Ether Falters in Bitcoin's Shadow Despite Ethereum Upgrade

Ethereum (ether), the second largest cryptocurrency, has underperformed compared to Bitcoin in the first quarter of 2022, despite a recent Ethereum blockchain upgrade and institutional interest in crypto-based ETFs. Ether's legal status and its role in staking could hinder the approval of spot ether ETFs in the US, which would limit its growth potential. However, the underlying Ethereum technology continues to find utility in various Web3 applications, tokenization, and decentralized finance.

Ether Struggles to Match Soaring Bitcoin, Despite Ethereum Upgrade

In the ever-evolving cryptocurrency market, Ethereum's native cryptocurrency, Ether, has been struggling to keep pace with its dominant sibling, Bitcoin. While Ether's market capitalization of approximately $2.7 trillion is significant, it accounts for less than a fifth of the broader crypto market.

During the first three months of 2023, Ether's value increased by approximately 53%, significantly lagging behind Bitcoin's 65% surge. In contrast to Bitcoin's recent ascent to record highs, Ether currently trades around $3,612, at least 26% below its all-time high of $4,867.60 established in November 2021.

A recent technical upgrade to the Ethereum blockchain, dubbed the "Dencun upgrade," aimed at reducing transaction fees, failed to generate substantial excitement beyond the circle of crypto enthusiasts. This lack of enthusiasm stands in stark contrast to the anticipation surrounding Bitcoin's upcoming "halving," a technical adjustment scheduled for next month that is designed to slow the issuance of new coins.

Upon the implementation of the Dencun upgrade on March 13, Ether experienced a 12% dip, as markets reacted negatively to the event. This decline highlights a persistent challenge for Ether: its lack of widespread recognition among non-cryptocurrency investors.

"Ethereum continues to face challenges in gaining widespread recognition among non-endemic investors," observed Joseph Edwards, head of research at London-based crypto firm Enigma Securities. "The economic activity on Ethereum has grown significantly since 2020, but it is likely to take some time before it reaches all-time highs."

The approval of spot Ether exchange-traded funds (ETFs) by the U.S. Securities and Exchange Commission (SEC) is widely seen as a potential catalyst for Ether's growth. The approval and launch of similar spot Bitcoin ETFs in the U.S. spurred institutional demand and drove Bitcoin to record highs.

Ether ETF filings are currently pending with the SEC, with VanEck's filing scheduled for a decision on May 23. Standard Chartered Bank has projected that the potential approval of U.S. Ether ETFs could propel its value to $8,000 by the end of 2024 and $14,000 by the end of 2025.

However, not all experts are optimistic about the prospect of the SEC approving Ether ETFs. Some lawyers and industry insiders have raised concerns about Ether's legal status, arguing that its ambiguous nature may lead regulators to proceed cautiously.

Unlike Bitcoin, which is considered a commodity by the SEC, Ether is traded on a proof-of-stake blockchain, which allows users to earn yield by locking up their tokens for a certain period. This unique feature has led to speculation that Ether could be classified as a security, triggering stricter disclosure requirements that run counter to the decentralized ethos of cryptocurrencies.

"Convincing the SEC to approve staked Ether ETFs would be an extremely challenging negotiation and is highly unlikely at this time," said Anders Helset, head of research at digital assets analytics firm K33.

Institutional demand for Ether has remained a fraction of that for Bitcoin. In the month leading up to March 23, digital asset funds tracking Ether experienced outflows of $46.4 million, while similar products tracking Bitcoin saw inflows exceeding $4 billion, according to CoinShares data.

Some market participants prefer to focus on Ethereum's underlying technology rather than its token's value. Ethereum is the backbone of much of the internet's "Web3" vision, supporting applications related to decentralized finance, blockchain gaming, and other crypto-native developments.

BlackRock's recent launch of its first tokenized fund on the Ethereum blockchain has sparked conversations about the platform's potential in the broader tokenization of real-world assets. According to 21Shares, a Swiss cryptocurrency manager, over $2 billion worth of traditional assets, including commodities and government securities, have been tokenized on various networks, with over 80% of these assets residing on the Ethereum blockchain.

While Ether's performance has lagged behind Bitcoin in recent months, the Ethereum platform's technological advancements and potential applications in Web3 and real-world asset tokenization could provide long-term advantages. As the regulatory landscape evolves and the crypto market matures, the trajectory of Ether and its underlying blockchain remains uncertain but potentially promising.