Why Ethereum Is Lagging Bitcoin—Analysts Cite Inflationary Problems, Dencun Upgrade Blowback, And Solana’s Meme Coins

Ethereum (CRYPTO: ETH), the second-largest cryptocurrency by market capitalization, has been on a different trajectory compared to Bitcoin (CRYPTO: BTC) over the past year. While Bitcoin has seen a 32% increase, reaching an all-time high of $109,000 and expanding its market share from 52% to 60%, Ethereum has faced a 39% contraction, reducing its market share from 16% to 8%.

This divergence has sparked discussions about Ethereum’s position in the cryptocurrency hierarchy and its future prospects. Analysts have pointed to various factors contributing to Ethereum’s downturn. Jeffrey Hu, Head of Investment Research at digital asset manager HashKey Capital, believes that Ethereum’s economic model is to blame. The activation of EIP-1559 allows more Ether to be burned for deflation when Ethereum activity is high, but Hu emphasizes the need for further scalability to support on-chain applications.

The Ethereum London Hard fork, known as EIP-1559, introduced a token burn mechanism to add deflationary pressure to ETH and boost its value. However, Hu notes that the rise of Layer-2 blockchains and the Dencun Upgrade, which reduced fees on L2s significantly, diverted on-chain activity away from the base Ethereum chain, leading to inflation.

Trever Koverko, a Web3 investor and co-founder of Sapien, echoes these observations, stating that Ethereum is struggling to establish a narrative around how L2’s can benefit the main chain. Additionally, competition from other cryptocurrencies like Solana (CRYPTO: SOL) has intensified. Solana has become a meme coin hotspot, attracting more application development and on-chain transactions.

Despite these challenges, Ethereum remains the only cryptocurrency besides Bitcoin to have a spot exchange-traded fund on Wall Street. However, inflows have been relatively subdued due to a lack of consensus on Ethereum’s narrative. Himanshu Maradiya, Founder & Chairman of CIFDAQ Global, attributes this to Ethereum’s perceived lack of a pure store-of-value proposition and its position as the “middle child” of the crypto ecosystem.

While Ethereum ETFs may become more appealing with the introduction of staking rewards, the Ethereum Foundation remains focused on ecosystem development and research. Overall, Ethereum’s shrinking market share underscores the need for continued innovation and adaptation in the rapidly evolving cryptocurrency landscape.