Ethereum’s dominance declines after the Merge

In early September, Ethereum’s dominance had risen back up to over 19%, according to CoinGecko data. 

It was data in line with a year ago, but well above that of mid-June, when it fell as low as 16%. 

In particular, it was assumed that the rise from 16% to 19% during July and August was due to the anticipation of the Merge, and that was probably the case. 

However, many people were convinced that this rise might continue even after the Merge, whereas starting as early as 13 September, two days before the Merge, it actually began to fall. 

Now it is even back below 17%, a level not seen since late July. 

However, a due clarification must be made in this regard. 

Crypto market dominance, a race between Bitcoin and Ethereum

Dominance fluctuations in the short term are not of much value, because they are very much influenced mainly by speculation in the financial markets. 

As is often the case, the speculation was there before the Merge, with the price of ETH rising from $1,400 in late August to nearly $1,800 on 11 September. 

It was precisely on 11 September, four days before the Merge, that the monthly peak in dominance also occurred, but this growth that lasted a couple of weeks was probably only speculative related to the upcoming Merge. 

As early as 13 September, the price had fallen back below $1,600, while on the 15th, the day of the Merge, it also fell below $1,500. In the following days it also fell all the way below $1,300.

In other words, from 28 August to 11 September it had registered an encouraging +26%, but from 11 September to the present it has registered -27%. The problem is that since the previous rise was due to pre-Merge speculation, once the Merge arrived that rise turned out to be insubstantial. 

The fact is that the rise in dominance from 16% to 19% in the run-up to the Merge had convinced many that Ethereum would have a chance to catch up with Bitcoin, post-Merge, due to increased competitiveness. The return of dominance below 17% in a very few days suggests that these expectations were overestimated, even if in the long run such dynamics do not suffer from short-term speculative swings. 

That is, although the post-Merge has seen a significant decline in Ethereum dominance, while many, on the other hand, expected it to rise again, over the long run the potential for this has not been touched. 

However, there is probably an underlying misunderstanding in the reasoning of those comparing Ethereum’s market capitalization with that of Bitcoin. 

The differences between the analysis of Bitcoin and Ethereum

In the same way that the Ethereum network is not, and should not be considered, a direct competitor to the Bitcoin network, ETH is not, and should not be considered, a direct competitor to BTC. 

BTC is now a financial asset used in the markets as an outlet for the aggressive monetary policies of Central Banks, while ETH increasingly resembles a bond. 

In fact, with the introduction of Proof-of-Stake, those staking ETH can receive other ETH as a reward with an annual return in ETH that can be in line with that of some bonds. Sure, the real value of ETH in the market varies all the time, so the real returns of ETH staking also vary all the time, but broadly speaking, ETH staking resembles a bond investment. 

Therefore, BTC and ETH are not direct competitors battling for dominance in the crypto markets, but rather they are different assets, not in direct competition with each other, that offer innovative alternatives to investors and speculators. 

This is evidenced by the fact that when the market value of one generally falls so does the other, and vice versa. If they were competitors, there would instead be an expectation that any decline in one might favor a rise in the other. 

In these post-Merge days, BTC has also fallen, although less than ETH. Since 11 September, BTC has lost 14%, while ETH has lost 27%. 

The fact that the sharp decline in the value of ETH since 9/11 has somehow affected not only the crypto market as a whole, but specifically BTC as well, suggests that the two major crypto assets move in complementary ways in the markets, and not in competition with each other. 

That said, the highest dominance ever achieved by Ethereum was over 30 % in June 2017, but that was an anomaly. That was also the time when it went closest to Bitcoin, as BTC’s dominance dropped to 38 %. However, it should be remembered that in this data calculated by CoinGecko unfortunately the market capitalizations of stablecoins are also counted, and in 2017 these were hugely lower than they are today. 

Ratio of market cap of BTC to ETH

It would be better to use as a metric for analysis the ratio of BTC’s market capitalization to that of ETH, which has risen above 2.2 in recent days. 

The 2022 low was reached on 8 September, when this ratio had fallen to just over 1.8. In June, during the collapse of the crypto markets, it had, by contrast, risen well above 3.1. 

In June 2017, when ETH came closer than ever to BTC, it had even fallen to 1.2, the lowest level ever, never reached again thereafter. The highest level ever recorded since then exceeds 10 points, and was recorded in September 2019. 

In light of this, there are those who speculate that after the Merge a medium-term phenomenon may have been triggered that could bring BTC’s market capitalization well over twice that of ETH, and perhaps even over three times as high. 

The point is that now that the Merge has occurred, over the medium term there may be no reason for ETH’s price to spike. If so, it could be BTC that dominates the crypto markets in the coming months, gnawing dominance away from everyone. 

It is worth mentioning that Bitcoin’s price fluctuations depend on macro events much more than those of other cryptocurrencies, although these in turn depend on Bitcoin’s price changes. 

US monetary policy

This could be a crucial week at the macro level because the Fed will have to announce what decision it has made about raising rates. This decision has already had an impact on the financial markets before it was even announced, because with inflation falling less than expected, markets have been betting on a sharp increase this time as well. 

While it seems very unlikely that the Fed will opt for a moderate increase, it is not ruled out a priori that the increase could go up to 100 basis points, instead of the now classic 75 as was the case last month.

The fact that the situation in the markets has remained critical is quite obvious to everyone, but it is not yet clear whether it could get even worse or not. 

The uncertainty scenario may not even dissipate after the data release, and as long as uncertainty continues to reign supreme it is unlikely to trigger an upward rebound. 

In such an environment, it is difficult for the price of ETH right now to move on its own, so after the post-Merge decline it may follow Bitcoin’s again. However, this is a situation that is unlikely to last very long, so over the medium or long term sooner or later something should change.