Since the Ethereum merge on September 15, 2022, Ethereum has dropped 48% compared to Bitcoin.

Chart 1: Ethereum versus Bitcoin (ETH/BTC) Since 2020

This Sunday marked the two-year anniversary of the Ethereum merge, during which it switched from Proof-of-Work to Proof-of-Stake. As part of this transition, Ethereum’s issuance of new Ether was sharply reduced from 4% to less than 1% annually. Over the past two years, the result has been a net negative supply growth, with more Ether being burned through transaction fees than issued to stakers.

Despite this reduction in inflation, Ethereum has been unable to keep pace with Bitcoin, particularly in the last few months.

Chart 2: Ethereum versus Bitcoin (ETH/BTC), Year-to-Date

The substantial underperformance of Ethereum, not only in the past few years but especially this year, frankly, has caught us off guard. As we highlighted in Crypto Moves #12, we had – and still have – greater conviction in Ethereum. Therefore, the extent of Ethereum’s underperformance compared to Bitcoin has been unexpected and disappointing. There is no denying that we have been on the wrong side of this trade, but we remain confident in the arguments we presented in that report.

This update focuses on the ETH/BTC pair and, importantly, what will drive Ethereum to outperform Bitcoin – because it will. It is only a matter of time. To get a clear picture, though, we need to understand why Ethereum has struggled so much recently.