The Pain Trade - Why Owning Ether Is Bad For Your Mental Health
Pain is an important aspect of trading or investing your money. There is, of course, the obvious pain of taking a financial loss. Then, there is the equally painful feeling (or perhaps even more painful feeling) of missing out on massive gains, especially while left-curve chads are making money hand over fist on things like meme coins. Many have haunting memories of the one that got away, the one you sold too early (that could have put you on a beach somewhere) or the one that you lost through forgetting a password or throwing your hard drive into a landfill.
Of all the pain that crypto investors experience, there is a very special type of pain that is known to those sadomasochists that choose to currently HODL Ether, the native token on the Ethereum blockchain. Holding Ether has always been a wild ride. One of the original “altcoins”, or “shitcoins”, as Bitcoin Maxis have often derisively referred to them, Ether has actually done quite a lot to expand the possibilities of what one can do with a crypto asset. Ether’s turning-complete smart contract design, its ICO debut and its introduction of decentralized finance (DeFi) have all contributed to the world of crypto, and for that we must be grateful.
Figure 1. Ether has significantly underperformed many of its peers this year.
Despite its pedigree, Ether has performed rather terribly over the past few years. While Bitcoin is up an impressive 36% this year, Ether is up a paltry 3%, as of this writing. The current Ether pain trade may be familiar to long-time Ether investors, who have experienced long and drawn-out periods of underperformance, that are broken up by (often brief) periods of outperformance. To chart this, we can turn our attention to the long term chart of the ETH/BTC ratio.
Figure 2. Bitcoin has been quiet all week, except for the temporary pop we saw following Jerome Powel’s Jackson Hole speech..
You can see on Figure 1 that ETH/BTC has been in a roughly 2-year downtrend, ever since it attempted to challenge 0.085 in August of 2022. You can see that the ratio has had other drawn-out downtrends, such as the one in 2016 and the one from 2018- 2021 (although ETH/BTC has yet to make a new high since then). These periods have been associated with crypto winters in which attention from non-crypto investors shrivels up and crypto-believers sit around, share depressing memes and complain about the lack of excitement and volatility.
The fact that we have bled down to test 0.04, could be significant. 0.04 was the upper band of the multi-year downtrend/range that we saw in 2019-2021. Once it broke above that level, not only did Ether rally, but it also signalled the beginning of an eye-watering altcoin rally. So even though it has been like watching paint slowly drip down a wall towards the floor, investors should watch for any reaction at 0.04 over the coming weeks.
Is there a fundamental reason why Ether is suffering so dreadfully in recent years? One would think that the launch of multiple spot Ether ETFs in the US would help turn things around.
There are a few fundamental reasons for Ether’s underperformance:
1. Ether ETF Outflows
Figure 3. Daily inflow/outflow figures for all the spot Ether ETF (until the end of August) show a wave of outflows and no recent inflows. h/t Luke Martin
One key reason Ether has been having a rough time lately is that the Ether spot ETFs have not seen anywhere near the same success as the Bitcoin ETFs in terms of flows and volumes. Net flows since launch are around negative $500M.
2. L2 success extracting value from Ether
After the Dencun upgrade, which included EIP-4844, it had become much cheaper for layer-2s to use Ethereum as a data availability layer. This reduced the fees Ethereum earns from the L2s, lowering staking yields.
Figure 4. Revenues for those staking Ether have fallen since the upgrade.
3. Middle-child syndrome
Ether currently sits in an odd position. Every investor worth their salt is at least vaguely familiar with Bitcoin, but Ether is not nearly as well-known. At the same time, Ethereum’s current market capitalization is so big that it takes a significant amount of capital to really move the needle to “pump” the price. So capital either seeks the familiarity and relative safety of Bitcoin, or goes dumpster diving in the hopes of finding the next 1000X L1 or memecoin. This phenomenon has led to the “dumbbell” returns that many crypto investors have noticed this year, in which Bitcoin and microcap altcoins/memecoins have done well.
4. US politics and the upcoming election
Figure 5. Trump’s lackluster debate performance this week may have helped Kamala reclaim the lead in a tight election.
After this week’s bizarre US Presidential debate, which saw Trump repeatedly emphasize the risk of Haitain illegal immigrants eating dogs and cats, there is a sense that Trump is now trailing behind Kamala Harris. Trump lagging is bad for crypto/defi because it increases the chances of a continuation of the anti-crypto policies that we saw under Biden. While a Harris win would not exactly be great for Bitcoin, the popularity of Bitcoin and its position as an alternative investment to hedge against currency debasement, could mean that a Harris win could still be positive for the Bitcoin thesis (in the form of deficit spending and US dollar devaluation).
5. Transaction count still down since peaking in the last bull market
Despite the rally in risk assets in general, and with Bitcoin flirting with new highs, the transaction count on Ethereum hasn’t seen much of a recovery since the bear market.
Figure 6. Daily Ethereum transactions have been in a downtrend for most of the year.
6 - Solana has stolen some of Ethereum’s thunder
Figure 7. Solana has outperformed Ether significantly, as can be seen on this SOL/ETH ratio.
One of the often-cited reasons for Ether’s disappointing year has been the rise of Solana as the go-to chain for memecoins, DEX activity and general crypto experimentation. The fundamental driver of this is the higher through-put and lower fees that Solana offers its users. Ether maxis would point out that Solana achieves this feat at the cost of decentralization. If every Ether founder disappeared today, the network would operate smoothly - it is one of the most decentralized platforms in crypto. The same probably cannot be said for the Solana network, which has a reputation of going down occasionally (requiring coordination to restart). On the flip side, Ethereum’s decentralized design choices may be the reason that Blackrock has chosen to host their $160 million on-chain money market fund on Vitalik’s creation, instead of Anatoly’s.
7. Vitalik has a girlfriend
Image 1. This often shared image has become a meme which hints that Vitalik is too distracted to work on Ethereum.
Finally, we come to the most important reason that Ether is underperforming this year, the very selfish decision by Ether’s founder, Vitalik Buterin, to acquire a girlfriend. This often-cited crime against crypto has kept many Ether maxis up at night wondering whether the father of smart-contracts is too distracted to come up with novel ways to pump our bags.
While this last point is obviously a joke, there have been some rumblings from crypto twitter that Vitalik’s philosophizing, and specifically his comments around the value of DeFi (decentralized finance such as decentralized exchanges), are harming the ecosystem. His comments have drawn criticism from DeFi enthusiasts, which has been compounded by the fact that the Ethereum Foundation recently sent over $95 million worth of Ether to a Kraken deposit address, presumably to liquidate the position in order to finance operations and grants.
Figure 8. As Ether approaches 10 years of being operational, it has been a wild ride for Ether holders.
Overall, it has been a rough year for Ether holders, but long, drawn-out and depressing downtrends are nothing new for those of us who have been around since the Ether ICO. The first cycle saw Ether debut at around $1, after the network launched in the summer of 2015, rallying to around $20 a year later, only to slowly bleed down to around $7 for the next 18 months. Then, in January of 2017, the clouds parted, and Ether rallied from a low of around $6 to a high of $400 in the summer of 2017 and an eye-watering $1,600 in January of 2018. Then, predictably, another winter took hold, and the price fell from $1,600 to a March 2020 COVID crash low of approximately $90. The $90 dollar double bottom proved to be a good buying opportunity when Ether rallied all the way to it's all-time high of $4,400 in November 2021, only to crash, during the 2022 crypto credit event to around $920.
Ether has caused prolonged periods of pain for investors since its birth in 2015. It will be interesting to see what special kind of pain Ether has in store for investors in the next 18 months. Investors would be wise to watch how the ETH/BTC ratio reacts around 0.04; it has been an important level in years past.
Latest Crypto Developments
Ethereum Stablecoin Volume Hits Record: Ethereum’s stablecoin volumes in August reached $1.46 trillion, a new all-time high. The record high underscores the growing adoption of stablecoins.
PayPal and Venmo Integrate Ethereum Name Service: PayPal and Venmo have integrated Ethereum Name Service (ENS), allowing users to send and receive crypto payments using human-readable addresses instead of complex wallet addresses.
SWIFT to Test Solutions Interlinking Fiat with Tokenized Assets: SWIFT plans to test solutions for connecting fiat currencies with tokenized assets, highlighting efforts to bridge traditional finance and digital assets. It is unclear whether they intend to connect to crypto protocols like Ethereum. SWIFT has previously conducted proof of concepts using the Ethereum testnet and other protocols like Avalanch.
DeFi Hearing: Lawmakers Clash: A U.S. Congressional hearing on DeFi showcased clashing views between lawmakers, with some seeing DeFi as a threat to financial stability and others advocating for innovation-friendly regulations.
Blockchain Association Investigates Federal Reserve Order: The Blockchain Association is investigating a Federal Reserve order that allegedly limits crypto firms' access to banking services, raising concerns about fairness and regulatory transparency.
That's Some Good Content!
Recommended articles, podcasts, and other content from this week:
On the Margin podcast - Breaking Down the Disconnect Between TradFi & Crypto | Austin Campbell
Forward Guidance podcast - Bitcoin's Path To $3 Million Dollars | Matthew Sigel
Unchained podcast - ETH Is Down Bad, While Layer 2s Are Ripping. Are L2s Parasitic to Ethereum?
The Breakdown podcast - What Happened in the First Ever Congressional DeFi Hearing
Meme Of The Week