Here’s Why Ethereum’s Price Is Struggling, According to IntoTheBlock

Ethereum (ETH) has lagged behind bitcoin (BTC) and other cryptocurrencies in price performance over the past few months, raising concerns about the factors contributing to this widening gap. 

While trying to understand the reason behind ether’s lagging performance, blockchain analytics firm IntoTheBlock found that a notable drop in Ethereum’s network fees could be a key factor contributing to the asset’s poor price movement. 

Our latest newsletter takes a deep dive into Ethereum’s performance, examining its usage and price trends, while tackling the market’s growing doubts about ETH as a form of money. 👇https://t.co/mclVKKky6U

— IntoTheBlock (@intotheblock) October 5, 2024

According to IntoTheBlock’s analysis, Ethereum and Bitcoin saw significant declines in their network fees during the last quarter. Bitcoin’s transaction fees plummeted by 86%, yet this sharp decline did not trigger investor concerns. 

In contrast, Ethereum experienced a lesser fee reduction of 44% quarter-over-quarter. Still, it faced increased scrutiny due to a decline in on-chain activity on its Mainnet, underscoring concerns over Ethereum’s underperformance relative to Bitcoin, which maintained stable network engagement despite the more pronounced fee drop.

Dencun Upgrade Impacts Ether’s Fee Structure

One major development impacting Ethereum’s fee structure is the recent Dencun upgrade. The upgrade has had a notable effect on its Mainnet, resulting in a considerable decrease in fees while boosting on-chain activity across leading Layer 2 (L2) solutions. 

The upgrade, which included EIP 4844, reduced L2 transaction costs by more than tenfold, driving rapid growth in L2 transactions, particularly on platforms such as Base.

Despite the surge in L2 activity, the benefits of the Dencun upgrade to Ethereum’s value have been muted, as average transaction fees on the Mainnet dropped to unprecedented lows. For instance, priority fees for front-running swaps benefit L2 sequencers instead of ETH holders. These sequencers reap significant rewards due to the drop in transaction costs on the Mainnet.

Fee Drop Leads to Decline in ETH Burn Rate

The blockchain analytics firm also noted that the drop in fees has decreased the amount of ETH being burned, causing Ethereum to revert to an inflationary model after previously aiming for deflation.

While the reduced fees on L2s could present possible long-term benefits, IntoTheBlock’s report highlighted that Ethereum is currently grappling with an “identity crisis,” as its objective of achieving “ultrasound money” appears less feasible amid declining revenues and a shift back to an inflationary model.

The divergence in fee dynamics has broader implications. The report suggests that the widening price gap between Bitcoin and Ethereum implies that BTC is increasingly viewed as a currency. In contrast, ETH’s value is becoming more closely linked to its cash flows.

As Ethereum’s price hit new yearly lows, Bitcoin’s price remained relatively stable, pushing BTC’s market share to its highest level since April 2021.