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Ethereum: A Cryptocurrency with Strong Fundamentals
Ethereum (ETH) is being closely watched by analysts at Bernstein, a renowned research and brokerage firm. Despite its underperformance in the crypto market, especially compared to Bitcoin (BTC), Solana (SOL), and XRP in 2024, Ethereum’s solid fundamentals indicate a possible rally on the horizon.
Understanding Ethereum’s Struggles
As the second-largest cryptocurrency, Ethereum boasts a market capitalization exceeding $430 billion. It stands at a crucial juncture where significant positive price action might be forthcoming. Analysts at Bernstein believe that ETH’s core fundamentals remain robust, which could present a compelling investment opportunity even amidst its recent struggles.
To contextualize Ethereum’s performance, consider this: while Bitcoin and Solana have experienced remarkable year-to-date (YTD) increases of 125% and 122% respectively, Ethereum’s growth has been more modest at 57%.
Factors Behind Ethereum’s Challenges
In a recent client note, led by analyst Gautam Chhugani, several factors were identified contributing to Ethereum’s challenges. One significant aspect is Ethereum’s inability to establish itself as a store of value on par with Bitcoin. Additionally, Ethereum is facing growing competition from low-latency Layer 1 blockchains like Solana, Sui, and Aptos.
Impact of Layer 2 Blockchains
Ethereum’s dependency on Layer 2 solutions such as Optimism, Arbitrum, and Base is noteworthy. While these solutions aim to enhance scalability, they also redirect users away from Ethereum’s main chain, posing challenges in user retention and limiting transaction fee growth. These factors create hurdles for ETH’s price momentum.
Evaluating the Right Timing to Invest in Ethereum
The analysts at Bernstein believe that Ethereum’s prospects could improve significantly, especially in light of recent political developments. The election victory of Republican candidate Donald Trump has led to a remarkable rally in the total cryptocurrency market, which has surged by over 45%, crossing the $3.5 trillion mark. Ethereum has been one of the major beneficiaries, gaining 46% since the election, compared to Bitcoin’s 41% and Solana’s 36%.
Key Developments Supporting Ethereum’s Growth
Several key factors could bolster Ethereum’s growth in the near future. The analysts highlighted the increasing possibility of staking yield approval in Ethereum exchange-traded funds (ETFs) under a potentially crypto-friendly Securities and Exchange Commission (SEC) led by Trump. They expressed optimism regarding Ethereum’s staking yield, suggesting:
“We believe, under a new Trump 2.0 crypto-friendly SEC, ETH staking yield will likely be approved.”
The current yield rate of 3% for Ethereum could potentially rise to 4% or 5%, making it an appealing option for investors, especially in a declining interest rate environment. Moreover, the recent uptick in Ethereum ETFs, marked by higher inflows, could further benefit ETH.
Ethereum ETFs: A Growing Trend
Although Ethereum ETFs had a lukewarm start, they have recently outperformed Bitcoin ETFs in terms of daily inflows. As an example, on November 29, spot ETH ETFs in the US attracted inflows of $332.9 million, surpassing the $320 million inflows for Bitcoin ETFs.
Ethereum’s Transition and Supply Dynamics
Ethereum’s transition to a proof-of-stake (PoS) consensus mechanism in September 2023, along with its burn mechanism, has effectively stabilized the total supply around 120 million. Of this, approximately 28% is staked, while about 10% is involved in lending protocols or Layer 2 bridges.
With nearly 60% of the total ETH supply remaining unmoved over the past year, Bernstein analysts anticipate that this could lead to favorable demand-supply dynamics for Ethereum. Currently, ETH is trading at $3,644, reflecting a slight decrease of 1.8% in the past 24 hours.
