Ethereum
Ether emerges as the new “internet nexus” amid growing interest in crypto assets
We continue to see unprecedented inflows into spot bitcoin ETFs, as assets under management surpassed $55 billion and bitcoin reached “bigger than money” status. Alex Tapscottauthor of Web3: Charting the Internet’s Next Economic and Cultural Frontier, points out that while bitcoin gets all the attention, Ether, the second largest cryptocurrency in terms of market capitalization, is evolving and has different investment criteria .
With talk of possible approval of the ETH ETF in May and renewed interest in bitcoin and crypto, Adam Blumberg from Interaxis answers the various investment questions he receives in Ask an Expert.
The investment case for Bitcoin is strong and getting stronger, just like those for Ethereum.
Bitcoin surpassed $70,000 this week, hitting new all-time highs, driven by massive (and seemingly insatiable) investor interest in new U.S.-listed spot Bitcoin ETFs, which by all accounts , had one of the best launches in history. They have accumulated more than $10 billion in net income in less than two months. In comparison, it took gold ETFs two years and S&P 500 ETFs three years to reach the same goal.
With excess demand, we are on the brink of another supply shock, with Bitcoin halving in less than two months. Every four years, the amount of new bitcoins periodically created by the network to pay miners to secure the Bitcoin blockchain is cut in half. A new all-time high in Bitcoin followed each previous halving.
So, with the dual tailwinds of Bitcoin ETF flows and the upcoming halving, is Bitcoin the better bet? Not so fast. Ethereum, the second largest crypto asset by market capitalization, has its own arguments to make. While bitcoin is often described as a store of value, a medium of exchange, or both – essentially money for the Internet – Ethereum is a platform for developers to create more than 4,500 applications in areas as as diverse as art and collectibles (NFTs), stocks, bonds, and real estate (real world assets or RWAs), fiat currencies (stable coins), and internet-native organizations called DAOs, known collectively as Web3.
Wall Street realizes the potential of Ethereum: last week, Bernstein released a research report that predicted a big comeback for DeFi, saying they “expect a massive recovery in DeFi and the investor narrative to return as the future of blockchain finance.” As I write in my new book, Web3: Charting the Internet’s Next Economic and Cultural FrontierWeb3 adoption is also gaining momentum among enterprises, with 52% of Fortune 100 companies having launched blockchain-related projects since 2020.
Additionally, three catalysts could propel ETH to all-time highs and help it overtake bitcoin:
First, since September 2022, Ethereum’s supply has decreased by a total of 430,000 ETH, which is equivalent to $1.7 billion in today’s value. During this period, the supply of Bitcoin increased by 490,000 BTC ($35 billion). Why this difference in trajectories? Because part of the fees users pay for using Ethereum is for the withdrawal or “burning” of tokens, similar to a stock buyback in traditional public markets. The more active the network, the greater the combustion and the greater the deflation, and network activity has recently heated up.
Chart A: Evolution of the net supply of Ethereum relative to Bitcoin since the merger
Second, this week Ethereum underwent a major network upgrade that may help resolve its scalability issues. One of the downsides of Ethereum is that the network is expensive to use, opening the door to competitors like Solana. This upgrade should help optimize its scalability potential and maximize its capacity. Higher throughput and lower fees will help Ethereum gain a greater lead over its competitors.
Finally, we could see an ETH ETF as early as May this year. May 23 is the latest deadline for the SEC to rule on the VanEck and ARK 21Shares applications. In a sign of growing confidence in ETF approval, Grayscale’s closed-end Ethereum Trust (ETHE), with $11.6 billion in assets, is currently trading at an 8.17% discount. . This time last year, ETHE was trading at a 59% discount to NAV. Bloomberg ETF senior analysts Eric Balchunas and James Seyffart put the chances of approval on May 23 at just 35%, but in my opinion the market gives the ETF little chance of approval by May. On a recent episode of my DeFi Decoded podcastSeyffart said that even if the May deadline falls short of approval, an ETH ETF remains a question of when and if.
ETH and BTC have been the leaders for years. In previous cycles, ETH has strengthened against Bitcoin, reaching highs of 0.15 and 0.09 ETH per BTC in 2017 and 2021, respectively. The current ratio of 0.056 is only slightly above its three-year low. Assuming a hypothetical target of $100,000 for Bitcoin, Ethereum would reach $14,750 using the 2017 high and $8,800 using the 2021 high.
Chart B: ETH/BTC ratio since the creation of Ethereum
Between bitcoin and ether, I don’t think there is a bad option if you want exposure to major Web3 platforms and assets. But, with strong fundamentals and several upcoming catalysts, I think Ethereum has the edge.
Q. We have heard that there is a fixed supply of Bitcoin. Also is there a fixed supply of ETH?
A: There is no fixed supply of ETH, like with Bitcoin (21 million). Ether has a different issuance policy.
Just like with Bitcoin, new ETH is created with each new block (approximately every 12-13 seconds) and used as a reward for those who process the transactions. However, this does not mean that the supply of ETH is infinite.
With each block processed, a portion of the ETH is also burned or deleted forever. The amount burned is based on the number of transactions in that block. So if there are more transactions, we often burn more ETH with each block than the new ETH created. This leads to a deflationary policy: we are currently seeing around 1.3% less ETH per year.
Bottom line: As the Ethereum network is adopted and used more, there should be less ETH available in the world.
Q. Is the investment thesis for ETH the same as BTC?
A: We have just discussed the issuance policy of ETH and its differences with Bitcoin.
Now let’s talk about why someone would invest in ETH or BTC, and how they are different.
Most investment theses for bitcoin revolve around the obviously scarce supply and bitcoin as a store of value and hedge against inflation. As more dollars, euros, and yen are created and the supply of bitcoin increases very slowly at a known rate, the value of bitcoin against the dollar is expected to increase.
For ETH, demand generation is different. ETH is used to pay for transactions on the Ethereum network, or as we commonly call it, to pay for block space.
So, as we see increasing adoption of the Ethereum network – use of stablecoins, NFTs, tokenized assets – there will be demand required for ETH to drive these transactions forward.
With the issuance policy described above – more ETH burned than created in each block – an increase in demand should increase the value.
Of course, ETH also comes with staking capability – the ability to lock up a portion of my ETH to receive rewards similar to a stock dividend. We see demand for ETH not only for paying for transactions, but also for staking and earning rewards in the form of revenue.
If you do your research and determine that adoption of the Ethereum network will increase, it is logical to think that the value of ETH will increase, as will the price at which we will increase the price to use it to pay for transactions.