Why has Ethereum performed significantly weaker than Bitcoin this year? From the perspective of historical cycles, in the process of the crypto market turning from bear to bull, funds will first flow into Bitcoin and then into other sectors; from the perspective of short-term factors, compared with other crypto assets, the recent Bitcoin spot ETF has a significantly stronger stimulus effect on BTC; from the perspective of technological development and narrative, in addition to the original value recognition of "digital gold", Bitcoin has developed a new narrative again, while Ethereum has further entered a technical bottleneck; from the perspective of on-chain data, Ethereum staking has slowed down, inflation has rebounded, and Bitcoin on-chain activity is relatively high; from the perspective of supervision, Bitcoin's non-securities status is clear, and Wall Street has a higher degree of recognition of it. From different dimensions, the reasons for Ethereum's weakness will also be different, so what are the most core influencing factors?
The rotation effect does exist, but why is Ethereum so weak?
Bitfinex said in a recent report that the market is in the early stages of a bull market, and it is normal for Bitcoin to rise first and then rotate capital as investors look for transactions such as Ethereum. Looking further at historical data, the highs of ETH/BTC usually occur during bull markets when Ethereum performs well, reaching 0.085 at one point; however, in bear markets, the situation reverses and Bitcoin usually takes the lead.
This article believes that in the process of the transition from a bear market to a bull market, the effect of capital rotation does exist, but Ethereum is too weak in this round of bull-bear transition! You should know that the volume of Bitcoin is much larger than that of Ethereum. If the funds only have a rotation effect, then the difference in the increase of Ethereum and Bitcoin will be larger in a short period of time. With the rotation of funds, the difference in the increase between Bitcoin and Ethereum should be reduced rather than enlarged after the timeline is extended; after a certain period of time, the increase of Ethereum often begins to surpass Bitcoin.
According to the latest data from TradingView, the ETH/BTC ratio once reached 0.05182, the lowest since mid-2021. Data shows that the price of BTC has risen by 32% in the past month, while ETH has only risen by 12%. From a longer timeline, the price of Bitcoin has doubled this year, while ETH has only risen by about 50%.
From the data point of view, as time goes by, the growth gap between Bitcoin and Ethereum continues to widen; this article does not deny that there is a fund rotation effect, but this is obviously not the reason why Ethereum is significantly weaker than Bitcoin.
Are BTC and ETH just one spot ETF away?
Earlier this month, six Ethereum futures-based ETFs launched in the U.S.; however, opening trading was sluggish, failing to generate the same level of excitement and volume as the first BTC futures ETF, ProShares BITO, which launched in October 2021. Coinbase head of research David Duong said that the top ETH futures ETFs had a total of less than $1.5 million in first-day trading volume. In stark contrast, BITO had more than $1 billion in trading volume on its inception day, according to Bloomberg data. In addition, the net inflows into these ETH futures ETFs were less than 2% of BITO.
According to a report released by digital asset management company CoinShares on October 23, so far this month, investment products based on Bitcoin and Solana have inflows of approximately $112 million and $43 million, respectively, while Ethereum-based funds have outflows of $4.7 million, and Ethereum's outflows this year have reached $119 million. CoinShares research director James Butterfill attributed the difference in changes in BTC and Ethereum funds to people's "expectations for spot Bitcoin ETFs" and "continued concerns about Ethereum." Bitfinex analysts also said in a report that the market's main bullishness is due to BTC ETF products, while Ethereum lacks a convincing long-term narrative.
Benjamin Jarvis, co-founder of analysis firm JLabs Digital, said in a Bloomberg interview that institutions may be more willing to invest in Bitcoin spot ETFs because they believe that Bitcoin spot has lower risks than Ethereum futures.
As can be seen from the above, the gap between the recently launched Ethereum futures ETF and the Bitcoin futures ETF is very obvious, which further shows that the short-term impact of an ETF is not the fundamental reason for the huge gap between Ethereum and Bitcoin. There are deeper reasons for the indifference and escape of large funds.
What happened to ETH? The challenges facing Ethereum from Vitalik’s latest speech
Since Ethereum switched to the PoS mechanism, many people in the market have been optimistic about it. After calculating through its destruction mechanism, some people believe that Ethereum will explode in the next bull market, and will rise significantly compared to Bitcoin. Many people choose to exchange their Bitcoin for Ethereum. However, since the beginning of this year, Ethereum's performance has been disappointing. A number of well-known crypto projects such as DYDX and MarketDao have chosen to flee or are planning to flee Ethereum. Below, this article looks at the huge challenges facing Ethereum from Vitalik's latest speech.
Centralization of staking: Since staking has become an essential element for the daily operation of Ethereum, staking service providers can help users to stake, but this inevitably leads to the centralization of staking.
Account abstraction and social recovery: Vitalik has repeatedly emphasized the importance and necessity of account abstraction. He believes that the promotion of account abstraction is based on two considerations: convenience: users can pay gas fees with any ERC 20 tokens, and perform multiple operations (signature, authorization, verification, etc.) in one transaction. But account abstraction itself also faces challenges. This challenge is not just an isolated technical issue, but involves the entire crypto ecosystem. For existing wallets, applications, and development tools, if they choose to use account abstraction to improve user experience or developer experience, it will inevitably involve technical adjustments and adaptations. Account abstraction is a technical concept, but it will inevitably encounter problems in actual adaptation and execution. In addition, with the emergence of more L2s, whether and how different L2s support account abstraction is also a challenge. Users may encounter situations where one L2 supports but another does not. While promoting broader account abstraction, it is likely that we will also need to consider how to deal with the MEV issue to ensure the fairness, security, and healthy development of the system.
Security considerations: Vitalik has also talked with multiple multi-signature wallets and MPC wallet projects, and believes that the solution based on mnemonics is still not the most perfect choice. The loss of mnemonics and private keys will lead to the loss of assets.
In the crypto market, Ethereum is like an aircraft carrier, huge but slightly old. With the continuous emergence of new things and new requirements, Ethereum needs to carefully expand its capabilities, such as expansion, user experience and privacy. This makes many crypto projects unable to wait for changes, so they choose to flee, and competitors such as Cosmos and Solana become its strong competitors. At the same time, with the transition of Ethereum to the PoS mechanism, the problem of centralization has become increasingly prominent, and how to find a balance between experience and decentralization has also become a difficult problem. It is precisely because of these challenges that the market seems to have gradually lost its initial blind optimism.
Layer2 development suppresses Ethereum underlying demand, ETH inflation rebounds
With the explosion of Layer 2 on Ethereum, more and more transactions and applications have begun to leave the Ethereum layer, which has led to a significant decline in Ethereum's ability to directly capture value. Below, we take the recently popular friend.tech as an example to illustrate.
According to DefiLlama data, the developers of friend.tech, a popular Web3 social application, have earned nearly $20 million since its launch in August; as of October 6, statistics from crypto research firm Messari show that friend.tech has attracted 300,000 independent users and has a daily fee income of $320,000 (six times that of OpenSea). However, friend.tech is built on the Base chain built on the Op Stack, rather than directly on Ethereum, but it shares the security of Ethereum. So, how does friend.tech share the security of Ethereum?
Optimism (Ethereum Layer2) proposes the concept of a super chain, which seeks to integrate the originally isolated L2 into a single interoperable and composable system by maintaining the OP Stack code base as a public product. In Op's super chain ecosystem, each OP chain (the Base chain is an OP chain) chooses to join the sorter on its own, and then interacts with Ethereum L1 in batches through the Chain Factory.
Despite the popularity of friend.tech, transaction activity on the Ethereum chain has reached a low point in August and September 2023. Currently, the Gas fee on the Ethereum chain remains basically below 10 gwei. Due to the reduction in on-chain activity and the reduction in Gas fees, the supply of Ethereum has exceeded consumption in the past 30 days, causing the inflation rate to rise back to 0.275%, with 27,000 ETH added in the last 30 days. In addition, Ethereum staking has slowed down and the queue for staking tokens has decreased. As of now, there are 844,000 active staking nodes on the Ethereum network, with a stake of approximately 27 million ETH. Compared with the second quarter of 2023, the current number of new stakes has decreased significantly.
Summarize
Overall, the technical bottleneck of Ethereum itself is the main reason for its price stagnation. In contrast, Bitcoin has successfully triggered a wave of Meme hype through the inscription NFT and BRC-20 protocol since this year, which has further stimulated the development boom of Bitcoin Layer2. As the Bitcoin ecosystem begins to extend, funds begin to flow to the Bitcoin ecosystem after entering Bitcoin, and a lot of funds begin to stay in the Bitcoin ecosystem, which leads to a corresponding reduction in the traditional capital rotation effect. In addition, with the development of Layer2, a lot of funds have also begun to flow between Layer2, which has greatly reduced the number of transactions on the Ethereum chain, causing its inflation to begin to rebound to a certain extent. From a macro perspective, Bitcoin is more favored by Wall Street and the market. Against the backdrop of continued global liquidity tightening and regional tensions, Bitcoin has also shown a certain blood-sucking effect, which further leads to Ethereum's weak performance.
