Why Bitcoin Outperformed Ethereum’s Price Action

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Ethereum (ETH) made headlines for turning deflationary two weeks ago despite Bitcoin’s underperformance. According to Ultrasound Money, the net issuance or annualized inflation rate of the second-largest cryptocurrency fell below zero on January 15.

This means that the main smart contract blockchain is now burning more ETH than minted, in contrast to BTC. Despite this, Ethereum still lags behind Bitcoin as January draws to a close.

Source: Ultrasonic Silver

While Bitcoin saw a gain of almost 44.97% this month, Ether appreciated by 40.66%. The Ether-Bitcoin ratio, or ETH/BTC, is also on track to post its second consecutive monthly decline. There are three factors that could be responsible for Ether’s underperformance, which will be discussed in detail below.

Source: TradingView Defensive Positioning Before Shanghai Upgrade

The first factor responsible for Ether’s underperformance is the defensive positioning ahead of the Shanghai upgrade.

The Ethereum upgrade in Shanghai, which is expected in March, will enable withdrawals of 17.2 million ETH that have been staked or deposited into the Beacon Chain since December 2020. Although the entire staking balance of 17, 26 million cannot be withdrawn on upgrade day, only 43,200 ETH can be withdrawn per day.

Source: Glassnode

The total staking reward for the last two years, which is equivalent to approximately 1 million ETH, can be withdrawn instantly. This has caused some concern among traders as the entire stack becomes withdrawable and holders may rush to exchanges to liquidate their ETH as soon as the floodgates are opened, potentially driving the price down.

Macro Focused Bullish Alarm Clock

The second factor responsible for Ether’s underperformance is the recent rally in the crypto market, which was partly fueled by favorable macroeconomic developments. Recent reports from the U.S. government and business surveys have shown falling manufacturing activity and inflation expectations, helping to bolster hopes for a quick end to the Federal Reserve’s liquidity tightening. that rattled risky assets last year.

As inflation continues to fall, more than 80% of forecasters in the latest Reuters poll predicted the Fed would move to a 25 basis point hike at its next meeting. Meanwhile, traders saw a 55% chance that the central bank would suspend rate hikes in May, according to the CME’s Fed Watch tool.

Source: Reuters

Bitcoin’s relatively larger gains stem from a changing macroeconomic regime towards the end of the Fed’s hike cycle, so this is a pure monetary policy game, hence gold’s performance as well. This decision is made by the institutions, not by the retail trade. Notably, all of Bitcoin’s gains this year have come during US trading hours, with a surge in open interest in CME futures.

Short press

The third factor responsible for Ethereum’s underperformance is short pressure, which drove Bitcoin’s rally. The market held a short position in Bitcoin in Q4 2022 due to perceived credit risk issues, which are currently being resolved. The market did not hold any shorts in ETH, so there is no unwinding.

Short-term interest in Bitcoin increased after Sam Bankman Fried’s FTX crypto exchange went bankrupt in early November, raising the risk of market-wide contagion.

Source: CoinGlass

Finally, the rotation of money into riskier corners of the crypto market like gaming and non-fungible tokens (NFTs) seems to have

Disclaimer

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