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ethereum (eth) now offers an attractive risk-reward ratio, according to analysts at research and brokerage firm Bernstein. Despite underperforming other major cryptocurrencies such as bitcoin (btc), Solana (SOL), and XRP for most of 2024, ethereum's strong fundamentals may set the stage for a potential rally.
Why is ethereum struggling? Bernstein analysts explain
ethereum, the second-largest cryptocurrency with a market capitalization exceeding $430 billion, may be on the verge of major positive price action. Bernstein Analysts Suggest eth Fundamentals stay strong despite his poor performancewhich makes it an attractive investment opportunity.
To put ethereum's performance in perspective, year-to-date (YTD), bitcoin and Solana are up 125% and 122%, respectively, while eth has only managed a 57% increase.
In a client note shared today, analysts led by Gautam Chhugani highlighted several factors contributing to ethereum's difficulties. One problem is that eth has not established itself as a store of value to the same extent as btc. Additionally, the leading smart contract platform faces increasing competition from low-latency Layer 1 blockchains such as Solana, Sui, and Aptos.
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The note also noted that ethereum's reliance on Layer 2 blockchains, including Optimism, Arbitrum, and Base, often diverts users away from the main ethereum chain. This makes it difficult to retain users and limits the growth of transaction fees, creating a hurdle for eth price momentum.
Is now the right time to buy eth?
Bernstein analysts maintain that ethereum's prospects could improve substantially, particularly in light of Republican presidential candidate Donald Trump's recent election victory. Following Trump's victory, the total cryptocurrency market capitalization has increased by more than 45%, surpassing $3.5 trillion. ethereum has been one of the biggest beneficiaries of this rally, gaining 46% since the election compared to 41% for bitcoin and 36% for Solana.
Analysts also noted key developments that could support ethereum's growth in the future. They highlighted the increasing likelihood of getting performance approval on ethereum exchange-traded funds (ETFs) under a Trump-led, crypto-friendly Securities and Exchange Commission (SEC). The analysts explained:
We believe that under a new Trump 2.0 crypto-friendly SEC, eth staking performance is likely to be approved.
The analysts added that ethereum's current yield rate of 3% could rise to between 4% and 5%, which could be a attractive rate of return for investors in a falling interest rate environment. Additionally, the growth recently seen in ethereum ETFs in the form of higher inflows could benefit eth.
Although eth ETFs had a warm launch, they have recently surpassed bitcoin ETFs in daily inflows. For example, on November 29, eth spot ETF in the US. <a target="_blank" href="https://sosovalue.com/assets/etf/us-btc-spot” target=”_blank” rel=”nofollow”>attracted $332.9 million in inflows, compared to $320 million for bitcoin ETFs.
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Furthermore, ethereum transition to a proof-of-stake (PoS) consensus algorithm in September 2023 and the protocol's burning mechanism have stabilized the total eth supply at around 120 million. Of these, about 28% are tied to staking contracts, while about 10% are tied to lending protocols or Layer 2 bridges.
With a high proportion (close to 60%) of the total eth supply remaining unchanged over the past year, Bernstein analysts believe the digital asset could benefit from favorable supply and demand dynamics. At the time of this publication, eth is trading at $3,644, down 1.8% in the last 24 hours.
Featured image from Unsplash, chart from Tradingview.com
