Brief Summary
This video discusses the underperformance of Ethereum (ETH) compared to Bitcoin (BTC) and other altcoins, exploring the reasons behind this and the potential for future recovery. It covers the impact of Layer 2 solutions, competition from other blockchains ("Ethereum killers"), the macro environment (specifically interest rates), and potential catalysts for a price recovery, such as changes in SEC leadership and increased institutional adoption.
- ETH has been underperforming BTC since September 2022.
- Layer 2 solutions, while solving scalability, have fragmented liquidity.
- Competition from "Ethereum killers" like Solana and BNB Chain is increasing.
- High interest rates make government bonds more attractive to institutional investors than ETH staking.
- Potential recovery catalysts include staked ETH ETFs, institutional adoption via Etherealize, and the upcoming Pera upgrade.
Intro
The video starts by addressing the concerns of ETH holders regarding its recent underperformance compared to Bitcoin, which has reached new all-time highs. The initial confidence that ETH would follow BTC's lead has waned, leading to questions about its potential for recovery and relevance in the future. The video aims to analyse the reasons behind ETH's struggles and assess the likelihood of a bullish turnaround.
How Badly Has ETH Been Underperforming?
Ethereum's performance has been notably poor, becoming a point of concern as BTC has rallied to new all-time highs while ETH has struggled to keep pace. While BTC surpassed its previous high of around $69,000 last March, ETH has not reclaimed its 2021 high of approximately $4,900. ETH has struggled to break the $4,000 resistance level during this cycle, and its price has fallen to levels reminiscent of the bear market. The video highlights that ETH has been "bleeding" against BTC since September 2022, despite both being major cryptocurrencies with accessible US spot ETFs.
Impact of Ethereum’s Layer 2 Ecosystem
One of the primary reasons for Ethereum's struggles is the proliferation of Layer 2 (L2) solutions within its ecosystem. Ethereum has faced scalability issues since its inception, leading to the exploration of scaling solutions. The original plan of sharding has been replaced by a modular architecture using L2s to process transactions faster and cheaper. While L2s help Ethereum remain competitive against "Ethereum killers" and offer flexibility, they have also caused liquidity fragmentation, which many believe is a major factor in ETH's underperformance. Venture capitalists are increasingly interested in investing in L2 infrastructure. The complexity and saturation of the L2 ecosystem also contribute to a less-than-ideal user experience.
Competition From Ethereum Killers
Ethereum faces increasing competition from "Ethereum killers," which are smart contract blockchains offering alternatives to Ethereum. These include Solana, BNB Chain, Aptos, Avalanche, and Sui. These blockchains generally offer lower transaction fees and higher transaction speeds than Ethereum. For example, Solana can theoretically process up to 65,000 transactions per second (TPS) with 1.3-second finality, while Ethereum can handle around 15 TPS. Despite Ethereum's dominance in the non-Bitcoin crypto market, it lags behind competitors in several metrics. While these alternative Layer 1 chains have competitive advantages, none have overtaken Ethereum in adoption, developer activity, or ecosystem size.
Macro Impact on Ethereum
The macro environment, particularly high interest rates, poses another challenge for Ethereum. Higher interest rates on government bonds (e.g., US Treasury bonds yielding 4.28%) make them more attractive to institutional investors compared to ETH staking (yielding around 3%). This has been the case since mid-2023, when ETH staking yields dropped below 4% while US Treasury yields rose above 4%. The lack of institutional interest is reflected in the minimal interest in spot Ethereum ETFs, which lack a staking mechanism to differentiate them from Bitcoin ETFs. The complexity of running an Ethereum validator also deters institutions.
Could ETH’s Price Make A Recovery?
Despite the challenges, there are potential catalysts for a major recovery in ETH's price. A recent change in leadership at the SEC towards a more crypto-friendly approach increases the likelihood of staked Ethereum ETFs being approved, which would be more attractive to investors. Etherealize, launched in January, aims to drive Ethereum's institutional adoption by promoting the tokenization of real-world assets (RWAs) on the Ethereum blockchain. The Ethereum Foundation also has new leadership with backgrounds in traditional finance (TradFi), which could improve the focus on Ethereum's development. The upcoming Pera upgrade will implement several Ethereum Improvement Proposals (EIPs) to improve wallet functionality and user experience, including increasing the validator staking limit. If interest rates fall, US Treasuries will have lower yields, making ETH staking more appealing. DeFi activity on Ethereum's Layer 2 protocols continues to rise, increasing the demand for ETH as collateral and a trading pair.
