Analysts at research and brokerage firm Bernstein identified Ether’s supply dynamics, restructuring protocols, its Dencun upgrade and Uniswap’s proposed fee change among the catalysts behind of its breakout above the $3,000 mark – but not from spot exchange-traded funds. .
With the successful launch of Bitcoin spot ETFs in January – attracting average daily inflows of around $200 million – attention has turned to another narrative for crypto markets – the prospect of an ETF in counting on ether in major US companies, including Fidelity, BlackRock and Franklin Templeton have requested a spot ether ETF in recent months.
Eric Balchunas, analyst at Bloomberg ETF, recently suggested a 70% chance of approval by May 23 – the final deadline for the Securities and Exchange Commission to rule on an Ether spot ETF application from Ark and 21Shares – the first filed. Balchunas’ view is also shared by Standard Chartered, with the bank forecasting a potential $4,000 target for ether if it mimics Bitcoin’s ETF pre-approval performance.
However, Bernstein analysts Gautam Chhugani and Mahika Sapra wrote in a note on Monday that the prospect of spot ether ETF approvals by mid-2024 was still unclear – echoing the sentiment from TD Cowen and JPMorgan – with ether’s rally led by more idiosyncratic investors. catalysts, in addition to the ETF.
Catalysts Behind Rising Ether Prices
An underappreciated catalyst, analysts say, is deflationary ether supply – down 0.2% since Ethereum ETH
+0.58%
the transition to a proof-of-stake consensus in September 2022, known as Fusion. “That means [the] The Ethereum network has been sustainable solely because of the transaction fee model that provides a return to staking validators,” Chhugani and Sapra wrote. “And the fee burn mechanism offset ETH issuance.”
The amount of ether locked through staking or in DeFi smart contracts is another factor, analysts suggested. The amount of ether supply staked on the Ethereum network reached 25% for the first time earlier this month.
The amount of ether locked in smart contracts is also at an all-time high of 35%, according to Bernstein analysts.
Ether supply in smart contracts. Picture: Bernstein Research.
This creates a reflexive feedback loop of increased demand for the cryptocurrency, with the supply of ether on exchanges simultaneously falling to an all-time low of 11% – slightly below the 12% level for Bitcoin, they said. noted Chhugani and Sapra.
The restyling of EigenLayer has also been cited as a catalyst, reducing the speed to market of other protocols using the Ether Stalking model to bootstrap – thus attracting increased demand for staking. EigenLayer’s protocol allows users to restake validators’ ether stakes natively or via liquid staking tokens, allocating these funds to economically secure third-party protocols. EigenLayer currently holds approximately $8.4 billion in total value locked, according to DeFiLlama data.
Analysts say Ethereum’s Dencun upgrade – due March 13 – is another factor – reducing data costs for Ethereum Layer 2 networks like Arbitrum and Optimism. “Lower fees and higher throughput on Layer 2 networks would, in the short term, reduce congestion on Layer 1, but drive higher overall volume to the Ethereum ecosystem consisting of multiple interoperable Layer 1 chains/ 2/3,” the analysts wrote.
Finally, Chhugani and Sapra suggested that the “return of DeFi” was another catalyst, with the Coinbase v. Securities and Exchange Commission case “hopefully providing clarity on token regulation,” and the mechanism fee sharing recently offered by Uniswap. for UNI token stakeholders “giving rise to hope that the economic designs of the tokens might improve” – generating activity and accumulation of value for ether.
Ether will surpass Bitcoin in 2024
Ether has outperformed Bitcoin so far this year, gaining around 34% compared to Bitcoin’s 21% price increase. Ether is currently trading at $3,052, according to The Block’s price page, up 5% over the past week.
Bernstein’s own portfolio of digital assets – which includes Bitcoin, Ether, Optimism, Arbitrum, Polygon, Link, Lido, Solana and Uniswap, among others – also outperforms Bitcoin alone for the first time since its inception in July 2023. added Chhugani and Sapra. Bernstein’s crypto portfolio is up 94% compared to Bitcoin’s 77% gain over the same period.
“We think this is a pretty important signal to understand that the crypto bull market is broadening,” they wrote.
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