What’s going on with Ethereum? Should we even care?

👇1-14) Ethereum remains this cycle’s basket case. Surprisingly, BTC and ETH remain highly correlated, with an R-square of 95%. Ethereum’s weak fundamentals are becoming a roadblock for Bitcoin as they prevent broad fiat inflow into the crypto ecosystem.

👇2-14) During the last 2020/2021 cycle, ETH was the driver as Ethereum was supposed to replace the legacy banking system. NFT minting opened new areas of crypto adoption that could have expanded into various personalized documents on the blockchain, driving broad ‘wallet’ adoption. However, Ethereum developers did not react quickly enough.

👇3-14) In 2017, Bitcoin transitioned from a peer-to-peer currency to becoming purely digital gold when the developers (including the Bitcoin miners as enforcers) decided to keep the block size of 1MB (explained here). With the explosion of sovereign deficits and the proven path of currency debasement, Gold and Digital Gold have their place in ‘sovereign individuals’ portfolios. This is why Bitcoin has become highly sensitive to inflation and deficit numbers.

Ethereum - we think we know where ETH might be going next…

👇4-14) This digital gold narrative is precisely what Blackrock has been pitching and resonates with its clients. Blackrock themselves have said that ‘Bitcoin is overwhelmingly the No. 1 focus and a little bit Ethereum’. So, even if an ETH ETF is approved, demand might underwhelm. Also, it is early days for the HK ETFs; the ETH ETFs have seen only 15% of the inflows vs. 85% compared to the HK-listed BTC ETFs. Interest from TradeFi investors for ETH is meager.

👇5-14) Our 10x Research subscribers have voted Ethereum as their least favorite topic to analyze—Bitcoin is number one, followed by Altcoins and miners. The prediction market sees only a 7% chance that an ETH ETF will be approved by May 31. This probability has steadily declined from 75% on January 10 to 40% when it reached a cycle high in early March (4,000).

👇6-14) Bloomberg analysts close to the ETF approval process have downgraded their probability from 50% to 35% in mid-March, stating the prolonged radio silence from the SEC to prospective ETF issuers and political pushback by SEC Chair Gensler. By late March, those journalists expect that Ether ETFs will ‘ultimately be denied’ by the SEC on May 23 (the final deadline and fourth deadline for VanEck Ethereum ETF application, while the final deadline for ARK 21Shares is a day later).

👇7-14) The SEC cases against Kraken (February 2023) and Coinbase (June 2023) do not clarify (yet) whether the SEC sees ETH as a security. Although, Gensler has repeatedly suggested that proof-of-stake tokens are securities.

👇8-14) Hence, demand for Ether is unlikely to come from ETFs soon. However, we were very bullish on Ethereum earlier in the year (where we expected the Ether rally from 2,500 to 3,400). By mid-March, we noticed a sharp decline in ETH Gas fees that signaled (near) zero demand for transactions with ETH. This made us bearish as it implied much lower ETH prices (see strategy report ‘Ethereum, the bearish case’ on April 2 when ETH traded at 3,500).

👇9-14) When demand was high for ETH due to NFT minting and DeFi transactions, high gas prices were an issue. While the Dencun Upgrade (EIP-4844) solved this in March 2024, it was three years too late. Crypto users (and traders) are not sitting around and waiting until a blockchain solves their bottlenecks; instead, those users move on, and today, most of the action is on Layer 2s. Since the Dencun upgrade, Ethereum’s dominance has declined from 17.8% to 15.8%. Forget the flipping of BTC that many predicted.

👇10-14) Ethereum’s decision to become ultrasound money has become as exciting as fixed-income investing (as we predicted 18 months ago). The only Ethereum bull story there is staking and re-staking. TVL, in general, sits at $94bn. Most of that is in staking (Lido $29bn) and restaking (EigenLayer $15bn) protocols. As a comparison, most of the TVL was in lending when TVL reached $180bn during the 2020/2021 bull market. Crypto TVL has half the amount where it should be as Bitcoin made new all-time highs.

👇11-14) Ethereum also lost the stablecoin battle as most Tethers are issued on Tron ($58bn) and not on Ethereum ($51bn). Tron was initially known for gaming and gambling, which needed cheaper gas fees to make it viable. But over time, USDT on Tron has also been used for money transfers and payments. USDT on Tron for transfers is snowballing, and while stablecoin growth is bullish, Ethereum is missing out.

👇12-14) Ethereum issuance has also become inflationary, as 17k ETH were issued while only 6k were burned last week. During the previous month, 43k were burned, while 74k were issued. The concept of staking Ethereum became flawed as soon as US Treasury yields were available on-chain at much higher yields (5%). At the same time, the Ethereum use cases nosedived (see previous notes on low revenues). Staking rewards at Lido currently pay 3.0%.