Exploring the Reasons Behind Ethereum’s Underperformance in Relation to Bitcoin

Parallels between Bitcoin and Ethereum are common in the crypto space, and people usually compare the two when they want to buy Bitcoin with bank transfer or add Ethereum to their portfolios. Bitcoin is the originator of the crypto industry and the largest coin by market cap, while Ethereum is the leader of the altcoins, holding the second-largest position in the market. Therefore, these two crypto projects, although significantly different in scope and structure, as well as the functions they serve, have always been regarded as direct rivals that share dominance over the crypto landscape.

Except this rivalry is mostly metaphorical because although Bitcoin and Ethereum combined command over 60% of the entire crypto market, towering over the other coins, Bitcoin is eons away from Ethereum as regards value, and the distance between the two is only getting bigger.

At the time of writing, Ethereum’s year-to-date increase was standing at +15.94% while Bitcoin showed year-to-date gains of +51.24%. While Bitcoin is making significant progress, aside from the occasional setbacks, Ethereum seems unable to advance at a similar pace, despite the numerous upgrades and updates outlined each year in its road map, which should theoretically make the platform stronger and more efficient overall.  

Things have been going downhill for Ethereum ever since the network made the switch from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism back in September 2022. While the blockchain improved in terms of energy-efficiency, it has gradually lost ground against Bitcoin in terms of performance. The situation worsened in 2024, with Ethereum hitting a three and a half years performance low of over 44% this past September.

So, why exactly has been Ethereum’s recent run so underwhelming compared to Bitcoin’s? Experts say there might be several factors responsible for the discrepancy between the two assets’ trajectories, and we’re going to explore them shortly.  

Investors Prefer Bitcoin over Ether

On-chain data reveals that the demand for Ethereum as an investment instrument is considerably weaker than for BTC. This is highlighted by the trading volume registered by the spot crypto exchange-traded funds (ETFs), which were approved earlier this year by the U.S. Securities and Exchange Commission. According to recent reports, the trading volume for spot ETH ETFs went down from being 1.6 times that of BTC ETFs to only 0.76.

It’s true that Bitcoin-based ETFs were launched a few months earlier and therefore had more time in the market, but Ether ETFs failed to catch up, recording six weeks of negative flows at one point. Glassnode also showed that these new investments vehicles have a greater impact on Bitcoin’s price (8%) than on Ethereum’s (1%). This goes to show that Ethereum, for all its innovative features and diverse use cases, is still not as popular among investors as Bitcoin.

Network Activity

Another factor that seems to be directly linked to Bitcoin overperforming Ethereum is network activity. One way to assess the effectiveness of a blockchain and, therefore, interest in its native token is by looking at the number of active users engaging with the platform. In Ethereum’s case, analysts noticed that network fees have dropped significantly as of late, indicating a decline in network traffic. On-chain data shows that at press time, the 30-day average for daily active addresses was a little over 430,000, revealing a 7.7% decrease from three months prior.

This might be a direct effect of transaction volumes having doubled on Ethereum’s Layer 2 chains following the Dencun upgrade which was rolled out in March. As a result, fewer users interacted with the main blockchain and gas fees fell to a to a five-year low of 1.9 gwei back in August, which might partly explain Ethereum’s lackluster evolution.    

Supply Dynamics  

Concerns regarding supply dynamics may also play a part in the whole situation. Some argue that Ethereum is on route to becoming inflationary, while the original crypto is moving in the exact opposite direction. After the last halving event which took place in April 2024, Bitcoin’s mining rate went from 6.25 BTC to 3.125 BTC, further reducing the number of new coins entering the market and thus lowering the risk of inflation.  

Ethereum is designed differently and doesn’t have a halving protocol to control the number of coins that are being minted and keep inflation in check. The crypto employs a burning mechanism which implies permanently removing a certain portion of the fees from every transaction processed by the network. While this has allowed Ethereum to maintain a healthy supply balance, generally burning more coins than it issues, a decline in the fee burn rate over recent months has caused the ETH supply to increase. This spike in supply may also be related to Ethereum’s poor performance.  

Bitcoin Continues to Impose its Dominance

Bitcoin has always been the dominant force in the cryptocurrency space with its unparalleled achievements making it stand well above the rest. Nothing has changed in this respect, expect for the fact that the primary coin continues to expand its control over the crypto ecosystem, occupying a larger share of the market.

After a solid run over the past two years, Bitcoin’s dominance rose above 58% on September 16, a level it last reached in April 2021. This signals renewed confidence in the asset’s potential but also spells bad news for altcoins, including Ethereum, as Bitcoin’s growing dominance is forcing them to take steps back.

What’s Next?

While Ethereum’s current situation is pretty clear, people’s eyes are set on the future as the crypto market is known to serve sudden shifts and turns of events. So, could Ethereum turn the tables on Bitcoin and outpace it, or is it bound to live in its shadow?

According to experts, it would take a constant and significant network growth, and a surge in ETH transactions for Ethereum to break free from this declining trend and have a chance at a comeback. However, we’ll just have to wait and see if market conditions are going to be favorable and smoothen the path for Ethereum or, on the contrary, throw more obstacles in its path.