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Ethereum (ETH) has made headlines for turning deflationary two weeks ago despite underperforming . According to Ultrasound Money, the second-largest cryptocurrency’s net issuance or annualized inflation rate dropped below zero on Jan. 15.
This means that the blockchain leader of the smart-contract now burns more ETH than it hits, which contrasts with BTC. Despite this, ethereum is still lagging behind Bitcoin as January approaches its end.
While Bitcoin has seen a gain of nearly 44.97% this month, Ether has appreciated by 40.66%. The ether-bitcoin, or eth/btc, ratio is also on track for its second consecutive monthly decrease. There are three factors that could be responsible for Ether’s underperformance, which will be discussed in detail below.
Defensive positioning ahead of improving Shanghai.
The first factor responsible for Ether’s underperformance is defensive positioning ahead of the Shanghai upgrade
Ethereum’s Shanghai upgrade, which is expected in March, will allow the withdrawals of 17.2 million ETH staked or deposited in the Beacon Chain since Dec, 2020. While the entire 17.26 million milestone balance cannot be withdrawn on the upgrade date, only 43,200 points can be withdrawn daily.
The total milestone award for the last two years, equivalent to approximately ETH 1 million, may be withdrawn immediately. This caused traders to be concerned, as the entire pile withdraws and the holders rush into trade to liquidate their water as soon as the valves are open, make prices fall.
Macro Inflationary Rally.
The second factor contributing to Ether's underperformance is the recent recovery in the crypto market, which has been fuelled in part by favourable macroeconomic developments. Recent U.S. government reports and business surveys revealed lower manufacturing activity and lower expectations for inflation, This helped bolster hopes for an early end to the tightening liquidity of the Federal Reserve, which put a strain on risky assets last year.
inflation continues to decline, more than 80% of forecasters in the latest Reuters poll predicted the Fed would downshift to a 25-basis-point hike at its next meeting. Meanwhile, traders saw a 55% probability that the central bank would pause rate hikes in May, according to the CME’s Fed Watch tool.
Bitcoin's relatively larger gains come from an evolving macroeconomic regime towards the end of the Fed's upward cycle, so it's a pure monetary policy game, so gold also performs. It is the institutions, not the retail trade, that are at the origin of this movement. Notably all of the Bitcoin gains this year have come during U.S. trading hours, with a sharp increase in open interest in CME futures
Short Squeeze
The third factor responsible for Ethereums’s underperformance is a short squeeze, which has driven the rally of Bitcoin. The market held a short on Bitcoin in the fourth quarter of 2022 against the issues of perceived credit risk, which is now in the process of settlement. The market hasn't held up, so there isn't any relaxation.
Short interest in Bitcoin rose after Sam Bankman Fried’s crypto exchange FTX went bust in early November, raising the risk of a market-wide contagion.
Lastly, rotation of money into more risky corners of the crypto market like gaming and non-fungible tokens (NFTs) seems to have
