After a few days of market correction, the price of ETH has once again risen above $3900. Looking back at the development of Ethereum over the past year, there are many complex factors and emotions at play. On one hand, the Cancun upgrade has been successfully completed, and the spot ETF has been officially approved, leading to a new bullish outlook in terms of technology and fundamentals; on the other hand, as Bitcoin, SOL, and BNB have consecutively broken historical highs, ETH's price still hovers around the $4000 mark.
From the price chart of ETH this year, it can be seen that Ethereum has gone through three main phases, each corresponding to different reasons for the price increase. At the beginning of the year, the approval of Bitcoin spot ETFs pushed Ethereum's price higher, breaking through $4100 at one point, but it began to decline along with the market at the end of March. Additionally, due to the strong surge of SOL and its ecosystem, Ethereum's ecosystem faced significant liquidity outflow.
In May, after the approval of Ethereum's spot ETF, the price briefly surged, but its demand was not as strong as Bitcoin's. The market's initial reaction to the launch of Ethereum ETFs was negative, as speculative investors who had purchased Grayscale Ethereum Trust and expected its conversion to ETF took profits, resulting in a $1 billion outflow of funds, putting downward pressure on Ethereum's price. Furthermore, the narrative of ETH as a tech innovation product is less compelling to traditional markets compared to BTC's 'digital gold,' and the SEC's prohibition of ETH spot ETFs from engaging in staking features has objectively weakened its attractiveness.
Following this, Ethereum Foundation, re-staking ecology, and roadmap disputes followed, marking a dark period for Ethereum.
In November, with the U.S. elections concluded, the pro-crypto Republican Party and Trump brought stronger confidence and liquidity inflow to the entire crypto ecosystem, leading to Ethereum experiencing its third wave of increase this year. This rise is different from previous ones, as institutions are entering the market openly, and the improvement in liquidity fundamentals indicates what institutions recognize and are optimistic about; Ethereum is destined to continue its initial vision as a 'world computer.'
Improvement in liquidity fundamentals
Since December, Ethereum's spot ETF has 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 are just beginning to pay attention to this area.
In the third quarter of this year, banks like Morgan Stanley, JPMorgan, and Goldman Sachs significantly increased their holdings of Bitcoin ETFs, nearly doubling their quarterly holdings. However, their investment scope is not limited to Bitcoin; according to the latest 13F filings, these institutions have also started purchasing Ethereum spot ETFs since then.
Additionally, in the previous two quarters, the Wisconsin Investment Board and the Michigan Retirement System purchased Bitcoin spot ETFs, with Michigan further buying over $13 million worth of Ethereum spot ETFs in the third quarter. This indicates that pension funds, symbolizing low risk tolerance and a focus on long-term investment, not only recognize Bitcoin as a digital value store but also value Ethereum's growth potential.
At the beginning of the approval of Ethereum's spot ETF, JPMorgan pointed out in a report that the demand for Ethereum's spot ETF will be far lower than that of Bitcoin's spot ETF. However, the report predicts that the remaining time this year could attract up to $3 billion in net inflows for spot Ethereum ETFs, and if staking is allowed, this number could rise to as much as $6 billion.
Jay Jacobs, head of U.S. thematic and active ETFs at BlackRock, stated at the 'ETFs in Depth' conference that 'our exploration of Bitcoin and especially Ethereum is just the tip of the iceberg; only a very small number 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. This indicates that institutional willingness to participate in ETH staking has reached a critical mass, driven by yield generation and network security contributions.
Institutions are actively participating in ETH staking, but the level and methods of participation vary. Regulatory uncertainty has led to different attitudes among parties; some institutions are acting cautiously while others are less concerned, and institutional participants have a high level of awareness regarding operations and risks associated with staking.
Trend reversal
Since the FTX collapse, Coinbase, Kraken, Ripple, and others have faced severe crackdowns from the SEC and other U.S. regulatory bodies, with many crypto projects unable to open accounts at mainstream U.S. banks. Traditional financial institutions that entered the crypto market due to DeFi in the last bull market suffered significant losses; large funds such as Toma Bravo, Silver Lake, Tiger, and Cotu faced setbacks not only on FTX but also invested in some crypto projects that failed to deliver on their grand promises, and funds have yet to return.
In the second half of 2022, many DeFi projects were forced to relocate outside the U.S. According to Alliance DAO co-founder qw, 'Two years ago, about 80% of qualified crypto startups were located in the U.S., but this proportion has been declining ever since, now only about 20%.'
However, on November 6, with Trump's victory, the green light that the U.S. financial system had been waiting for was finally lit.
Trump saves the crypto market
Trump's victory undoubtedly clears regulatory uncertainties for institutional adoption.
Establishing a Department of Government Efficiency, directly gathering a series of Wall Street financial elites such as Musk, Peter Thiel, and Marc Andreessen under its wing, and appointing Paul Atkins as SEC chairman, Trump has also appointed PayPal co-founder David Sacks as the 'White House Chief of AI and Cryptocurrency Affairs.' This series of measures indicates that Trump will create a government with relaxed cryptocurrency regulations.
JPMorgan analysts state that several stalled cryptocurrency bills may quickly gain approval following Trump's ascendance, 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 indicate that, as the regulatory framework becomes clearer, the SEC's strategy of increasing enforcement efforts may evolve into a more collaborative approach, and restrictions preventing banks from holding digital assets (SAB 121) may be abolished.
High-profile lawsuits against companies like Coinbase may also be eased, settled, or even withdrawn. Regulatory notices sent to companies like Robinhood and Uniswap could be reconsidered, thus reducing the overall litigation risks for the broader crypto industry.
In addition to departmental and legislative reforms, Trump's team is also considering significant cuts, mergers, or even the elimination of major banking regulatory agencies in Washington. Insiders revealed that Trump advisors inquired whether certain personnel from the Department of Government Efficiency could abolish entities like the Federal Deposit Insurance Corporation (FDIC) during interviews with potential candidates for banking regulatory positions. Trump advisors also questioned potential candidates for the FDIC and the Office of the Comptroller of the Currency. Furthermore, plans to merge or completely reform the FDIC, OCC, and the Federal Reserve were proposed.
As policy benefits gradually unfold, larger-scale institutional funds in the U.S. are expected to return to the crypto market.
DeFi renaissance in progress
Family offices, endowment funds, pension plans, and other more conservative capital will not only invest in Ethereum's spot ETF but will also re-enter the DeFi sector, which has been validated in the previous cycle.
Compared to 2021, the total supply of stablecoins has reached an all-time high. In the month following Trump's victory, the total amount of stablecoins has increased by nearly $25 billion, bringing the total market cap of stablecoins to $202.2 billion.
Coinbase, as the leading publicly traded crypto company in the U.S., has made strides in the DeFi sector this year, contributing politically as well. It serves as the largest crypto ETF custodian while also launching cbBTC.
Due to cbBTC facing the same custody and counterparty risks as most Bitcoin ETFs, some traditional financial institutions may reassess whether to continue paying fees to hold Bitcoin ETFs and instead turn to participate in the DeFi ecosystem at almost zero cost. This shift could bring capital inflows to market-tested DeFi protocols, especially when the yields provided by DeFi are more attractive compared to traditional finance.
Another major DeFi sector in this cycle is RWA. In March of this year, BlackRock issued a tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund) in partnership with U.S. tokenization platform Securitize, making a high-profile entry into the RWA sector. Capital giants like Apollo and Blackstone, which control massive pools of funds, are also preparing to enter this market, bringing a large influx of liquidity.
After the Trump family launched a DeFi project, compliant DeFi has been a hot topic. Established Ethereum DeFi projects like Uniswap, Aave, and Lido immediately reacted to Trump's victory with price increases, while emerging DeFi projects like COW, ENA, and ONDO also reached new highs.
Meanwhile, Trump's crypto DeFi project WLFI has recently been frequently trading Ethereum-related tokens, exchanging 5 million USDC for 1325 ETH in multiple transactions, and subsequently, its multi-signature address purchased $10 million worth of ETH, $1 million in LINK, and $1 million in AAVE. Recent news of large whales accumulating ETH suggests that both institutions and whale accounts are refocusing on the Ethereum ecosystem.
WLFI multi-signature address holding information
Recently, the price performance of new and old projects in the DeFi sector speaks for itself. Currently, DeFi's TVL is approximately $100 billion, while the total value of cryptocurrencies and related assets is around $4 trillion, with only 2% of funds actively engaged in the DeFi space, which is still relatively small compared to the overall cryptocurrency market size. This indicates that under the warming regulatory winds, DeFi has enormous 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, both TVL and revenue showed explosive growth: TVL broke through the historical high of $22 billion in October 2021; the token price surged from a low of $80 USDT this year, breaking above 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, with weekly revenue reaching an all-time high.
Although Aave has recently upgraded to V4, the innovative drive at the technical level may not be sufficient to sustain such a large-scale increase. Regulatory and funding support is clearly more critical, and this push may even spill over into the NFT sector, which also gained institutional favor in the previous cycle.
The future of Ethereum
Ethereum faced a series of controversies and discussions related to ecosystem development in the middle of this year. With the rise of Solana, new and old public chains began to compete for Ethereum's developers and user base, shaking the ecosystem, and Ethereum seemed to forget its original goal. As the first blockchain to create smart contracts, Ethereum successfully made institutional investors pay during the last cycle through its first-mover advantage, whether in DeFi, gaming, NFT, or the metaverse, all are inescapably part of the Ethereum ecosystem, and its initial vision as a 'world computer' has deeply resonated.
Although the liquidity fundamentals of Ethereum have improved optimistically, from Ethereum's perspective, metrics such as daily transaction volume, gas fees, and the number of active addresses have not seen significant growth. This indicates that Ethereum's on-chain activity has not increased in tandem with its price, and block space remains excessive.
Ethereum Gas fee levels
In recent years, Ethereum's focus has been on building the infrastructure of cryptocurrencies, providing the market with a large amount of inexpensive block space. This initiative not only improves Dapp's access performance to blocks and reduces transaction costs for L2 scaling solutions, but also, due to insufficient market liquidity and low transaction demand, Ethereum's vast block space has not been fully utilized.
However, in the long run, this is not a real problem. As mentioned earlier, institutional funds are gradually returning, even starting to create dedicated blockchain use cases. For Ethereum, which has security and flexible architecture, the B2B market is its advantage. It not only has a significant security advantage but can also accommodate numerous EVM projects, providing developers with an option that is almost 'impossible to be fired.'
The long-term value of Ethereum will depend on the scarcity of its block resources, meaning 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, laying a more solid value foundation for Ethereum. Ethereum is a world computer for institutions, starting from DeFi, institutions will address the issues of Ethereum's block surplus and roadmap disputes in the future.
At the beginning of December, Ethereum researcher Jon Charbonneau wrote a lengthy analysis on why Ethereum needs a clearer 'North Star' objective, suggesting that Ethereum's ecological forces focus on being a 'world computer,' akin to Bitcoin's 'digital gold' and Solana's 'on-chain Nasdaq.'
Ten years later, Ethereum is no longer in its startup phase, and the next decade presents a clear future for Ethereum.
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