Is Ethereum inflationary again? Why cryptocurrency is losing ground

​Ethereum is experiencing one of the most challenging periods in its history. Not long ago, its supporters claimed that the token-burning mechanism and the transition to the Proof-of-Stake consensus algorithm would make the network deflationary. Ethereum was hailed as «ultra-sound money»—an asset whose supply would shrink over time, increasing its value. However, by 2025, it became clear that this concept had not materialized in reality.

Today, ETH supply is once again increasing, and its price is lagging catastrophically behind Bitcoin. While BTC is confidently reaching new all-time highs, Ethereum is losing investor trust. Its price relative to Bitcoin has dropped to 0.027 BTC—the lowest level in the past four years. So, what went wrong?

From deflation to inflation: Ethereum’s supply is growing again

When the EIP-1559 upgrade was implemented in 2021, it introduced a fee-burning mechanism that was supposed to offset new token issuance, making ETH a limited-supply asset. Later, in 2022, developers took another step toward the «ultra-sound money» vision—the network abandoned mining and transitioned to Proof-of-Stake. Under this model, new ETH was issued exclusively through staking, theoretically reducing its emission rate.

However, by 2024, the situation began to change. Transaction activity in the network declined, fees dropped, and as a result, ETH burning slowed down. Consequently, Ethereum’s supply stopped contracting and started growing again. The total ETH supply has risen to 120.5 million ETH, a level last seen in September 2022, before The Merge upgrade.

Compared to similar projects, Ethereum is also falling behind in terms of network revenue from fees distributed to validators. According to Token Terminal, Ethereum ranks only sixth, trailing behind assets like USDC and Solana. At the same time, the number of active validators in the network is declining: in the past month alone, it has dropped by 1%, raising concerns among the community, especially as the Pectra update has been postponed once again.

Ethereum co-founder Vitalik Buterin has stated that if Pectra’s key changes are implemented, they could "reverse" the ongoing downtrend.

Loading...

Why are investors betting on Bitcoin?

The market does not tolerate mistakes. While Ethereum struggles with issues, Bitcoin continues to strengthen its position. In 2024 alone, BTC has surged 121%, whereas Ethereum has gained only 46%. The gap becomes even more apparent when looking at the ETH/BTC exchange rate: since 2022, it has dropped by more than 70%.

Ethereum’s weakness is particularly striking amid growing institutional interest. In January 2024, U.S. regulators approved the first spot ETFs for cryptocurrencies, a milestone event for the market. However, as it turned out, large investors are primarily interested in Bitcoin. Bitcoin ETFs have attracted $40.6 billion, while Ethereum-focused funds have only managed to accumulate $2.6 billion—a staggering difference.

Ethereum seems stuck: it is too complex for institutional investors, who favor Bitcoin as «digital gold», yet it is also losing popularity among retail traders.

Ethereum’s internal challenges

Beyond macroeconomic factors, Ethereum is also dealing with internal governance issues. In January, Ethereum Foundation Executive Director Aya Miyaguchi sparked controversy after an unsuccessful interview. Her statement that Ethereum «has no single leader» was perceived as a sign of a governance crisis.

Vitalik Buterin even hinted that staff changes might occur within the Ethereum Foundation.

Loading...

All of this is undermining confidence in the project. Once regarded as a technological leader, Ethereum is now being compared to bureaucratic organizations that are losing momentum.

Does Ethereum have a chance to recover?

Despite all its challenges, Ethereum remains the second-largest cryptocurrency by market capitalization and plays a crucial role in the DeFi and NFT ecosystems. However, its long-term outlook depends on whether it can return to a deflationary model.

If Ethereum fails to increase network activity, boost ETH burning, and attract institutional investors, it risks becoming a second-tier asset that lingers in Bitcoin’s shadow while gradually losing ground to faster and more innovative blockchains like Solana.

Ethereum was designed as the network of the future. But today, its future looks uncertain.