Ethereum (ETH) plunged into territory not seen since 2019 before it posted a substantial recovery in the past few days. However, its still trading at a steep discount to Bitcoin (BTC).

According to the latest weekly report from on-chain analytics platform CryptoQuant, the ETH/BTC MVRV ratio, which measures market value relative to realized value, has entered “extremely undervalued” territory, a level that in past cycles set the stage for major ETH rebounds.

 A Discount Amid Growing Headwinds

CryptoQuant’s analysis noted that Ethereum’s deep discounts against BTC have historically signaled prime buying opportunities.

However, it pointed out that the current environment is markedly different, with a series of fundamental headwinds responsible for the undervaluation. These include the unraveling of Ethereum’s once-promising deflationary supply narrative, with the asset’s total supply hitting an all-time high of 120.7 million.

The analytics platform attributed the reversal to March 2024’s Dencun upgrade, which drastically reduced transaction fees and collapsed the ETH burn rate. With fewer tokens being burned, inflationary pressure found its way back into the ETH market.

Further compounding the issue is that on-chain activity has been stagnant for a while. Since 2021, key metrics such as transaction counts and active addresses have dropped, mostly because Layer 2 (L2) networks diverted usage away from the Ethereum mainnet. Even though they have improved scalability, L2s have also diluted demand for base-layer block space, undermining ETH’s utility narrative in the process.

CryptoQuant also noted that institutional interest in the asset has been waning. The amount of staked ETH has reportedly dipped from its November 2024 peak of 35 million to about 34.4 million. ETF holdings have also shed as much as 400,000 ETH since February this year, reflecting weakening investor confidence.

Bitcoin is benefiting from robust institutional demand, capped supply, and ETF-driven inflows, read the report, contrasting the fortunes of the two cryptocurrencies.

Undervalued but Not Without Risk

Despite the obstacles, ETH staged a sharp rebound towards the end of the week. It shot up to roughly $2,400 on Friday.

Additionally, over the past week, the altcoin soared just above 30%, crushing Bitcoin’s 7.5% climb and vastly outpacing the global crypto market’s 8% gain. The rally coincided with the successful activation of the long-awaited Pectra upgrade on May 7, which introduced account abstraction and improved staking mechanics via 11 bundled EIPs. However, its impact may be muted.

Past experiences show that Ethereum’s discount to Bitcoin is often a buying signal. Still, CryptoQuants analysis suggests that the returning inflation, weakening demand, and stagnant activity may mean that this could be the first cycle in which ETH’s undervaluation isn’t a springboard but a trap.

While ETH appears undervalued on a historical basis, its recovery path may be more complex and slower than in prior cycles, CQ concluded.