Why Ethereum Shows Weakness Against Bitcoin

Ethereum has more practicality due to the support of smart contracts. This feature allowed altcoin to surpass Bitcoin in terms of growth rates in 2020-21, just since the heyday of the DeFi and NFT markets tied to smart contracts. However, now Ethereum is losing its power.

The collapse in the first half of May of the third largest UST/USD stablecoin of the Terra project led to a decrease in confidence in the entire sector of decentralized finance. Ethereum with a 50% stake did not stand aside – the amount of blocked funds collapsed from $75 billion to $51 billion in two weeks.

However, the loss of DeFi capitalization is due not only to the undermining of confidence in the market, but also to the general macroeconomic situation. Since the beginning of the year, the Fed has taken a course to tighten monetary policy, which led to the updating of the US dollar index to a nine-year high.

Because of the Fed’s policy, institutional investors are shifting money from high-risk assets to more conservative ones. This is also reflected in crypto-messages, since Bitcoin has been called “digital gold” in recent years. As a result, the weekly inflow to Bitcoin funds amounted to $63.4 million in May, while funds with Ethereum recorded an outflow of $13.2 million.

The decline in interest in DeFi and NFT is reflected in the return of transaction fees to minimum levels. Ethereum has a low bandwidth, so during the hype in the market, users are forced to increase the premium to miners so that their transaction is processed as soon as possible.

All of the above events lead to the fact that investment interest in Ethereum is declining. And if, in relation to Bitcoin, cryptocurrency exchanges still record outflow to cold wallets, the influx of Ethereum is at local highs.

Bitcoin has another trump card – a deflationary mechanism.

Every four years there is a halving (halving of the reward for creating a block), and the number of coins is limited to 21 million. Ethereum launched a burning mechanism in August last year, but the inflow still exceeds the volume of coins burned, and there is no limit on the issue.

If inflation in the US gets out of control, Bitcoin will once again take the role of a savings asset and insurance against inflation in the preferences of investors. All other things being equal, this will lead to its further strengthening against Ethereum.