Ethereum: A More Favorable Backdrop Is Emerging (Cryptocurrency:ETH-USD)

Oleksandr ShatyrovEther (ETH-USD) has performed relatively poorly during the current cycle. While there are valid questions around Ethereum\'s functionality and adoption in real-world use cases, I think that some of Ether\'s struggles are simply the result of tighter monetary policy. Declining inflation could lead to lower interest rates later in 2024 though, which may support Ether\'s price. Inflows into Ethereum ETFs could also provide a boost, although I believe that the fragmentation of demand across competing chains will remain a headwind in the near term.SupplyEthereum became modestly deflationary in 2022 with the switch to proof of stake. This move was widely expected to drive Ether\'s price higher, although I tend to think the importance of supply changes is generally overstated, particularly when viewed in isolation.Ethereum is now returning to an inflationary supply to help try and reduce transaction fees, with the Dencun upgrade in March 2024. Inflation is modest, though, and I don\'t believe this will be an important determinant of Ether\'s price going forward.Figure 1: Ethereum Supply Inflation (source: Created by author using data from Yahoo Finance and Etherscan)DemandThe number of Ethereum active addresses suggests that demand has increased along with price in recent months, although this has been fairly modest. Unlike 2020, price has led demand rather than the other way around, which I think is somewhat concerning.While DeFi and NTFs created hype in 2021, a similar growth driver hasn\'t really emerged in the current cycle. This is an area where scalability is hurting Ethereum. Low cost and fast transactions have been driving DeFi and NFT adoption on Solana. Solana has also seen a surge in meme coin activity.Figure 2: Ethereum Active Addresses (source: Created by author using data from Yahoo Finance and Etherscan)AIArtificial intelligence and autonomous agents could be an emerging tailwind for Ethereum. This is because generative AI

and agents threaten to create a world where:The majority of content is created by AIPublicly available information is used to train models without attribution or compensationInternet users are unable to determine whether content is real or fakeThe activity of many agents needs to be coordinatedCrypto can help to alleviate some of these issues by:Transparently proving ownershipProviding a source of identityProviding economic incentives which coordinate the activity of agents and help allocate resourcesIt is too early to say how large the impact of AI will be or how these types of issues

will be managed, though. For example, ownership, identity and activity coordination could also be provided by a centralized service.Ethereum ETFEthereum\'s recent ETF approval could be considered a tailwind based on Bitcoin\'s experience. The launch of Bitcoin ETFs has probably opened up demand somewhat, with ETF flows an important driver of price at the moment. ETF inflows have fallen off in recent weeks, but Bitcoin\'s price appears to have led this move.Figure 3: Bitcoin ETF Flows (source: Created by author using data from Yahoo Finance)Spot Ethereum ETFs are expected to begin trading in the coming days/weeks. While there are likely to be inflows that are supportive of Ether\'s price, outflows from Grayscale\'s Ethereum Trust could weigh on the price initially. A similar dynamic occurred with Bitcoin, where there was 6.5 billion USD of outflows from Grayscale in the first month. The fact that Ethereum ETFs will not offer staking rewards to investors may also limit their appeal.Relative PerformanceEthereum\'s performance has been relatively poor in recent months/years in comparison to some cryptocurrencies, like Bitcoin and Solana. While some of this can likely be attributed to sentiment and financial conditions, Ethereum is also facing competition from within its own ecosystem as well as competition with other blockchains. This is less about competition from any particular chain, as I don\'t think there is a real competitor to Ethereum at this point in time. Rather, Ethereum is competing against many chains, some of which have managed to craft compelling narratives at various points in time (Solana, Avalanche, Binance).With the approval of Ethereum ETFs, it has been suggested that other cryptocurrencies could follow, in particular Solana. Solana is still at risk of being classified a security though, and currently lacks a futures-based ETF in the US.Figure 4: SOL/ETH Ratio (source: Created by author using data from Yahoo Finance)Financial ConditionsI think that monetary policy could be part of the reason for Ethereum\'s relatively poor performance in the current cycle. Interest rates remain elevated, and the Federal Reserve continues to drain liquidity from the system. This has had a dramatic impact on some assets and equities, although many assets and equities remain unaffected. Ethereum\'s underperformance relative to Bitcoin appear