Comparing Ethereum and Bitcoin: Understanding the 44% Performance Gap

Bitcoin (BTC) and Ethereum (ETH) continue to dominate the cryptocurrency market in terms of market capitalization. Despite their prominence, ETH has lagged behind BTC in performance over the past two years, even as both cryptocurrencies have experienced significant price fluctuations.

Both BTC and ETH recently received approval for Spot Exchange Traded Funds (ETFs), yet this development has not been sufficient to reverse ETH’s underperformance relative to BTC.

Data from CryptoQuant reveals that Ethereum has trailed behind Bitcoin by 44% in the last two years. This decline in ETH’s performance compared to BTC commenced after The Merge, which saw Ethereum transition from a Proof of Work (PoW) to a Proof of Stake (PoS) consensus mechanism. Since then, Ethereum has struggled to keep up with the pace set by Bitcoin.

The ETH/BTC price currently stands at 0.0425, hitting its lowest level since April 2021. Despite the positive news of ETF approvals for both assets in 2024, including Ethereum’s approval in July, this has not altered ETH’s lackluster performance against BTC.

One of the factors contributing to the Ethereum/Bitcoin disparity is the differing trends in network fees and transaction activity. Ethereum’s fees have decreased following its Dencun upgrade, leading to reduced network activity. Additionally, Ethereum’s transaction count has significantly dropped from its peak in June 2021.

In contrast, Bitcoin has experienced an increase in both fees and transactions due to the introduction of Inscriptions and Runes, driving up transaction costs on the Bitcoin network.

The decline in Ethereum fees has impacted its burn rate associated with the EIP-1559 mechanism, resulting in less ETH being burned and a reduction in deflationary pressure on the network, making Ethereum more inflationary.

An analysis of the two-year Market Value to Realized Value (MVRV) ratio for Ethereum and Bitcoin further highlights the widening gap between the two assets. Currently, Ethereum’s MVRV stands slightly below zero at -1.16%, while Bitcoin’s MVRV is significantly higher at over 14%.

This disparity in MVRV ratios underscores how much ETH has underperformed compared to BTC, with BTC holders realizing a profit of over 14% while ETH holders are facing a loss of over 1%.

In conclusion, the data indicates a clear underperformance of Ethereum against Bitcoin over the past two years, with various factors contributing to this discrepancy in performance between the two leading cryptocurrencies.