Bitwise: Ethereum Faces Challenges, But Is a Strong Contrarian Bet

Ethereum has been facing significant FUD (fear, uncertainty, and doubt) recently, as its ETH/BTC ratio has dropped to a three-year low. While Bitcoin has surged 38% year-to-date, Ethereum has remained mostly flat, and its biggest competitor, Solana, has gained 31%.

Several factors contribute to Ethereum’s current slump:

1. U.S. Election Risks:

Ethereum faces significant regulatory uncertainty ahead of the November U.S. election. While Bitcoin has largely passed regulatory scrutiny, with SEC Chair Gary Gensler acknowledging it’s not a security, Ethereum has not received the same clarity.

The SEC views staked ETH as a security and has concerns about the DeFi ecosystem driving much of Ethereum’s value. If a Harris administration continues the Biden government’s skeptical stance toward crypto, Ethereum could face challenges.

2. Competitors Gaining Ground:

Ethereum is being challenged by newer blockchains offering higher throughput and lower costs. Solana is leading this charge, but other chains are also carving out space.

Some in the crypto market believe that Ethereum’s technology is outdated and too costly compared to its competitors.

3. Token Economics Struggles:

In recent years, Ethereum’s community has focused on growing activity on Layer 2 networks rather than Ethereum’s main blockchain. This strategy has been successful, with Base, Arbitrum, and Optimism seeing surging activity.

However, the rise of Layer 2 solutions has also shifted a large portion of transaction volume away from Ethereum, leading to its lowest network revenue in four years. This has prompted concerns that Ethereum may have undermined itself by moving away from its Layer 1 base.

4. Mixed ETF Performance:

Ethereum ETFs haven’t matched the overwhelming success of Bitcoin ETFs. Despite new Ethereum ETFs raising billions, the $2.7 billion outflows from Grayscale’s Ethereum Trust (ETHE) far outweigh the inflows into these new products.

While these concerns are valid, many overlook Ethereum’s broader strengths.

In the bigger picture, Ethereum and its competitors like Solana are all trying to create a “world computer”—a global, decentralized platform for building applications. But when you examine the breakthrough successes in this space, many of them are built on Ethereum:

• Stablecoins: Over half of all stablecoins are issued on Ethereum.
• DeFi (Decentralized Finance): Over 60% of DeFi assets are locked on Ethereum.
• Polymarket: A leading prediction market, also built on Ethereum.

There are numerous similar examples. When BlackRock wanted to tokenize a money market fund, it chose Ethereum. This fund now manages over $500 million in assets. When Nike launched its Web3 fashion platform, .Swoosh, it chose Ethereum. When the next major traditional company moves into blockchain, it’s highly likely they’ll also choose Ethereum.

Ethereum has the most active developers, the largest user base, and its market cap is five times that of its closest competitor. It is also the only programmable blockchain with some regulatory support in the U.S., featuring a thriving futures market and multi-billion-dollar ETF market.

Ethereum is like the “Microsoft of blockchains.” While everyone talks about Google, Slack, and Zoom for their game-changing innovations, Microsoft’s scale remains larger than all of them combined.

This doesn’t mean I’m bearish on Solana or other blockchains. They’re making a significant impact and have plenty to look forward to. But I believe people are overlooking Ethereum’s success in real-world applications, especially in tokenizing real-world assets.

In my view, the challenges Ethereum faces aren’t existential. It also has vast opportunities ahead. As the U.S. election approaches and regulatory clarity increases, the market might reassess Ethereum. Right now, it appears to be a strong contrarian bet for the rest of the year.