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Crypto investors are starting to question the investment opportunity in ether . Ethereum has always been seen as the blockchain with a stronger and more easily understood value proposition as a smart contracts platform that could power many different types of applications. Now, investors are reckoning with the possibility that ether may have lost some of its appeal, while bitcoin’s has never been clearer or broader. Ether, the second largest cryptocurrency by market cap, is nearly 50% off its all-time high. It has underperformed bitcoin 44% since the Merge (which took place two years ago this week), and hasn’t followed the bitcoin rally in March to a new record this year. Meanwhile, ether ETFs had nine consecutive days of outflows between Aug. 15 and 27 totaling $115 million and have seen net outflows overall since their July launch. Meanwhile, bitcoin ETFs had inflows in eight of those nine August days, netting to $427 million, and saw strong inflows in the initial five weeks following their launch in January. “The relative difficulty in educating new investors on Ethereum’s supply schedule and smart contract utility, combined with the absence of staking yields, may be contributing to the lack of ETH ETF appetite,” said David Duong, head of institutional research at Coinbase. “Sentiment around ETH among more crypto-native investors may have been dampened by the apparent transience of previous bull cycle narratives, [like] deflationary ‘ultra sound money,’ as well as the rise of strong technological competitors in Solana and other next-generation chains.” Ether is down 2% this year, while Solana’s SOL token has gained 20%. Bitcoin is up 25%. The ETH/BTC ratio, a sentiment indicator reflecting the relative value of ether compared with bitcoin, is at its lowest level since April 2021. Mike Colonnese, an analyst at H.C. Wainwright, said there isn’t “a particularly strong investment case for ETH” at the moment and noted that institutional investor demand in crypto has been “predominately for bitcoin, which has a cleaner and more easily understood supply schedule than ether.” “Bitcoin has a very well established use case, which is a store-of-value currency,” said Julio Moreno, head of research at CryptoQuant. “Other use cases may still be not so clear as this one. ETH has changed its narrative a few times – a world computer for [decentralized applications], DeFi layer, ‘ultra sound’ money – so it can be confusing for traditional investors.” DeFi, or decentralized finance, protocols account for the majority of activity on Ethereum. Citi pointed out Friday that DeFi activity in ETH terms is some 63% above recent lows and has recently seen highs from the first half of 2023. However, the community has been debating the utility of the DeFi sector and questioning whether or not it can significantly drive growth on the Ethereum blockchain. “The ongoing existence of the DeFi market is downstream of the existence of the ETH market, which means that while DeFi may be great it’s fundamentally capped and can’t be [the] thing that brings crypto to another 10-100x adoption burst,” Ethereum co-founder Vitalik Buterin said recently on X . Nevertheless, Duong said, Ethereum “remains one of the most credibly neutral developer platforms today and … the growth of DeFi-adjacent sectors like the tokenization of real world assets is making promising progress in spite of these debates.” Unique daily users on the Ethereum network are up more than 150% across Layer 1 and Layer 2 networks — that is, base layer settlement networks like Bitcoin or Ethereum, and the smaller networks that build on top of them like the Lightning Network or Coinbase’s Base network — versus 2023 averages, Citi noted on Friday. Still, Ethereum’s transaction fee revenue is at multiyear lows, according to CryptoQuant. The network is also not functioning as “ultra sound money,” in part because its supply is rising. The Merge, a 2022 technical upgrade, was expected to make Ethereum’s infrastructure more energy efficient and slow the rate at which supply would grow. Some investors had hoped ether could compete with bitcoin, whose rate of supply growth slows every four years after the halving. However, ether supply has been rising at a fast pace this year, and is on track to resume its pre-Merge levels in the next three months, according to CryptoQuant. —CNBC’s Michael Bloom contributed reporting.
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