Original title: A Contrarian Bet on Ethereum
Author: Matt Hougan, Chief Investment Officer of Bitwise; Translated by: 0xjs@Golden Finance
No one likes Ethereum right now.
ETH/BTC (the ratio of Ethereum price to Bitcoin price) recently fell to its lowest level in three years. So far this year, Ethereum prices are flat, while Bitcoin is up 38% and Ethereum's main competitor Solana is up 31%.
The community atmosphere is tough.
There are many reasons why Ethereum is in a slump:
Election Risk: Ethereum faces significant risk in the November election. While Bitcoin has largely passed regulatory scrutiny — even SEC Chairman Gary Gensler has acknowledged it is not a security — Ethereum has not. The SEC appears to believe that staked ETH is a security, and the agency has significant concerns about the broader decentralized finance ecosystem that drives much of Ethereum’s value. Ethereum could face challenges if Harris wins and continues the Biden administration’s skeptical approach to cryptocurrencies.
Increased competition from Solana and other projects: Ethereum faces increasing competition from new blockchains that offer higher throughput and lower costs. Solana is the primary example of this, but other established and upcoming projects are beginning to enter the space. It is somewhat fashionable in cryptocurrency circles to favor Solana and other new chains over Ethereum, which has older technology and higher costs.
Problematic Token Economics: Over the past few years, the Ethereum community has decided to focus on growing transaction volume on “Layer 2” networks surrounding Ethereum, rather than on the core (or “Layer 1”) Ethereum blockchain itself. This has been a huge success — transaction activity on Layer 2 networks like Base, Arbitrum, and Optimism is surging. But the rise of Layer 2 networks has shifted so much transaction volume away from Ethereum that its revenue has dropped to its lowest level in four years. Many are wondering if Ethereum has shot itself in the foot by scaling away from its base Layer 1 blockchain.
Mixed ETF Results: Ethereum ETFs have not been as overwhelmingly successful as Bitcoin ETFs. While newly launched ETFs have raised billions of dollars, the $2.7 billion outflow from the Grayscale Ethereum Trust (ETHE) completely offset this growth.
These are all good reasons to be concerned. But I think they miss the broader point.
From a macro perspective, blockchains like Ethereum and Solana are trying to create a “public computer” — a global database that others can use to build applications. But when you look at which applications have achieved breakout success, they are almost all dominated by Ethereum:
Stablecoins: More than half of all stablecoins are issued on Ethereum.
Decentralized Finance (DeFi): More than 60% of DeFi assets are locked on Ethereum.
Polymarket: Groundbreaking prediction markets finally settled on Ethereum.
There are many other examples.
When BlackRock wanted to build a tokenized money market fund this year, it built it on Ethereum; the fund now has over $500 million in assets under management. When Nike launched a Web3 gear platform called .Swoosh, it did so on Ethereum. When the next big traditional company wants to make a blockchain product, I bet they’ll choose Ethereum, too.
Ethereum has the most active developers, the most active users, and a market cap 5x that of its closest competitor. It is the only programmable blockchain with some regulatory support in the US, with a thriving regulated futures market and a multi-billion dollar ETF market.
It’s like the Microsoft of blockchain. Everyone wants to talk about Google, Slack, and Zoom, and for good reason: Each of them brought game-changing technology to the market. But Microsoft is still bigger than them all combined.
That doesn’t mean I’m bearish on Solana or other chains. They are making a big impact and there’s a lot to be excited about. But I think people are too quick to discount Ethereum and the real-world success we’ve seen in its ecosystem.
To me, none of Ethereum's challenges seem life-or-death, while its opportunities abound. I suspect the market may re-evaluate Ethereum as we get closer to the November election and any regulatory clarity that emerges. For now, it looks like a potentially contrarian investment until the end of the year.
