After a year of underperformance in 2023, the ETH/BTC dominance will grow this year on the backdrop of Dencun upgrade and other contributing factors within the Ethereum ecosystem.
In the year 2023, Ether (ETH), the native token of the Ethereum blockchain, faced a period of underperformance compared to Bitcoin (BTC). Bitcoin’s newfound narrative centered around smart contracts, non-fungible tokens (NFTs), and optimism surrounding a spot exchange-traded fund (ETF) drew significant investor interest. Analysts now suggest a potential reevaluation of Ether in 2024, given Ethereum’s continued status as the leading smart contract blockchain globally, coupled with upcoming key upgrades. Analysts also see Ether as a strong contender for the next spot-based ETF in the United States.
In a recent weekly newsletter, Nasdaq-listed cryptocurrency exchange Coinbase expressed optimism, stating that “ETH could be poised for a breakout year.” The impact of last week’s Bitcoin ETF news proved beneficial for Ethereum, causing a brief spike above $2,700, marking its highest price since May 2022. Further optimism for ETH’s near-term future arises from the fact that firms behind Bitcoin ETFs, including BlackRock and VanEck, are actively considering Ethereum-based spot ETFs.
A spot ETF involves actual cryptocurrency investment, offering exposure to the asset without direct ownership. This is a favorable alternative to futures-based ETFs, which are susceptible to roll costs. The potential launch of spot ETH ETFs is likely to unleash a flood of institutional and retail investment, mirroring the success observed with nearly a dozen Bitcoin spot ETFs that commenced trading in the US last Thursday. These Bitcoin ETFs have collectively recorded a cumulative volume exceeding $10 billion, with BlackRock’s product amassing an impressive $1 billion in inflows.
Ethereum Dencun Upgrade and Its Effect on ETH in 2024
Coinbase reports that Ethereum’s upcoming Dencun upgrade, designed to enhance the mainnet’s scalability through the introduction of “data blobs,” has the potential to ignite investor interest in the cryptocurrency. The upgrade recently went live on Ethereum’s Goerli testnet.
The Dencun upgrade introduces “data blobs”, which are temporary transaction data memories typically associated with Layer 2 solutions. These can be attached to Ethereum. Thus, following the mainnet upgrade, the network will only need to confirm the correctness of the blob data attached to the block, reducing congestion and network fees.
Coinbase notes that the Dencun upgrade, currently undergoing initial tests, is likely to implement Ethereum Improvement Proposal (EIP) 4844 in the coming months. Some Ethereum observers predict that this proposal could significantly decrease network fees by 90% or more.
ETH/BTC Growing Dominance
In its annual report, institutional crypto firm ETC Group expresses a bullish outlook for the ether-bitcoin ratio. Despite Bitcoin’s surge in network activity in 2023, Ethereum continues to dominate as the preferred chain for decentralized applications, NFTs, and tokenized assets.
ETC Group’s data reveals that the top 10 ERC-20 tokens on Ethereum have a combined market value of $21 billion, surpassing the $1.6 billion market capitalization of the entire BRC-20 token universe on the Bitcoin network. ERC-20 represents Ethereum’s token standard, while BRC-20 signifies a fungible digital asset on the Bitcoin network.
Additionally, in 2024, Ethereum investors can generate extra returns by staking or locking their coins on the network, earning rewards at an annualized rate of around 3.84%. Ethereum’s feature of burning a portion of transaction fees paid in ETH further contributes to a deflationary effect on the token’s supply, positively impacting investors.
ETC Group emphasizes Ethereum’s strong dominance in smart contract platforms and the potential for additional yield, stating that Ethereum should be a core holding in a diversified crypto asset portfolio. The report anticipates a reversal in the relative performance of ETH/BTC in 2024, citing historical trends of mean reversion in the 12-month relative performance of these two cryptocurrencies.