Ethereum Has Catching Up To Do (ETH-USD)

The crypto market is back. We have enjoyed broad rallies in the crypto coins and have seen large year-to-date increases in Bitcoin (BTC-USD), Ethereum (ETH-USD), Solana (SOL-USD), and Avalanche (AVAX-USD), among others. Some cryptos are rallying with the market while others are benefiting from specific catalysts. For BTC, that catalyst is renewed interest from institutional investors as a spot ETF approval within weeks seems admire a foregone conclusion.

This ETF optimism has allowed BTC to significantly outperform ETH, which itself is up an impressive 91% year-to-date. In this article, we’ll look at updated network metrics for Ethereum, holder data, evaluate a new risk to consider, and get into investor flows for ETH.

Network & Holder Metrics

Activity levels on chain are picking up steam. Last week network transactions topped 1.1 million for the first time since early January.

This renewed interest in the network has driven gas prices higher. The result of this has been a return to ETH’s deflationary dynamic. Even though Ethereum doesn’t have a cap on coin supply admire Bitcoin, Ethereum does have a token burn mechanism. When the network usage is high and gas prices (transaction fees) boost, there is a possibility that more tokens will be burned than created through supply emissions. With the resurgence in activity in the crypto market, more ETH is being burned than issued again after ETH briefly turned inflationary for much of September and October 2023.

Since “the merge” in September 2022, the total supply of ETH has gone down by nearly 300k ETH. While this is a small portion of the 120.2 million ETH in circulating supply, had ETH stayed on a proof of work consensus mechanism, we’d have seen the token supply boost by 3.1% in the time since the merge.

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Source: CoinMetrics, millions

From a holder standpoint, we’ve seen a nice boost in non-zero wallet addresses for Ethereum. In fact, Ethereum just crossed 110 million non-zero addresses at the beginning of December. While it’s admittedly very close by percentage, ETH has seen a slightly larger year-to-date gain in non-zero addresses than Bitcoin. It’s important to note, non-zero addresses are not the same thing as unique holders as it’s possible for one person to control many different wallet addresses. But we can get a sense of holder motivations when we look at control of supply.

Ethereum has a similar holder dynamic to Bitcoin. Long-term “hodlers” are consuming an increasingly large share of token supply. At 75.4%, hodlers have the largest share of token supply on Ethereum that they’ve ever had. The long-term trend is for this metric to continue rising. We don’t generally see hodlers relinquish coins until a new price high has been made.

Is Bitcoin The NFT Captain Now?

In addition to stablecoin footprint and DeFi activity, one of the major areas where Ethereum has reigned supreme over all smart contract blockchains has been in the area of NFTs, or non-fungible tokens. Over the last month or so, we’ve seen market exuberance proliferate the NFT market once again. However, the market is a little bit different this time around. Certain “blue chip” projects on Ethereum admire Bored Apes or CryptoPunks have experienced increases in volume.

Meanwhile, we haven’t seen participation in this NFT rally from other chains admire Flow (FLOW-USD). Often times smaller chains lack the ability to replicate the success of a flagship project from the last crypto bull; in Flow’s case, this would be NBA Top Shot. However, I suspect that a large part of this indifference to those smaller chains is due to the huge presence of Ordinals and BRC-20 tokens that can now be observed on Bitcoin:

In the last 30 days, Bitcoin has been the top blockchain for NFTs when adjusting for wash sales. This is very interesting because Bitcoin has not historically been viewed as a smart contract blockchain. So seeing Bitcoin currently leading in this area is a new development that crypto investors should pay attention to. I’ve long maintained that most NFTs are junk, but there is a legitimate application for non-fungible tokenization in real world asset markets and for domain IP. If Ethereum loses the NFT crown to Bitcoin longer term, that would potentially diminish the attractiveness of Ethereum as an investment idea.

Investor Flows

There has been a lot of excitement about the possibility of a spot Bitcoin ETF in the US market. The expectation for the approval of such a product has been a large driving factor for these recent returns. It almost feels as though larger investors have forgotten about Ethereum even though we’re already starting to see spot ETF applications roll in for that asset as well from many of the same fund managers that want spot Bitcoin ETFs. If one takes the view that these products will be approved next year as well, then fund managers have quite a bit of catching up to do from an asset acquisition standpoint.

Consider how dramatic the net fund flow has been for crypto assets over the last two months as it has become increasingly likely we’ll see a spot BTC ETF. The last ten weeks have brought in $1.76 billion of asset inflows. This small period accounts for almost the entire $1.84 billion net asset flow to crypto investment products year-to-date. Where it gets interesting is when we break it out by asset.

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Source: CoinShares, figures in millions USD, as of 12/1/23

BTC is clearly still the largest driver of institutional cryptocurrency exposure. Ethereum is the clear second favorite for fund managers, but the year-to-date fund flow for ETH only went positive within the last week. Fund managers have been more interested in Solana this year. It took eleven months for asset managers to feel comfortable buying Ethereum again. One possible reason for this could be that the current administration’s SEC has been anything but clear when answering questions about how the agency views the asset. But the same SEC has stated SOL is an unregistered security and that hasn’t hindered investment in 2023. Regardless, Ethereum has quite a bit of catching up to do from an asset allocation standpoint.

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Sources: CoinShares, CoinMarketCap, dollars in billions

Consider the market caps for each coin and the share of investment capital that has been allocated to them. In the table above, I’m showing the circulating market caps for each asset and the combined value of those market caps. When we make the same calculation for the investment community, we can see asset managers are theoretically underweight Ethereum. A rebuttal to this process may say Ethereum doesn’t have a spot ETF approval yet. But neither does Bitcoin.

Closing Summary

ETH is still a volatile and risky coin just admire the other digital assets in the cryptocurrency market. Investors should be both patient and responsible with position sizing. The general election next year could theoretically be a turning point for the crypto industry domestically. However, if the SEC is run by the same people in 2025, that agency may remain antagonistic to the industry to whatever degree it can. For me personally, the strategy is the same. I think Ethereum will remain the leading smart contract ecosystem for stablecoin footprint and DeFi. Until that thesis falls apart, I’m still very bullish Ethereum long term.