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SUBSCRIBE TO RECEIVE THE WEEKLY CIO MEMO
A weekly market commentary from CIO Matt Hougan and the Bitwise Research Team,
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RECENT CIO MEMOS
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SEPTEMBER 17, 2024
A CONTRARIAN BET ON ETHEREUM
MATT HOUGAN
CHIEF INVESTMENT OFFICER
IT’S COOL TO HATE ETHEREUM RIGHT NOW. I BET THIS ENDS UP LOOKING SILLY.
No one likes Ethereum right now.
The ETH/BTC ratio—a comparison of the price of Ethereum versus the price of
Bitcoin—recently hit its lowest level in three years. On a year-to-date basis
Ethereum is flat while Bitcoin is up 38%, and Ethereum’s top competitor, Solana,
is up 31%.
The vibes in the community are tough.
There are many reasons for Ethereum’s doldrums:
1. Election Risk: Ethereum faces material risk in the November election. While
Bitcoin has largely passed regulatory scrutiny—even SEC Chair Gary Gensler
admits it's not a security—Ethereum has not. The SEC appears to think that
staked ETH is a security, and the agency has significant worries about the
broader DeFi ecosystem that drives much of Ethereum’s value. If Harris wins
and continues the Biden administration’s skeptical posture towards crypto,
Ethereum could face challenges.
2. Rising Competition from Solana and Others: Ethereum faces rising challenges
from newer blockchains that offer higher throughput and lower costs. Solana
is the leading example of this, but others—both existing and
soon-to-launch—are starting to crowd the space. It’s somewhat cool in crypto
circles to be bullish on Solana and other new chains and bearish on Ethereum
because of its older, costlier tech.
3. Challenged Tokenomics: Over the past few years, the Ethereum community has
made the decision to focus on growing transaction volume on “Layer 2”
networks that surround Ethereum rather than on the core (or “Layer 1”)
Ethereum blockchain itself. This has been wildly successful—transaction
activity on Layer 2s like Base, Arbitrum, and Optimism is soaring. But the
rise of Layer 2s has shifted so much volume away from Ethereum that its
revenues are down to a four-year low. Many wonder if Ethereum has shot
itself in the foot by scaling away from the foundational Layer 1 blockchain.
4. Mixed ETF Results: Ethereum ETFs have not had the same overwhelming success
as Bitcoin ETFs. While newly launched ETFs have gathered billions, they’ve
been more than offset by $2.7 billion in outflows from the Grayscale
Ethereum Trust (ETHE).
These are good reasons to be concerned. But I think they miss the broader point.
From 30,000 feet, it's true that blockchains like Ethereum and Solana are both
trying to create a “public computer”—global databases that other people can use
for building applications. But when you look at which applications are seeing
breakthrough success, they’re almost all dominated by Ethereum:
* Stablecoins: More than half of all stablecoins are issued on Ethereum.
* Decentralized Finance (DeFi): Over 60% of all DeFi assets are locked on
Ethereum.
* Polymarket: The breakthrough prediction market ultimately settles on
Ethereum.
There are many more examples.
When BlackRock wanted to build a tokenized money market fund this year, it built
on Ethereum; that fund now has more than $500 million in assets under
management. When Nike launched a Web 3 gear platform called .Swoosh, it launched
on Ethereum. When the next large traditional company wants to do a blockchain
product, I bet they’ll choose Ethereum too.
Ethereum has the most active developers, the most active users, and a market cap
that is 5x bigger than its closest competitor. It’s the only programmable
blockchain that has a modicum of regulatory support in the U.S., with a booming
regulated futures market and a multi-billion-dollar ETF market.
It’s like the Microsoft of blockchains. Everyone wants to talk about Google and
Slack and Zoom, and with good reason: Each of them has brought game-changing
technology to the market. But Microsoft is still larger than all of them put
together.
None of this means I’m bearish on Solana or other chains. They are having
significant impact, and there is a lot to be excited about. But I think people
are too quick to look past Ethereum and the real-world success we’re already
seeing in its ecosystem.
From my seat, none of Ethereum’s challenges seem existential, and its
opportunities are brimming. I suspect the market may reevaluate Ethereum as we
get closer to the November elections and any regulatory clarity that emerges.
For now, it looks like a potential contrarian bet through the end of the year.
--------------------------------------------------------------------------------
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