since the 2018-2019 and 2022-2023 bear markets. The 2024 halving marks the first time Ethereum has significantly underperformed Bitcoin. In fact, it has underperformed Bitcoin for the past three years.
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ETH/BTC Ratio Falls to 3.5-Year Low
While fractals—the concept that similar patterns repeat across different time frames—are not a reliable method for predicting future outcomes, they do provide valuable context for what may lie ahead.
In previous halving years, the ETH/BTC ratio broke away from its support line around September-December, and then began an uptrend in the first quarter of the following bull market year. A similar scenario could unfold in 2024, as Ethereum breaks its support again. However, this time, the situation is more worrisome. Unlike previous halving years, when the support line appeared relatively recently, the current support at 0.05 has been holding high for the past 3.5 years, suggesting a more bearish outlook for Ethereum.
Another example for comparison comes from 2019, when the Federal Reserve began cutting interest rates, a move that could be repeated in September 2024. In 2019, from the time the Fed began cutting rates until it stopped, the ETH/BTC ratio fell by 22%.
Not only did the ratio fall in all of these cases, but the Ethereum price itself also performed negatively, with the exception of 2020. However, the critical question is not just whether the price rose or fell; it is whether holding Ethereum was the better investment decision. History has shown that holding Bitcoin has been a better choice in similar circumstances, and 2024 may well continue this trend.
Ethereum supply changes course and becomes inflationary.
Ethereum’s supply has been steadily declining since the 2022 Merge. The reduction in Ethereum’s supply occurs through a mechanism called “burning,” which was introduced in Ethereum Improvement Proposal (EIP) 1559 in August 2021. Essentially, a portion of the transaction fees paid in ETH are burned, or permanently removed from circulation. This reduces the overall supply of ETH over time, especially during periods of high network activity when transaction fees are higher.
The reason why Ethereum supply started to fall after Merge 2022 was because the network switched from a proof-of-work consensus mechanism to proof-of-stake. Under PoW, new ETH was continuously issued to miners as a reward for validating transactions, which contributed to the increase in the total supply of Ethereum. However, with Merge and the switch to PoS, the issuance of new ETH has significantly decreased since the validators who now secure the network receive much lower rewards compared to miners.
The Dencun upgrade in March 2024 was a turning point, reversing this deflationary trend and making Ethereum’s supply inflationary again. It introduced proto-danksharding and “blobs,” which optimize data storage and reduce 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 critical to keeping Ethereum’s supply deflationary.
As a result, Ethereum’s supply has begun to grow, with over 213,500 ETH added to circulation since the Dencun upgrade. In comparison, Ethereum’s supply is now at the same level it was in May 2023.
Negative ETF flows continue
Many expected the approval of the Ethereum ETF to boost ETH by increasing demand and driving up prices. However, that has not happened yet. Instead, ETF outflows have become a problem, with a total of $465 million withdrawn since the start of trading. The main driver of the trend is ETHE Grayscale, which has seen massive outflows that have eclipsed positive inflows from other Ethereum ETFs. The scale of the outflows from ETHE is so large that it creates a net negative effect when considering all Ethereum ETFs in aggregate.
An Ethereum ETF holds a certain amount of Ethereum, and each share represents a fraction of the total amount of Ethereum it holds. When many investors want to buy shares of an ETF, demand can push the price of an ETF share above the actual value of the underlying Ethereum. This is where 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 on the market at a higher price, making a profit. This process increases the supply of ETF shares, which helps bring the share price in line with the value of the underlying assets.
Conversely, when demand for an ETF is low, the price of its shares may fall below the value of the underlying Ethereum. Here, APs buy undervalued ETF shares from the market, return them to the ETF provider, and receive Ethereum in return. They can then sell the Ethereum on the open market at a higher price, making a profit from arbitrage. This reduces the supply of ETF shares and helps the price more closely match the value of the underlying Ethereum.
Simply put, the selling of ETH by AP as it buys back ETF shares may be one of the reasons why the price of ETH has declined and is struggling to recover.
Conclusion
While current data may suggest a bearish outlook for Ethereum, it remains a fundamentally strong asset. The number of active addresses on both its main chain and layer 2 networks continues to grow. Ethereum continues to lead the blockchain industry, holding the number one spot in total value locked (TVL) on DeFi platforms, and many projects are being developed on its ecosystem. Additionally, Ethereum continues to develop and upgrade regularly.
However, given current market conditions and the ongoing outflows from ETFs, Ethereum may not be the best investment option in the short term, especially until the end of 2024. However, looking ahead, starting in Q1 2025, Ethereum is likely to regain its momentum and may once again outperform Bitcoin, as it has in previous market cycles.
Disclosure: This article does not constitute investment advice. The content and materials on this page are for educational purposes only.
