Ethereum’s May Decline Factors
For the third year in a row, Ethereum’s fallen behind Bitcoin, dropping 13% since January. Two key factors suggest this trend will continue in May.
1. Shattered Hopes
The primary driver behind Bitcoin’s growth this year has been the introduction of spot ETFs in the US, accumulating $11.7 billion in investments over five months.
Ethereum investors have pinned their hopes on a similar surge, particularly as the deadline for VanEck’s request to launch a spot ETF approaches on May 23rd.
The SEC’s stance towards Ethereum has been notably negative, particularly following the transition to the PoS algorithm, as Chairman Gary Gensler conveyed on the same day. Gensler views Ethereum not as a commodity like Bitcoin but as a security, imposing different requirements on ETF managers and investors.
Despite recent amendments by Ark Invest and 21Shares to remove staking as an option for ETF investors, experts remain sceptical about its efficacy.
An indirect indication of the SEC’s stance is the lack of negotiations with applicants. Before launching the Bitcoin ETF, the regulator engaged with potential managers frequently for over a month and a half, a level of interaction not observed with Ethereum.
2. Inflation
Following the London hard fork and the activation of a mechanism to burn a portion of rewards, Ethereum became deflationary.
However, the popularity of staking and low network activity led to an undesirable outcome — inflation resurged. Last month, inflation stood at 0.4%.
The number of validators has hit over 1 million, more than enough for the network to run smoothly. Adding more validators will just clog things up with extra technical messages.
Meanwhile, network activity has dropped because people are using L2 and L3 networks more, which reduces the amount of coin burning.
These trends are just starting, so Ethereum’s inflation is likely to stick around. This could harm the cryptocurrency’s value in the long term, especially when combined with the SEC’s rejection, creating a bigger gap between Ethereum and Bitcoin’s momentum.
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