"No one likes Ethereum right now," according to Bitwise CIO Matt Hougan, with the ETH
-0.25%
/BTC ratio recently hitting its lowest level in three years below 0.04. But while there are good reasons to be concerned, it offers a potential contrarian bet coming into year-end, he said.
Despite a promising start, it has not been the best of years for the second-largest cryptocurrency by market cap, trading up just 1% year-to-date, according to The Block’s Ether Price Page. In contrast, while the broader crypto market has suffered over the past six months, bitcoin remains 42% up in 2024, while Solana holds year-to-date gains of 27%.
“The vibes in the community are tough,” Hougan said in a memo to clients late Tuesday, outlining U.S. election risk, rising competition from Solana, challenged tokenomics and mixed spot exchange-traded fund results as key factors for Ethereum’s descent into the doldrums.
Although spot Ethereum ETFs were approved in the U.S. in July, the Securities and Exchange Commission still appears to view staked ether is a security, according to Hougan. If Kamala Harris wins the presidential election in November and continues the Biden Administration’s skeptical posture towards crypto, Ethereum could face continued regulatory challenges, he said.
The spot Ethereum ETFs themselves, including Bitwise’s ETHW, have also seen mixed results compared to their bitcoin-based counterparts, with $2.1 billion in net inflows from the newly launched funds more than offset by $2.8 billion worth of net outflows from Grayscale’s higher-fee, converted incumbent, ETHE.
Headwinds from rising competitors like Solana and others are also crowding the space in Hougan’s view. “It’s somewhat cool in crypto circles to be bullish on Solana and other new chains and bearish on Ethereum because of its older, costlier tech,” he said.
Finally, Ethereum’s focus on growing transaction volume on its Layer 2 networks has been so successful in shifting volume from the Ethereum base chain that revenues are down to a four-year low. “Many wonder if Ethereum has shot itself in the foot by scaling away from the foundational Layer 1 blockchain,” Hougan added.
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A contrarian bet
Despite the impact of these challenges on sentiment and price, they miss the broader point, according to Hougan.
While Ethereum and Solana are both trying to create a “public computer” for decentralized applications, those that have seen “breakthrough success” are almost all dominated by Ethereum, Hougan said, citing the more than half of stablecoins issued on the network, over 60% of DeFi assets locked on the chain and it being the settlement layer of choice for the increasingly popular predictions platform Polymarket.
BlackRock’s on-chain U.S. Treasurys fund, with more than $500 million in assets under management, is also tokenized on Ethereum. Nike’s NFT platform is on Ethereum. Ethereum has the most active developers, most active users, a regulated futures and multi-billion dollar ETF market and a market cap that is five times bigger than its closest competitor, Hougan noted. The list goes on.
“It’s like the Microsoft of blockchains. Everyone wants to talk about Google and Slack and Zoom, and with good reason: Each of them has brought game-changing technology to the market. But Microsoft is still larger than all of them put together,” Hougan said.
Although this doesn’t mean the Bitwise CIO is bearish on Solana or other chains, too many have looked past Ethereum’s already-established success, in Hougan’s view.
“None of Ethereum’s challenges seem existential, and its opportunities are brimming. I suspect the market may reevaluate Ethereum as we get closer to the November elections and any regulatory clarity that emerges. For now, it looks like a potential contrarian bet through the end of the year,” he concluded.
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