Market Byte: Ether “Underperforms” with 80% Gain in 2023

Zach B&W
Zach Pandl
Last Update 12/21/2023
  • 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[1]) but still appreciated significantly less than Bitcoin (BTC), which is on track for a gain of 162% this year.[2] The ETH/BTC price ratio declined throughout the year, reaching its lowest level since mid-2021 (Exhibit 1).[3] 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).[4]

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.[5] 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.[6]

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).[7] 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.[8] 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.[9]

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.[10] 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[11], which would make it 10-100x cheaper[12] 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.


[1] 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.

[2] For both ETH and BTC, source for prices is Bloomberg as of December 20, 2023.

[3] The ETH/BTC price ratio was 0.0502 as of December 20, 2023.

[4] As of December 20, 2023.

[5] As of December 20, 2023. ETH represents about 20% of the index weight, as of December 2023.

[6] Based on index constituents before December 19, 2023 quarterly rebalance.

[7] Based on 7d moving average volumes to December 15, 2023. Source: Allium.

[8] Source: Coin Metrics.

[9] 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.

[10] Source: DApp Radar, Electric Capital Developer Report, Token Terminal. As of December 2023.

[11] “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.

[12] Source: Coinbase, as of December 2023.

Important Information

Investments in digital assets are speculative investments that involve high degrees of risk, including a partial or total loss of invested funds. Investments in digital assets are not suitable for any investor that cannot afford loss of the entire investment.

All content is original and has been researched and produced by Grayscale Investments, LLC (“Grayscale”) unless otherwise stated herein. No part of this content may be reproduced in any form, or referred to in any other publication, without the express consent of Grayscale.

This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any investment in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change. This content does not constitute an offer to sell or the solicitation of an offer to sell or buy any security in any jurisdiction where such an offer or solicitation would be illegal. There is not enough information contained in this content to make an investment decision and any information contained herein should not be used as a basis for this purpose.

The S&P 500 Index is a market-capitalization-weighted index that measures the performance of 500 of the largest publicly traded companies in the United States. The Bloomberg-Barclays 60/40 index is designed to measure cross-asset market performance globally. The index rebalances monthly to 60% equities and 40% fixed income. The Advanced Research Risk Parity Index tracks the performance of a multi-asset strategy that balances risk equivalently among four broad asset classes: global equities, commodities, U.S. Treasury Inflation-Protected Securities (TIPS) and U.S. Treasury Futures. The MSCI World ex USA Index captures large and mid cap representation across 22 of 23 Developed Market countries, excluding the United States. The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. With 2,946 constituents, the index covers approximately 85% of the global investable equity opportunity set.The MSCI Emerging Markets Index is designed to measure the financial performance of companies in fast-growing economies around the world and tracks mid-cap and large-cap stocks in 25 countries. The Bloomberg-Barclays Global Aggregate Index is a market-weighted index of global government, government-related agencies, corporate and securitized fixed-income investments. The S&P Goldman Sachs Commodity Index is a composite index of commodity sector returns representing an unleveraged, long-only investment in commodity futures that is broadly diversified across the spectrum of commodities. Indexes are unmanaged and it is impossible to invest in an index.

This content does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of investors.

Investors are not to construe this content as legal, tax or investment advice, and should consult their own advisors concerning an investment in digital assets. The price and value of assets referred to in this content and the income from them may fluctuate. Past performance is not indicative of the future performance of any assets referred to herein. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.

Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on Grayscale’s views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied in such statements. In addition to statements that are forward-looking by reason of context, the words “may, will, should, could, can, expects, plans, intends, anticipates, believes, estimates, predicts, potential, projected, or continue” and similar expressions identify forward-looking statements. Grayscale assumes no obligation to update any forward-looking statements contained herein and you should not place undue reliance on such statements, which speak only as of the date hereof. Although Grayscale has taken reasonable care to ensure that the information contained herein is accurate, no representation or warranty (including liability towards third parties), expressed or implied, is made by Grayscale as to its accuracy, reliability, or completeness. You should not make any investment decisions based on these estimates and forward-looking statements.

There is no guarantee that the market conditions during the past period will be present in the future. Rather, it is most likely that the future market conditions will differ significantly from those of this past period, which could have a materially adverse impact on future returns. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. We selected the timeframe for our analysis because we believe it broadly constitutes the most complete historical dataset for the digital assets that we have chosen to analyze.

Related content