Can Ethereum regain momentum and overtake Bitcoin in 2024?

ethereum has outperformed bitcoin in terms of price performance, especially when looking at time periods since its inception, halving years, and bull market periods. However, eth has underperformed bitcoin since the bear markets of 2018-2019 and 2022-2023. In the halving year of 2024, for the first time, ethereum is significantly behind bitcoin. In fact, it has underperformed bitcoin for the past three years.

<h2 class="wp-block-heading" id="eth–btc-ratio-plummets-to-3-5-year-low”>eth/btc ratio drops to 3.5-year low

While fractals, a concept in which similar patterns repeat over different time periods, are not a foolproof method for predicting future outcomes, they do provide valuable context for what might happen.

In previous halving years, the eth/btc ratio broke its support line around September to December, only to start an uptrend in the first quarter of the following bull market year. A similar scenario could play out in 2024, as ethereum has broken its support again. However, this time, the situation is more worrying. Unlike previous halving years, where the support line was relatively recent, the current support at 0.05 has held strong for the past 3.5 years, suggesting a more bearish outlook for ethereum.

Another point of comparison can be drawn 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 price of ethereum also performed negatively, except in 2020. However, the critical question is not just whether the price rose or fell; it is also whether holding ethereum was the best investment decision. History has shown that under similar circumstances, holding bitcoin turned out to be the most advantageous option, and it is quite possible that 2024 will continue that trend.

<h2 class="wp-block-heading" id="ethereum-supply-reverses-course-and-turns-inflationary”>ethereum supply reverses course and becomes inflationary.

The ethereum supply has been steadily decreasing following the 2022 merge. ethereum's supply decrease works through a mechanism called “burning,” which was introduced with ethereum Improvement Proposal (EIP) 1559 in August 2021. Essentially, a portion of transaction fees paid in eth are burned, or permanently removed from circulation. This reduces the total supply of eth over time, especially during periods of high network activity when transaction fees are higher.

The reason why ethereum’s supply started to decrease after the 2022 merge was because the network moved from a proof-of-work consensus mechanism to a proof-of-stake one. With PoW, new eth was continuously issued to miners as a reward for validating transactions, which contributed to an increase in the total supply of ethereum. However, with the merge and the switch to PoS, the issuance of new eth decreased significantly because validators, who now secure the network, receive much smaller rewards compared to miners.

The Dencun upgrade in March 2024 marked a turning point, reversing this deflationary trend and making ethereum’s supply inflationary once 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 decrease in the amount of eth being burned, which had been a critical factor in maintaining ethereum’s deflationary supply.

As a result, the ethereum supply began to increase, and since the Dencun upgrade, more than 213.5 thousand eth have been added to circulation. For comparison, the ethereum supply is now at the same level as in May 2023.

Negative ETF flows continue

Many expected the approval of ethereum ETFs to boost eth by increasing demand and pushing up prices. However, this has not been the case so far. Instead, ETF outflows have become a concern, with a total of $465 million leaving since trading began. The main driver of the trend is Grayscale’s ETHE, which has seen massive outflows, dwarfing the positive inflows of other ethereum ETFs. The scale of ETHE outflows is so large that it creates a net negative effect when considering all ethereum ETFs collectively.

An ethereum ETF holds a certain amount of ethereum, with each share representing a fraction of the total ethereum it holds. When many investors want to buy ETF shares, demand can drive the price of ETF shares higher than the actual value of the underlying ethereum. In this case, Authorized Participants (APs) step in—large financial institutions that work closely with the ETF provider. 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. The process increases the supply of ETF shares, helping to bring the share price back in line with the value of the underlying assets.

Conversely, when there is little demand for the ETF, its share price may fall below the value of the underlying ethereum. In this case, APs buy the undervalued ETF shares from the market, return them to the ETF provider, and receive ethereum in return. They can then sell ethereum on the open market at a higher price, profiting from arbitrage. This reduces the supply of ETF shares and helps the price align more closely with the value of the underlying ethereum.

Simply put, APs selling eth as they redeem ETF shares could be one of the reasons why the eth price has dropped and is struggling to recover.

Conclusion

While current data may suggest a bearish outlook for ethereum, it remains a fundamentally sound asset. The number of active addresses on both its main chain and Layer 2 networks continues to increase. ethereum still leads the blockchain industry, ranking first in total value locked (TVL) across DeFi platforms, with many projects in development in its ecosystem. Additionally, ethereum continues to undergo regular development and updates.

However, given the current market conditions and continued ETF outflows, ethereum may not be the best investment in the near term, particularly for the remainder of 2024. However, looking ahead to 2025, starting in Q1, ethereum is likely to regain its momentum and once again outperform bitcoin in terms of performance, just as it has done in previous market cycles.