Why is Ethereum underperforming Bitcoin since the Merge?

Key Takeaways

• Ever since the Merge went live in September, Ether has underperformed Bitcoin significantly 
• This is despite the supply of Ethereum falling post-Merge
• More Ether is also being staked since the Shapella upgrade in April 
• Demand has fallen with regard to Bitcoin, however, overriding the lower supply
• Regulatory crackdown and greater institutional interest in Bitcoin appears to be driving the divergence, writes our Head of Research

One of the more interesting trends to follow within crypto is that of the ETH / BTC chart. In other words, how the world’s two largest cryptocurrencies move in relation to one another. Now ten months on from the Ethereum Merge, it feels like a good time to re-analyse the relationship.

The Merge completely transformed Ethereum, switching the network to a proof-of-stake mechanism rather than the proof-of-work mechanism it was on previously. On the other hand, Bitcoin remains (and always will be) a proof-of-work blockchain. 

This means that the fundamentals underlying the Ethereum network have flipped. Perhaps this is most noticeable when plotting the total circulating supply of ETH. The Merge going live in September 2022 sticks out like a sore thumb, with the supply (slightly) contracting from that date. 

Zooming in on the post-Merge period in the next chart shows the contraction. The supply has reduced at an average rate of 0.15% per month. Prior to the Merge, the supply grew by 0.41% per month.  

Moreover, the supply of liquid Ether has contracted even further than the above charts show. Looking at the total value of staked Ether, the pattern was relatively steady from when the staking contract opened in November 2020. This trend more or less continued as the Merge went live in September 2022. However, as seen on the next chart, the amount of staked Ether spiked notably in April of this year, as the Shapella upgrade went live. 

This Shapella upgrade, also known as Shanghai, allowed staked Ether to finally be sold, with some of the early stakers having locked up their tokens since Q4 of 2020. Despite concern that this would lead to a vast amount of Ether flooding the market and denting the price, the opposite has happened. With the indefinite lock-up restriction no longer a factor, the Ether staked has spiked noticeably, with the trend far steeper in the three months since. 

But how has this structural break on the supply side affected Ether’s performance against Bitcoin? Less supply equals a higher price, right? Well, no actually. Almost on a dime from when the Merge went live, ETH has fallen relative to Bitcoin, as I have plotted on the below chart (the black line denotes the Merge in September). 

The reason, of course, is that price is governed by supply and demand, rather than just supply. And while supply has contracted, the demand side of the equation has not held up – at least relative to Bitcoin.

Ether underperforms Bitcoin

Two months after the Merge, FTX collapsed, sending the entire crypto sector for a spin. As is customary in times of price decline, Bitcoin fell less than the rest of the market. Thus, Ether falling against Bitcoin in the aftermath of the crash is not surprising. 

However, thus far in 2023, the crypto market has been on fire, with token prices accelerating across the board as the macro climate has softened amid falling inflation. The Nasdaq jumped 32% in the first six months of the year, its best half-year return since 1983. And yet, despite the crypto market riding this wave, Ether fell further still against Bitcoin, something which seemingly bucks the trend. 

The rea