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Why Is the Ethereum Price Lagging Behind?

Zaheer Ebtikar, the Chief Investment Officer (CIO) and founder of Split Capital, has attributed the Ethereum underperformance over the last months to strategic missteps by the Ethereum Foundation and structural shifts in crypto capital flows.

Ethereum’s Underperformance: A Structural Analysis

Ebtikar emphasized the importance of understanding capital flows within the crypto market. He identified three primary sources of capital flow: retail investors, private capital from liquid and venture funds, and institutional investors who invest directly through Exchange-Traded Funds (ETFs) and futures. However, he noted that retail investors are “hardest to quantify” and “not fully present in the market today,” thus excluding them from his analysis.

Private Capital’s Shift from Ethereum to Alternative Cryptocurrencies

Ebtikar highlighted that in 2021, private capital was the largest capital base, driven by crypto euphoria that attracted more than $20 billion in net new inflows. However, he attributed this decline to a series of poor venture investments and overhang from prior cycles, which have “left a bad taste in the mouths of LPs.”

As a result, investors shifted from Ethereum to alternative cryptocurrencies, such as Solana (SOL), Celestia (TIA), and Toncoin (TON). Ebtikar explained, “These locked deals also represented something more interesting for a lot of firms—there’s a world outside of Ethereum-based investing that is actually growing and usable and has enough market cap growth relative to ETH that could justify the underwriting of the investment.”

Institutional Investors’ Role in Shaping the Crypto Market

Ebtikar noted that institutional investors are aware it will be increasingly difficult to raise funds for venture and liquid investments. Without the return of retail capital, institutional products became the only viable avenue for a bid for ETH. He observed, “Abandon their core portfolio hold in ETH and move down the risk curve, or hold their breath for traditional players to start bailing them out.”

The Formation of Two Camps

This led to the formation of two camps. The first consisted of pre-ETF ETH sellers between January and May 2024, who opted out of ETH and swapped to assets like SOL. The second group, post-ETF ETH sellers from June to September 2024, realized that ETF flows into ETH were lackluster and that it would take much more for ETH’s price to gain support.

The Future of Ethereum

Ebtikar emphasized that the only way forward for Ethereum is to expand the universe of potentially interested investors, which can only happen at the institutional level. “ETH’s best odds of making a material comeback (short of changes to the core protocol’s trajectory) is to have institutional investors pick up the asset in the coming months,” he suggested.

Conclusion

Ebtikar’s analysis provides valuable insights into the structural factors contributing to Ethereum’s underperformance. His suggestions for its future trajectory – potential changes at the Ethereum Foundation, marketing of the ETH ETF, and shifts in institutional investors’ interest – offer a glimmer of hope for the asset’s recovery.

FAQs

• What are the primary sources of capital flow in the crypto market?
  • Retail investors
  • Private capital from liquid and venture funds
  • Institutional investors who invest directly through Exchange-Traded Funds (ETFs) and futures
• Why did private capital shift from Ethereum to alternative cryptocurrencies?
  • Poor venture investments and overhang from prior cycles
  • Increased interest in alternative cryptocurrencies like Solana (SOL), Celestia (TIA), and Toncoin (TON)
• What is the role of institutional investors in shaping the crypto market?
  • Aware of the difficulty in raising funds for venture and liquid investments
  • Prioritize traditional products, such as the BlackRock spot Bitcoin ETF (IBIT)
• What are the potential future developments for Ethereum?
  • Changes at the Ethereum Foundation
  • Marketing of the ETH ETF
  • Institutional investors’ interest