- Ether produced strong returns in 2023 but underperformed Bitcoin as well as certain other smart contract blockchain tokens. We think this reflects Bitcoin-specific positives this year and a slower recovery in Ethereum’s on-chain activity.
- Although up less than Bitcoin, Ether outperformed traditional asset classes on an absolute and risk-adjusted basis this year. Developments in Ethereum’s growing L2 ecosystem may attract new users and support the token’s valuation in 2024.
It’s rare that you can say an asset up 82% has “underperformed”, but this is the case for Ethereum’s Ether (ETH) token in 2023. The second largest crypto asset produced strong returns this year (with relatively low price volatility) but still appreciated significantly less than Bitcoin (BTC), which is on track for a gain of 162% this year. The ETH/BTC price ratio declined throughout the year, reaching its lowest level since mid-2021 (Exhibit 1). Grayscale Research sees a handful of reasons for ETH’s underperformance in 2023.
Exhibit 1: ETH/BTC price ratio trended lower in 2023
First, the year included several Bitcoin-specific positives, including progress on a potential spot Bitcoin ETF and instability among US regional banks, which highlighted Bitcoin’s role as an alternative digital money system. These developments seemed to drive inflows into Bitcoin-focused crypto investment products throughout the year, which may have contributed to its larger price returns. For example, Grayscale Research estimates that net inflows into Bitcoin-focused crypto exchange trade products (ETPs)—including futures-based products in the US and spot products overseas—totalled roughly $2 billion in 2023. In contrast, net inflows into Ether-focused ETPs totalled just $24 million over the same period (Exhibit 2).
Exhibit 2: Bitcoin-specific positives seemed to drive larger ETP inflows
Second, most smart contract platform tokens were up less than Bitcoin this year, and ETH largely traded in line with this peer group. As shown in Exhibit 3, the FTSE Grayscale Smart Contract Platforms Crypto Sector Index is up about 94% in 2023, only moderately more than ETH. Ether had outperformed its peers in the year to October, but other tokens have caught up more recently (notable outperformers include AVAX and SOL). For the year as a whole, ETH is near the middle of the pack among the 40 tokens in the Smart Contract Platforms Crypto Sector.
Exhibit 3: Ether performance in line with Smart Contract Platforms Crypto Sector
Third, there has been a slower recovery in the Ethereum mainnet’s on-chain activity (in certain categories) compared to other chains. For example, Solana NFT volume has increased faster since the start of the quarter (~15x) compared to NFT volume on Ethereum (~2x). Trading in digital collectibles on Bitcoin has also surged thanks to the rise of ordinals (Exhibit 4); in late December, Bitcoin daily fees even exceeded Ethereum fees thanks to heavy ordinals trading. Although Grayscale Research remains constructive about Ethereum’s NFT ecosystem, Solana and Bitcoin have recently captured market share in this segment of on-chain activity.
Exhibit 4: Rising NFT activity on Bitcoin and Solana
From a broader perspective, although Ether lagged Bitcoin and certain other crypto assets this year, it significantly outpaced traditional asset classes on both an absolute and volatility-adjusted basis (Exhibit 5). Therefore, while its price was up “only” 82% this year, the rebound should be considered evidence of broadening crypto recovery, in our view.
Exhibit 5: Ether’s risk-adjusted returns better than traditional asset classes
Although other blockchains were in the spotlight in 2023, Ethereum’s future looks bright. Most importantly, the chain has historically benefitted from the industry’s deepest network effects, boasting the most decentralized applications (DApps), the largest number of developers, and the highest revenue. Ethereum is pursuing a “modular” development approach, in which an ecosystem of Layer 2 blockchains will build upon the Layer 1 chain to allow activity to scale. This effort is still a work in progress, but next year should take a step forward with EIP-4844, which would make it 10-100x cheaper for Layer 2 scaling solutions to confirm transactions onto Ethereum. This would help reduce costs for Ethereum Layer 2 users.
If Ethereum can attract new users to its growing L2 ecosystem it could potentially be back to center stage in 2024. Among the five Grayscale Crypto Sectors, the Smart Contract Platforms market segment may see some of the stiffest competition.
Low cost “monolithic” blockchains like Solana can offer a compelling experience to new users, especially if paired with well-designed wallets and other ecosystem applications. In contrast, Ethereum’s modular landscape can be more cumbersome to navigate, because users need to actively bridge assets between the mainnet and its L2s. However, development of these networks is still at an early stage, and it remains to be seen which blockchain design choices will find the best product/market fit and accrue the most value to their native tokens over time. Once end users are interacting primarily with applications—with the blockchain infrastructure running in the background—the challenges with Ethereum’s current user experience should become less relevant, while Ethereum’s other features, like its credible decentralization, may attract developers and ultimately support token valuation. For investors unsure about how competition among smart contract platforms will play out, taking diversified exposure to this crypto sector may be worth exploring.
 Ether’s weekly price volatility was approximately 45% in 2023, about half its historical average, based on data through December 18, 2023. Source: Bloomberg, Grayscale Investments.
 For both ETH and BTC, source for prices is Bloomberg as of December 20, 2023.
 The ETH/BTC price ratio was 0.0502 as of December 20, 2023.
 As of December 20, 2023.
 As of December 20, 2023. ETH represents about 20% of the index weight, as of December 2023.
 Based on index constituents before December 19, 2023 quarterly rebalance.
 Based on 7d moving average volumes to December 15, 2023. Source: Allium.
 Source: Coin Metrics.
 For example, as of December 2023, Ethereum’s share of daily NFT trading volumes was approximately 40%, down from around 90% prior to Q4 2023. Source: Allium, Grayscale Investments.
 Source: DApp Radar, Electric Capital Developer Report, Token Terminal. As of December 2023.
 “EIP” is an Ethereum Improvement Proposal. EIP-4844 is a proposed upgrade for Ethereum aimed at significantly improving network efficiency and scalability by introducing a new transaction type for handling large amounts of data at lower costs.
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