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Ether's Undervaluation Dilemma: Can ETH Overcome Structural Headwinds to Outperform Bitcoin?

Samuel ReedThursday, May 8, 2025 11:38 am ET

3min read

The Ether-Bitcoin (ETH/BTC) ratio has plunged to historically low levels, sparking debates about whether Ethereum’s native asset is poised for a rebound against Bitcoin’s dominance. According to recent analysis by CryptoQuant, the ETH/BTC ratio dropped to 0.019 in May 2025, marking a 75% decline from its peak of 0.08 in late 2021. This stark divergence raises a critical question: Is ETH fundamentally undervalued, or are its structural challenges too entrenched to capitalize on this opportunity?

The Case for ETH’s Undervaluation

CryptoQuant’s analysis points to the Market Value to Realized Value (MVRV) ratio as a key indicator of undervaluation. The MVRV measures the difference between an asset’s current market cap and its "realized capitalization"—the value of all coins based on their last transaction price. For ETH, this metric has fallen to levels not seen since the early days of the bear market, suggesting the asset is trading far below its fundamental value.

Historically, low MVRV ratios have preceded periods of ETH outperformance against Bitcoin. For instance, during the 2019 bear market, a similar MVRV trough preceded a 200% surge in the ETH/BTC ratio. If this pattern repeats, ETH could witness a significant rebound. However, the current environment presents unique challenges.

Structural Headwinds Weighing on ETH

1. Network Stagnation and Fee Declines

Ethereum’s on-chain activity has flatlined since 2021, with transaction counts, active addresses, and daily transfers showing no sustained growth. The Dencun protocol upgrade in March 2024, which slashed transaction fees by over 90%, further eroded fee-based revenue—a key driver of ETH’s "value accrual" narrative.

The reduced demand for ETH as a transactional asset has nearly halted its burn rate, a mechanism that historically removed millions of ETH from circulation annually. With the burn rate now at ~1,000 ETH per day—down from peaks above 15,000 ETH in 2021—the total ETH supply continues to expand, weakening scarcity-driven valuation arguments.

2. Layer 2 Dominance and Mainnet Decline

Layer 2 solutions like Arbitrum and Base have siphoned activity away from Ethereum’s mainnet. While this improves scalability and lowers costs, it reduces the need for users to hold ETH for transaction fees. Mainnet fees, once a cornerstone of ETH’s value proposition, now account for just 2% of the ecosystem’s total transaction volume, per CryptoQuant.

3. Waning Institutional Demand

Institutional appetite for ETH has cooled. Staked ETH—a proxy for long-term investor commitment—has declined from a peak of 35.02 million ETH in November 2024 to 34.4 million ETH by May 2025. Meanwhile, ETH holdings in institutional products like ETFs have dropped by ~400,000 ETH since February 2024, signaling capital reallocation to safer or more yield-oriented assets.

Bitcoin’s Rise Complicates the Outlook

Bitcoin’s ascent to near $100,000 in early 2025 has reinforced its status as a macro-hedging asset. Investors seeking stability or exposure to inflationary pressures are increasingly gravitating toward BTC, which now accounts for 45% of the crypto market cap—its highest share since 2018. This divergence between BTC’s strength and ETH’s stagnation has made ETH’s recovery path more treacherous.

Conclusion: A Bullish Signal, But Catalysts Are Critical

The ETH/BTC ratio’s current undervaluation presents a compelling long-term opportunity, supported by historical precedents and fundamental metrics like the MVRV ratio. However, overcoming structural challenges—such as network stagnation, fee-driven burn dynamics, and institutional disinterest—will require more than technical signals.

For ETH to rebound, one or more of the following catalysts must materialize:
1. Protocol upgrades that reignite on-chain activity (e.g., Layer 1 innovations beyond Dencun).
2. Stablecoin reforms that shift demand back to ETH for settlement (e.g., regulatory clarity on USDC/USDT dominance).
3. Institutional capital inflows driven by new ETH ETFs or macro tailwinds favoring decentralized finance (DeFi).

Without such catalysts, ETH’s undervaluation may persist, even as its fundamentals suggest it is due for a correction. Investors should weigh this technical bullishness against the reality that structural underperformance has now lasted over three years—a span that has tested even the most patient holders. The road to outperforming Bitcoin is clear, but the obstacles remain formidable.

This analysis synthesizes CryptoQuant’s May 2025 data with historical price trends and on-chain metrics. The author holds no positions in the assets discussed.

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