Investors are likely to have a relook at ether as the spot ETF narrative gathers steam and Ethereum remains the dominant chain in the DeFi and NFT world, according to analysts.
Ether is qualified to be a core holding in a diversified crypto portfolio, one observer said.
Ether (ETH), the native token of Ethereum’s blockchain, underperformed bitcoin (BTC) in 2023, as the latter’s new-found smart contract, non-fungible tokens (NFT) narrative, and spot ETF optimism drew investor money.
Per analysts, investors will likely have a relook at ether this year as Ethereum is still the world’s leading smart contract blockchain with key upgrades lined up, and ether is widely seen as the next likely candidate to get a spot-based ETF in the U.S.
“ETH could be poised for a breakout year,” Nasdaq-listed crypto exchange Coinbase said in the weekly newsletter. “Last week’s bitcoin ETF news proved to be a boon for ethereum, which briefly spiked above $2,700 — reaching its highest price since May 2022. And there are reasons to be even more optimistic about ETH’s near-term future. For one, several of the firms behind the BTC ETFs — including BlackRock and VanEck — are also plotting ether-based spot ETFs.”
A spot ETF invests in actual cryptocurrency, allowing investors to take exposure to the asset without having to own it, and is considered a better option than futures-based ETFs, which are vulnerable to roll costs. So, just as spot BTC ETFs, a potential launch of spot ETH ETFs is expected to open floodgates to institutional and retail money.
Nearly a dozen bitcoin spot ETFs began trading in the U.S. last Thursday and have registered a cumulative volume of over $10 billion, with BlackRock’s product amassing $1 billion in inflows.
Dencun upgrade and institutional demand
In addition, Ethereum’s upcoming Dencun upgrade, which aims to improve the mainnet’s scalability by introducing “data blobs,” could galvanize investor interest in the cryptocurrency, according to Coinbase. The upgrade went live on Ethereum’s Goerli testnet early this week.
A blob is a temporary transaction data memory typically related to Layer 2 solutions that can be attached to Ethereum. Following the upgrade to the mainnet, the network will only need to confirm the correctness of the blob data attached to the block rather than verify each transaction, helping reduce congestion and network fees.
“Ethereum’s Dencun upgrade began initial tests on Wednesday and in coming months is expected to implement EIP-4844 (“EIP” stands for “Ethereum improvement proposal”), which some ETH watchers predict could help reduce network fees by 90% or more,” Coinbase noted.
Institutional crypto firm ETC Group, in its annual report, discussed a bullish outlook for the ether-bitcoin ratio and explained that despite 2023’s inscriptions-led boom in Bitcoin’s network activity, Ethereum remains the dominant chain for building decentralized applications, NFTs, and tokenized assets.
For instance, data tracked by ETC Group show, the top 10 ERC-20 tokens have a cumulative market value of $21 billion – or 13 times bigger than the $1.6 billion market capitalization of the entire BRC-20 token universe of over 37,000 coins. ERC-20 is Ethereum’s token standard, while BRC-20 is a fungible digital asset created on the Bitcoin network.
Further, ether investors can generate extra returns on top of their holdings by staking or locking their coins in the network in return for rewards. The current annualized reward rate is around 3.84%, having averaged about 4% to 5% since Ethereum completed the Merge in September 2022.
Lastly, Ethereum’s feature of burning a portion of transaction fees paid in ETH has a deflationary effect on the token’s supply, positively affecting investors.
“The strong dominance of Ethereum in terms of smart contract platforms and the possibility to earn an additional source of yield imply that it should also be a core holding in a diversified cryptoasset portfolio as well,” ETC Group said. “We therefore think that it is quite likely for the relative performance of ETH/BTC to reverse itself in 2024. In fact, ETH/BTC’s 12-month relative performance has historically shown a strong tendency to mean revert,” ETC Group added.
Ether has outperformed bitcoin so far this year, with the ether-bitcoin ratio (ETH/BTC) trading 10% higher. The ratio tanked over 25% last year.
