Ethereum: What Could Flip Its Underperformance?
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As the second-largest cryptocurrency gained less than 5% in 2019, Ethereum has been underperforming Bitcoin this year with BTC still maintaining its staggering 95% year-to-date gains despite previous selloffs. In light of Ethereum’s successful implementation of its latest network upgrades, dubbed Istanbul, and the rising popularity of decentralized finance, is playing catch-up with the price of ETH a viable strategy for investors? From a macro perspective, Ethereum’s approval among financial institutions has been rising noticeably. But what does that mean for general ETH investors?
Bitcoin has always been the most widely quoted cryptocurrency in the world. It often acts as a benchmark of the broader crypto space, and its performance has been a significant market focus since the very first day. Indeed, the cryptocurrency markets look a lot different now than when Bitcoin made its debut. The rapid development of the crypto space has widened the spectrum, resulting in a rising appetite fors altcoin like ETH, XRP, and EOS. Despite the massive ETH rally in late 2017 to early 2018, the price of ETH has been significantly underperforming BTC this year.
Figure 1: Ethereum vs. Bitcoin YTD Performance
While many factors may have attributed to ETH’s underperformance, a multi-layer analysis can provide us with a more comprehensive look at Ethereum and indicate whether its price has the potential to make a decisive turn in the long run.
In the age of the internet, investors can sometimes find difficulties in evaluating companies in new economies as they try to use conventional valuation methods. FAANG stocks (Facebook, Amazon, Apple, Netflix, and Google) are a good example. Despite criticisms, the group of the most influential tech giants has been one of the critical drivers of the equity markets for quite some time.
Similar to FAANG stocks, many believe that cryptocurrency is also a network value-driven asset, meaning that the more people use it, the higher its value. There are more than 81 million unique addresses in the entire Ethereum network, and that number has been growing solidly since early last year.
Figure 2: Ethereum Unique Address Growth Chart
However, things would look less robust without considering the usage factor. The number of active Ethereum addresses has stabilized at around 300K since touching 600K in June of 2019. Similarly, the number of active Bitcoin addresses has been fluctuating in the range of 500K to 700K in the second half of this year, after reaching 900K in late June.
Figure 3: Ethereum vs. Bitcoin Active Addresses 1-Year Chart
The Fuel to Grow Ethereum
Maker has been a leader in the Ethereum-based DeFi space, and its smart contract managed platform allows users to stake, trade, and borrow crypto assets. In November, MakerDAO’s protocol upgrade has created multi-collateral DAI, or MCD, which accepts ETH as collateral for DAI generation.
Ethereum is the single largest mainstay of the whole DeFi world. Data from DeFiPulse shows that DeFi has locked up as much as 2.7 million ETH in the system, representing 2.5% of the total ETH supply. Maker alone has locked up at least $325 million in DeFi, which accounts for about half of the value locked up in DeFi.
Markets seem to be buying DeFi’s promising outlook. We believe that Ethereum is well-positioned to benefit from the growth of DeFi in the long term, and we expect to see an increasing number of high-value transactions coming through to the Ethereum blockchain, which could be an underlying positive for the price of ETH over the long run.
Figure 4: Ethereum Number of Transactions & Volume
Figure 5: Total Value Locked (USD) in DeFi
From a macro perspective, the birth of DeFi has also shifted the market’s expectations of Ethereum, from being a utility token to more of a high-value transaction settlement application. Moreover, while Bitcoin has long been considered a store of value, DeFi could also pave the way for Ethereum to strengthen its store of value character. We expect this shift to become more evident in 2020, alongside the rapid expansion of the DeFi markets.
Enterprise Involvement Gains Traction
Increasing enterprise interest could be another fundamental factor that could shape the future development of Ethereum, especially in the banking sector.
Earlier this month, banking giant Standard Chartered its participation in the Enterprise Ethereum Alliance. The EEA claims that it’s an organization committed to developing an open, decentralized web, and blockchain specifications for businesses and consumers worldwide. Other major multinational banks like JPMorgan, ING, Citi, and BBVA, are already members of the EEA.
While this may not be StanChart’s first blockchain investment, since the bank has also been in a strategic partnership with Ripple, especially on the payment front, joining the EEA not only signals that the bank would like to embrace blockchain technology further, but that it may focus on Ethereum or even ETH.
While there’s no timeline for any upcoming Ethereum projects from StanChart, a lot is going on in the EEA. One example is JP Morgan-backed Quorum, and we may see more projects coming from primary EEA members in the foreseeable future.
Ernst & Young also announced a significant technology breakthrough that allows private transactions on the public Ethereum blockchain at much lower cost. With that development, we can expect to see more businesses transferring ETH and other Ethereum-based tokens privately on the public blockchain.
The underperformance of the price of ETH has been getting more noticeable since 2Q19. Investment demands, the cost of achieving consensus, network speed, and other market factors may have contributed to the disadvantage of the Ethereum network and ETH prices. However, the rise of DeFi, the growing enterprise interest, and the network upgrades could help to establish Ethereum as the critical infrastructure of the digital finance world. Increasing developments could become a major driver of ETH prices for the long term.