After the bull market correction phase a few days ago, the price of ETH once again stood at $3,900. Looking back at the development of Ethereum over the past year, there are many complex factors and emotions. On the one hand, the Cancun upgrade was successfully completed and the spot ETF was officially approved, ushering in a new bull market in terms of technology and fundamentals; but on the other hand, as Bitcoin, SOL, and BNB broke through historical highs one after another, the price of ETH is still hovering around the $4,000 mark.
From the above ETH price trend chart, we can see that Ethereum has gone through three major stages this year, and the rise in the three stages corresponds to different reasons. At the beginning of the year, the Bitcoin spot ETF was approved, and the price of Ethereum followed the market sentiment and rose, breaking through $4,100 at one point, but at the end of March, it also began to fall with the market. Due to the strong rise of SOL and its ecology, the Ethereum ecosystem is facing a large outflow of liquidity.
In May, when the Ethereum spot ETF was approved, the price briefly surged, but its demand was not as strong as that of Bitcoin. The initial market reaction to the launch of Ethereum ETFs was negative, as speculative investors who purchased Grayscale Ethereum Trust in expectation of its conversion to an ETF booked profits, resulting in a $1 billion capital outflow that put downward pressure on Ethereum's price. Additionally, the narrative of ETH leaning towards tech innovation products compared to BTC's 'digital gold' is less compelling to the traditional market, and the SEC's restrictions on allowing staking functionality for Ethereum spot ETFs objectively weakened its attractiveness.
After this, the Ethereum Foundation, the re-staking ecosystem, and the roadmap disputes followed one after another, leading Ethereum into a dark period.
In November, with the US election outcome settled, the pro-crypto Republican party and Trump brought stronger confidence and liquidity injection to the entire crypto ecosystem, leading Ethereum to welcome its third wave of growth this year. This rise is different from previous ones, as institutions are clearly entering the market, and improvements in liquidity fundamentals are telling us with capital what institutions recognize and favor; Ethereum is destined to continue its original vision as a 'world computer.'
Improvement in liquidity fundamentals
Since December, Ethereum spot ETFs have seen a net inflow of over $2.2 billion for half a month. Nate Geraci, president of The ETF Store, stated on social media that advisors and institutional investors have only just begun to pay attention to this field.
In the third quarter of this year, banks such as Morgan Stanley, JPMorgan, and Goldman Sachs significantly increased their holdings of Bitcoin ETFs, with quarterly holdings nearly doubling. However, their investment scope is not limited to Bitcoin; according to the latest 13F filings, these institutions have also begun purchasing Ethereum spot ETFs since then.
Additionally, in the last two quarters, the Wisconsin Investment Board and the Michigan Retirement System purchased Bitcoin spot ETFs, with Michigan further purchasing over $13 million worth of Ethereum spot ETFs in the third quarter. This indicates that pension funds, which symbolize low risk tolerance and a long-term investment approach, not only recognize Bitcoin's role as a digital store of value but also value Ethereum's growth potential.
When the Ethereum spot ETF was first approved, JPMorgan pointed out in a report that the demand for Ethereum spot ETFs would be far lower than that for Bitcoin spot ETFs. However, the report predicted that the remaining time this year would see a net inflow of up to $3 billion for spot Ethereum ETFs, and if staking is allowed, this figure could rise to $6 billion.
Jay Jacobs, head of BlackRock's US thematic and active ETFs, stated at the 'ETFs in Depth' conference that 'our exploration of Bitcoin, especially Ethereum, is just the tip of the iceberg; only a handful of clients hold (IBIT and ETHA), so our current focus is on this aspect rather than launching new altcoin ETFs.'
In a survey report by Blockworks Research, the vast majority (69.2%) of respondents currently hold ETH, with 78.8% being investment firms or asset management companies, indicating that under the impetus of yield generation and network security contributions, institutional willingness to participate in ETH staking has reached a critical scale.
Institutions are actively participating in ETH staking, but the degree and methods of participation vary. Regulatory uncertainty has led different parties to adopt different attitudes; some institutions are acting cautiously, while others are less concerned, and institutional participants have a high awareness of the operations and risks associated with staking.
Trend reversal
Since the FTX collapse, Coinbase, Kraken, Ripple, and others have faced severe crackdowns from US regulatory agencies like the SEC, and many crypto projects are unable to open accounts with mainstream banks in the US. In the last bull market, traditional financial institutions that entered via DeFi also suffered massive losses; large funds like Toma Bravo, Silver Lake, Tiger, and Cotu were not only hit by FTX but also invested in some crypto projects that failed to deliver on their grand promises at high valuations, and the capital has yet to return.
In the second half of 2022, many DeFi projects were forced to migrate outside the US. According to Alliance DAO co-founder qw, 'Two years ago, about 80% of crypto startups that met the standards were located in the US, but this percentage has continued to decline since then, and now it's only about 20%.'
However, on November 6, after Trump's victory, the green light long awaited by the US financial system was lit.
Trump saves the crypto space
Trump's victory undoubtedly cleared the regulatory haze for institutional adoption.
After establishing the Department of Government Efficiency, directly gathering a series of Wall Street financial elites like Musk, Peter Thiel, and Marc Andreessen under its wing, and appointing Paul Atkins as SEC Chairman, Trump also appointed PayPal co-founder David Sacks as the 'Head of Artificial Intelligence and Cryptocurrency Affairs at the White House.' A series of measures indicate that Trump will create a government with relaxed crypto regulation.
Related Reading: (The White House will usher in a crypto-friendly era: A look at the 'crypto dream team' under Trump's leadership)
JPMorgan analysts stated that several stalled cryptocurrency bills may quickly gain approval after Trump's inauguration, including the Financial Innovation and Technology Act of the 21st Century (FIT21), which could provide much-needed regulatory clarity for the crypto industry by clarifying the regulatory responsibilities of the SEC and CFTC. They also mentioned that as the regulatory framework becomes clearer, the SEC's strategy of increasing enforcement might evolve into a more collaborative approach, and its restrictions on banks holding digital assets (Staff Accounting Bulletin No. 121) may be abolished.
Moreover, the high-profile lawsuits against companies like Coinbase may also see easing, resolution, or even withdrawal. Regulatory notices sent to companies like Robinhood and Uniswap can be reconsidered, thereby reducing the lawsuit risk for the broader crypto industry.
In addition to departmental and legislative reforms, the Trump team is also considering significantly reducing, merging, or even abolishing major banking regulatory agencies in Washington. Insiders revealed that Trump's advisors asked potential candidates for banking regulatory agencies whether some personnel from the Department of Government Efficiency could abolish the Federal Deposit Insurance Corporation (FDIC) and other issues during interviews. Trump's advisors also inquired about potential candidates for the FDIC and the Office of the Comptroller of the Currency. Additionally, they proposed plans to merge or completely reform the FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve.
As policy dividends gradually release, larger-scale institutional funds in the US are expected to return to the crypto market.
Revitalization of DeFi underway
Family offices, endowment funds, and pension plans with more stable capital will not only invest in Ethereum spot ETFs but will also re-enter the previously validated DeFi space.
Compared to 2021, the total supply of stablecoins has reached an all-time high, and in the more than a month since Trump was elected, the total amount of stablecoins has increased by nearly $25 billion, with the current total market value of stablecoins reaching $202.2 billion.
Coinbase, as the leader among US publicly listed crypto companies, has made strides in the DeFi space this year, contributing politically while also acting as the largest crypto ETF custodian and launching cbBTC.
Due to cbBTC facing the same custody and counterparty risks as most Bitcoin ETFs, some traditional financial institutions may reevaluate whether to continue paying to hold Bitcoin ETFs or turn to participate in the DeFi ecosystem at almost no cost. This shift could bring capital inflows to proven DeFi protocols, especially when the yields provided by DeFi are more attractive than those in traditional finance.
Another major DeFi sector in this cycle is RWA. In March this year, BlackRock officially entered the RWA space by issuing the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund) in collaboration with the US tokenization platform Securitize, adopting a high-profile approach. Capital giants like Apollo and Blackstone, which control large pools of capital, are also beginning to prepare to enter this market, bringing significant liquidity injections.
After the Trump family launched the DeFi project, compliant DeFi has been a hotly debated topic. Established Ethereum DeFi projects like Uniswap, Aave, and Lido saw immediate price reactions after Trump's victory, all breaking through and rising, while emerging stars in the DeFi sector like COW, ENA, and ONDO also reached new highs in succession.
Meanwhile, Trump's crypto DeFi project WLFI has also been frequently trading Ethereum-related tokens, exchanging 5 million USDC for 1325 ETH in multiple transactions, and then its multi-signature address purchased $10 million worth of ETH, $1 million LINK, and $1 million AAVE. Recent news of whales accumulating ETH suggests that both institutions and whale accounts are refocusing on the Ethereum ecosystem.
WLFI multi-signature address holding information
Recently, the performance of new and old projects in the DeFi space in terms of price speaks for itself. Currently, the Total Value Locked (TVL) in DeFi is about $100 billion, while the total value of cryptocurrencies and related assets is approximately $4 trillion, with only 2% of funds genuinely active in the DeFi sector, which remains small compared to the overall cryptocurrency market size. This indicates that under a warming regulatory climate, DeFi has immense growth potential.
Aave is a typical beneficiary of this round of 'capital inflow'; its price had already broken through before Trump's victory, and subsequently, TVL and revenue saw explosive growth: TVL surpassed the historical high of $22 billion in October 2021; the token price rose from a low of 80 USDT earlier this year, breaking the March high of 140 USDT in early September and accelerating upward by the end of November; the protocol's total daily revenue exceeded the second-highest peak in September 2021, and weekly revenue set a new historical high.
Although Aave recently upgraded to V4, the innovation momentum at the technical level may not be enough to sustain such a large-scale rise. The driving forces from regulation and capital are clearly more important, and this drive may even spill over to the NFT sector, which also gained institutional favor in the previous cycle.
The future of Ethereum
However, in the middle of this year, Ethereum encountered a series of controversies and discussions related to ecological development. With the rise of Solana, new and old public chains began to compete for Ethereum's developers and user base, shaking the ecosystem, and it seemed that Ethereum had forgotten its original goals. As the first blockchain to create smart contracts, Ethereum successfully attracted major institutional investors in the last cycle due to its first-mover advantage; whether in DeFi, gaming, NFTs, or the metaverse, none can escape the Ethereum ecosystem, and its original intent as a 'world computer' has deeply resonated.
Although Ethereum's liquidity fundamentals have seen optimistic improvements, from Ethereum's perspective, its daily transaction count, gas fees, active address numbers, and other on-chain data indicators have not shown significant growth. This indicates that Ethereum's on-chain activity has not increased in tandem with its price, and block space remains excess.
Ethereum Gas fee levels
In recent years, Ethereum's focus has been on building the infrastructure for cryptocurrencies, providing the market with a large amount of cheap block space. This initiative has improved Dapp access to blocks and reduced transaction costs for Layer 2 scaling solutions. However, due to insufficient market liquidity and low trading demand, Ethereum's vast block space has not been fully utilized.
However, in the long run, this is not a real issue. As mentioned earlier, institutional funds are gradually flowing back, even beginning to create dedicated blockchain use cases. For Ethereum, which possesses security and flexible architecture, its advantage lies in its B2B capabilities. It not only has an overwhelming advantage in security but can also accommodate numerous EVM projects, providing developers with an option that is almost 'impossible to fire.'
The long-term value of Ethereum will depend on the scarcity of its block resources, which is the actual and sustained demand for Ethereum block settlement in the world. As institutions and applications continue to pour in, this scarcity will become increasingly prominent, thus laying a more solid value foundation for Ethereum. Ethereum is a world computer for institutions; starting with DeFi, institutions will address the issues of block surplus and roadmap disputes within Ethereum in the future.
At the beginning of December, Ethereum researcher Jon Charbonneau wrote a lengthy analysis on why Ethereum needs a more defined 'North Star' goal, suggesting that the ecological strength of Ethereum be gathered around the concept of a 'world computer,' much like Bitcoin's 'digital gold' and Solana's 'on-chain Nasdaq.'
Ten years have passed, and Ethereum is no longer in the startup stage. In the next decade, the future of Ethereum is becoming increasingly clear.
