Ether (ETH), the second-largest cryptocurrency by market value, has outperformed Bitcoin (BTC)'s rally over the past week, a trend that could continue as fundamentals for Ethereum's native token appear more favorable than those of the larger cryptocurrency Greg Magadini, Head of Derivatives at Amberdata.
Ether is up over 16% in seven days and traded above $2,900 for the first time in nearly two years, while Bitcoin price rose a more leisurely 8.5% to $52,300, data from CoinDesk shows. The Ether-Bitcoin ratio has increased by almost 7% to 0.055. The CoinDesk CD20 index, a measure of the broader crypto market, is up 10.7%.
ETH's outperformance comes after Bitcoin lagged for weeks as traders focused on the debut of spot BTC exchange-traded funds (ETFs) in the US and the upcoming quadrennial rewards halving, which will boost BTC payout per block will decrease from 6.25 BTC to 3.125 BTC.
The focus may soon shift to the significant decline in Ether supply since Ethereum switched to a proof-of-stake consensus mechanism in September 2022 in an upgrade called “The Merge,” Magadini said. This is in contrast to the Bitcoin halving, which merely slows the cryptocurrency's growth rate.
“Everyone is talking about the April Bitcoin halving, but that is nothing compared to the active ETH supply ‘REDUCTION’ that has already been going on since September 2022,” Magadini said in a weekly newsletter. “ETH is the next game here! Low ETH/BTC ratio, actively looking for a bid, [with ETH’s] fundamental supply picture even better than BTC.”
According to data tracking website Ultrasound.money, 1,047,643 ETH ($3.05 billion) have been issued and 1,407,200 ETH burned or withdrawn from circulation since the merger, resulting in a net supply decline of 359,557 ETH, or 0.209% year-over-year led. Bitcoin supply increased by 1.71% over the same period.
The reduction represents a deflationary trend that comes as Ethereum burns through some of the transaction fees paid to validators. The merger replaced miners with validators, removing a significant portion of the Ether supply from the market.
Validators stake at least 32 ETH to participate in the government process and secure the blockchain in return for rewards. The number of Ether staked or locked on the network exceeded 30.1 million, or 25% of the total circulating supply, earlier this month. The Dencun upgrade, due in March, is expected to reduce transaction costs.
Additionally, the Securities and Exchange Commission is expected to greenlight spot Ether ETFs in the US later this year. Franklin Templeton, BlackRock, Fidelity, Ark and 21Shares, Grayscale, VanEck, Invesco and Galaxy, and Hashdex have submitted applications to implement such a program.
The SEC approved nearly a dozen spot BTC ETFs last month, paving the way for investors to gain exposure to the cryptocurrency without having to own and store coins. Since debuting on January 11, the ETFs have seen inflows of around $5 billion, creating excitement about the potential ETH ETFs.
“Combine this ETH “supply BURN” with dormant STAKED ETH and mix in a SPOT ETF that actively puts ETH into cold storage…suddenly the supply story for ETH is as bullish as the fundamentals can get,” Magadini said.
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