Ether (ETH) has been outperforming bitcoin (BTC) this year, with a 33% gain year-to-date. This surge in price is not solely driven by the potential approval of a spot exchange-traded fund (ETF), according to a research report from broker Bernstein.
One of the key factors contributing to Ether’s rally is its deflationary supply. Since the Ethereum blockchain transitioned to a proof-of-stake consensus model in September 2022, the supply of Ether has remained constant. This aspect of the cryptocurrency is often overlooked but plays a significant role in its value.
Another important factor is the amount of Ether that is locked up. Currently, only 11% of ETH is held on exchanges, indicating that more of the cryptocurrency is being staked or utilized in decentralized finance (DeFi) smart contracts and on layer-2 solutions. This trend is driven by the growth in Ethereum transaction fees due to increased blockchain activity, such as DeFi, NFTs, and tokens.
The introduction of layer 2 networks has brought scalability and lower fees to the Ethereum ecosystem in 2023, revitalizing decentralized finance. Additionally, regulatory clarity surrounding tokens could pave the way for revenue sharing with token stakers, further incentivizing participation in the DeFi ecosystem.
The upcoming Dencon upgrade of the Ethereum blockchain, scheduled for March this year, is expected to bring significant improvements to layer 2 networks and reduce transaction costs. This upgrade will alleviate congestion on the mainnet and boost volumes in the ecosystem.
Overall, the combination of a deflationary supply, increased staking activity, growth in DeFi, improvements in layer 2 scalability, and upcoming protocol upgrades position Ether for continued growth and value accrual. As such, Bernstein views Ether as a potential “institutional darling” in the cryptocurrency space.
The resurgence of decentralized finance and the innovations within the Ethereum ecosystem are setting the stage for Ether’s continued success in the coming months. If these trends continue, Ether could solidify its position as a preferred asset for institutional investors seeking exposure to the cryptocurrency market.
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