Since the launch of spot Ethereum ETFs on July 23, 2024, Ethereum has underperformed Since the launch of spot Ethereum ETFs on July 23, 2024, Ethereum has underperformed compared to Bitcoin. Prior to the launch, Bitcoin had gained 60% year-to-date (YTD), while Ethereum returned 53%. Since then, Bitcoin has rallied an additional 6%, bringing its YTD gain to 70%, while Ethereum has fallen 24%, reducing its YTD gain to just 17%. This divergence has led investors to reconsider Ethereum’s role in their cryptocurrency portfolios.
Several factors have contributed to Ethereum’s underperformance. One driver was the substantial redemptions from an older Ethereum investment fund after its conversion to an ETF. Originally launched as a trust in 2017, this fund had restricted share redemptions. Following its conversion to an ETF in July this year, pent-up selling resulted in about $3 billion in outflows. Additionally, inflows into other Ethereum ETFs have been muted. Investors prefer holding Ethereum tokens directly, given that U.S. SEC permits ETFs to only hold unstaked Ethereum. Staking enables holders to earn returns (currently ~3.2% annualized) by locking their Ether to help secure the network, making it more attractive than ETF holdings. Furthermore, a recent Ethereum upgrade earlier this year reduced transaction costs, benefiting users but also decreasing network revenue. Lower fees have reduced the demand for Ether used in transactions, applying downward pressure on its price.
Nonetheless, we believe Ethereum still warrants exposure in cryptocurrency portfolios for the following reasons. The upcoming “Verge” upgrade is expected to enhance blockchain security by enabling nodes to operate on devices as small as smartphones. This “stateless verification” process significantly lowers data demand requirements and facilitates solo staking, reducing reliance on large, centralized staking pools. Moreover, Ethereum boasts the most developed ecosystem of any blockchain, hosting thousands of decentralized applications that serve millions of users and process billions in daily transactions. This network effect is difficult to replicate. Finally, Layer 2 (L2) scaling solutions, a recent development, further enhance Ethereum’s efficiency by processing transactions off the main network, making it faster and cheaper to use. As adoption of these solutions grows, Ethereum’s utility and long-term value will strengthen.
In conclusion, despite its recent underperformance, Ethereum’s leading position in the decentralized application space and ongoing technical advancements present a compelling long-term investment case. For investors with cryptocurrency allocations, holding Ethereum alongside Bitcoin offers diversified exposure to both utility-driven and store-of-value assets as the cryptocurrency space grows.
DISCLOSURES
Cryptocurrency is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but it does not have legal tender status. Cryptocurrencies are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not generally backed or supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies. Cryptocurrencies are not covered by either FDIC or SIPC insurance. Legislative and regulatory changes or actions at the state, federal, or international level may adversely affect the use, transfer, exchange, and value of cryptocurrency.
Purchasing cryptocurrencies comes with a number of risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks. In addition, cryptocurrency markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.
Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
Neither Asset Allocation nor Diversification guarantee a profit or protect against a loss in a declining market. They are methods used to help manage investment risk.
The information provided is for educational purposes only. The views expressed here are those of the author and may not represent the views of Leo Wealth. Neither Leo Wealth nor the author makes any warranty or representation as to this information’s accuracy, completeness, or reliability. Please be advised that this content may contain errors, is subject to revision at all times, and should not be relied upon for any purpose. Under no circumstances shall Leo Wealth be liable to you or anyone else for damage stemming from the use or misuse of this information. Neither Leo Wealth nor the author offers legal or tax advice. Please consult the appropriate professional regarding your individual circumstance. Past performance is no guarantee of future results.
This material represents an assessment of the market and economic environment at a specific point in time. It is not intended to be a forecast of future events or a guarantee of future results.
