A New Chapter in Digital Asset Interpretation: Bitcoin Leading the Way, Why Does Ethereum Disappear?

Why has Ethereum performed significantly weaker than Bitcoin this year? From a historical cycle perspective, in the process of the crypto market transitioning from bear to bull, funds will first flow into Bitcoin and then into other sectors; From a short-term perspective, compared to other crypto assets, the recent Bitcoin spot ETF has a significantly stronger stimulating effect on BTC; From the perspective of technological development and narrative, in addition to the original value recognition of "digital gold", Bitcoin has once again developed a new narrative, while Ethereum has further entered a technological bottleneck; From the on chain data, Ethereum's pledge has slowed down, inflation has rebounded, and Bitcoin's on chain activity is relatively high; From a regulatory perspective, Bitcoin's non securities status is clear, and Wall Street has a higher recognition of it. From different dimensions, the reasons for Ethereum's decline will also vary

Why has Ethereum performed significantly weaker than Bitcoin this year? From a historical cycle perspective, in the process of the crypto market transitioning from bear to bull, funds will first flow into Bitcoin and then into other sectors; From a short-term perspective, compared to other crypto assets, the recent Bitcoin spot ETF has a significantly stronger stimulating effect on BTC; From the perspective of technological development and narrative, in addition to the original value recognition of "digital gold", Bitcoin has once again developed a new narrative, while Ethereum has further entered a technological bottleneck; From the on chain data, Ethereum's pledge has slowed down, inflation has rebounded, and Bitcoin's on chain activity is relatively high; From a regulatory perspective, Bitcoin's non securities status is clear, and Wall Street has a higher recognition of it. From different dimensions, the reasons for Ethereum's decline will also vary. So what are the most core influencing factors?

The rotational effect certainly exists, but why is Ethereum so weak

Bitfinex stated in a recent report that the market is in the early stages of a bull market, with Bitcoin initially rising and then undergoing capital rotation as investors search for trades such as Ethereum, which is normal. Furthermore, from historical data, the high levels of ETH/BTC typically occur during Ethereum's excellent bull market, reaching 0.085 at one point; However, in a bear market, the situation has reversed, with Bitcoin typically taking the lead.

This article argues that during the transition from a bear market to a bull market, the effect of capital rotation does exist, but Ethereum has been too weak in this bull bear transition! It should be noted that the size of Bitcoin is much larger than Ethereum. If funds only exhibit a rotational effect, the difference in growth between Ethereum and Bitcoin will widen in a short period of time. As funds rotate, the time line will be extended, and the difference in growth between Bitcoin and Ethereum should be narrowed rather than amplified; After a certain period of time, Ethereum's growth often begins to surpass that of Bitcoin.

According to the latest data from TradeView, the ETH/BTC ratio reached 0.05182 at one point, the lowest since mid-2021. Data shows that BTC prices have increased by 32% in the past month, while ETH has only increased by 12%. Looking at the longer timeline, Bitcoin prices have doubled this year, while ETH has only increased by about 50%.

From a data perspective, as time goes on, the growth gap between Bitcoin and Ethereum continues to widen; This article does not deny the existence of a fund rotation effect, but this is clearly not the reason why Ethereum is significantly weaker than Bitcoin.

Is BTC and ETH only one spot ETF expectation short

Earlier this month, six ETFs based on Ethereum futures were launched in the United States; However, the sluggish opening trading did not generate the same level of excitement and trading volume as the first BTC futures ETFProsharesBITO launched in October 2021. David Duong, research director at Coinbase, stated that the total first-day trading volume of top ETH futures ETFs is less than $1.5 million. In stark contrast, according to Bloomberg data, the trading volume of BITO on its establishment date exceeded $1 billion. In addition, the net inflow into these ETH futures ETFs is less than 2% of BITO.

According to a report released by digital asset management company CoinShares on October 23rd, investment products based on Bitcoin and Solana have inflows of approximately $112 million and $43 million respectively so far this month, while funds based on Ethereum have outflows of $4.7 million. Ethereum's outflows this year have reached as high as $119 million. James Butterfill, the research director of CoinShares, attributed the difference in funding changes between BTC and Ethereum to people's "expectations for spot Bitcoin ETFs" and "ongoing concerns about Ethereum". Bitfinex analysts also stated in a report that the main bullish trend in the market is due to BTCETF products, while Ethereum lacks a convincing long-term narrative.

Benjamin Jarvis, co founder of analyst firm JLabs Digital, stated in a Bloomberg interview that institutions may be more willing to invest in Bitcoin spot ETFs because they believe that Bitcoin spot risk is lower compared to Ethereum futures.

From the above, it can be seen that the gap between the recently launched Ethereum Futures ETF and Bitcoin Futures ETF is very significant. This further indicates that the impact of an ETF in the short term is not fundamentally the root cause of the significant gap between Ethereum and Bitcoin. The disregard and escape of large funds have deeper reasons.

What's wrong with ETH? Viewing the Challenges Faced by Ethereum from Vitalik's Latest Speech

Since Ethereum entered the PoS mechanism, many people in the market have been optimistic about it. Some people calculate through its destruction mechanism that Ethereum will explode in the next bull market, with a significant increase compared to Bitcoin. Many people choose to exchange their Bitcoin for Ethereum. But since the beginning of this year, Ethereum's performance has been disappointing, with well-known encryption projects such as DYDX and MarkeDao choosing to flee or planning to flee Ethereum. Below, this article examines the enormous challenges faced by Ethereum from Vitalik's latest speech.

Centralization of pledge: As pledge has become an essential element of Ethereum's daily operation, pledge service providers can help users pledge, but this inevitably leads to the centralization of pledge.

Account abstraction and social recovery: Vitalik has repeatedly emphasized the importance and necessity of account abstraction. He believes that the abstraction of push accounts is driven by two considerations: convenience: users can pay gas fees with any ERC20 token, and perform multiple operations (signature, authorization, verification, etc.) in a single transaction. But account abstraction itself also faces challenges. This challenge is not just an isolated technical issue, but involves the entire encryption ecosystem. For existing wallets, applications, and development tools, choosing to use account abstraction to enhance user or developer experience inevitably involves technological adjustments and adaptations. Account abstraction is a technical concept, but it will inevitably encounter problems during actual adaptation execution. And with the emergence of more L2, whether and how different L2 supports account abstraction is also a challenge, as users may encounter situations where one L2 supports but another does not. While promoting broader account abstraction, it is likely that consideration will also need to be given to how to handle MEV issues to ensure the fairness, security, and healthy development of the system.

Security considerations: Vitalik has also discussed with multiple multi signature wallet and MPC wallet projects and believes that the solution based on mnemonics is still not the most perfect choice. The loss of mnemonics and private keys can lead to asset loss.

In the crypto market, Ethereum is similar to an aircraft carrier, with a huge size but slightly outdated appearance. With the continuous emergence of new things and requirements, Ethereum needs to carefully expand its capabilities, such as capacity expansion, user experience, and privacy issues. This has left many encryption projects and others unchanged, so they chose to flee, with competitors such as Cosmos and Solana becoming their strong competitors. At the same time, with the transition from Ethereum to PoS mechanism, the issue of centralization has become increasingly prominent. How to find a balance between experience and decentralization has also become a challenge. It is precisely these challenges that continue to emerge that the market seems to have gradually lost its initial blind optimism.

Layer2 development suppresses underlying demand for Ethereum, and ETH inflation rebounds

With the outbreak of Layer2 on Ethereum, more and more transactions and applications are starting to detach from the Ethereum layer, which has led to a significant decline in Ethereum's ability to directly capture value. Below, we will take the recently popular friend. tech as an example to illustrate.

According to DefiLlama data, developers of the popular Web3 social application friend.tech have earned nearly $20 million since its launch in August; As of October 6th, according to encryption research firm Messari, friend.tech has attracted 300000 independent users and has a daily fee revenue of $320000 (six times that of OpenSea). However, friend.tech is built on a base chain based on OpStack, rather than directly on Ethereum, but it shares Ethereum's security. So, how does friend.tech share Ethereum security?

Optimism (Ethereum Layer2) proposed the concept of a superchain, which seeks to integrate previously isolated L2 into a single interoperable and composable system by maintaining the OPStack code library as a public product. In the super chain ecosystem of Op, each OP chain (Base chain is an OP chain) chooses to join a sequencer and then interacts with Ethereum L1 in batches through a Chain Factory.

Despite the popularity of friend.tech, trading activity on the Ethereum chain entered a low point in August and September 2023. At present, the gas cost on the Ethereum chain remains basically below 10gwei. Due to the decrease in on chain activities and gas costs, the supply of Ethereum has exceeded the consumption in the past 30 days, leading to a rebound in inflation rate to 0.275%. In the past 30 days, 27000 ETHs have been added. In addition, Ethereum's pledge has slowed down and the queue for pledged tokens has decreased. As of now, there are a total of 844000 active pledge nodes on the Ethereum network, with approximately 27 million ETHs pledged. Compared to the second quarter of 2023, the current number of new pledges has significantly decreased.

summary

Overall, Ethereum's own technological bottlenecks are the main reason for its price stagnation. On the other hand, since the beginning of this year, Bitcoin has successfully sparked a wave of Meme hype through the NFT and BRC-20 protocols, which has further sparked the development boom of Bitcoin Layer2. Due to the extension of the Bitcoin ecosystem, funds begin to flow into the Bitcoin ecosystem after entering it, and many funds begin to stop in the Bitcoin ecosystem, resulting in a corresponding reduction in the traditional capital rotation effect. In addition, with the development of Layer2, many funds also began to flow between Layer2, which significantly reduced the number of transactions on the Ethereum chain and led to a certain rebound in inflation. From a macro perspective, Bitcoin is more favored by Wall Street and the market. Against the backdrop of continuous global liquidity tightening and regional tensions, Bitcoin has also experienced a certain degree of bloodsucking effect, which further leads to a weak performance of Ethereum.