Bitwise: The reason for Ethereum's downturn is not life-threatening, you can bet on ETH in reverse

Original title: A Contrarian Bet on Ethereum

Author: Matt Hougan, Chief Investment Officer of Bitwise; Compiled by: 0xjs@Golden Finance

No one likes Ethereum at the moment.

ETH/BTC (the ratio of Ethereum price to Bitcoin price) recently fell to its lowest level in three years. So far this year, Ethereum prices are flat, while Bitcoin has risen 38% and Ethereum's main competitor Solana has risen 31%.

Community atmosphere is difficult.

There are many reasons why Ethereum is in a slump:

• Election Risk:Ethereum faces significant risks in the November election. While Bitcoin has largely passed regulatory scrutiny—even U.S. SEC Chairman Gary Gensler has acknowledged that it is not a security—Ethereum has not. The U.S. SEC seems to believe that pledged ETH is a security, and the agency has significant concerns about the broader decentralized financial ecosystem that drives most of Ethereum's value. Ethereum could face challenges if Harris wins and continues the Biden administration’s skeptical approach to cryptocurrencies.

• Increasing competition from Solana and other projects:Ethereum faces growing competition from new blockchains that offer higher throughput and lower costs. Solana is the prime example of this, but other established and upcoming projects are beginning to enter the space. It’s somewhat fashionable in crypto circles to favor Solana and other new chains over Ethereum, which has older technology and higher costs.

• Problematic token economics:Over the past few years, the Ethereum community has decided to focus on growing transaction volume on “Layer 2” networks surrounding Ethereum, rather than on the core (or “Layer 1”) Ethereum blockchain itself. This has been a huge success—transaction activity on Layer 2 networks like Base, Arbitrum, and Optimism is surging. But the rise of Layer 2 networks has shifted so much transaction volume away from Ethereum that its revenue has fallen to its lowest level in four years. Many are wondering if Ethereum has shot itself in the foot by scaling away from its base, Layer 1 blockchain.

• Mixed ETF Results:Ethereum ETFs haven’t been the overwhelming success that Bitcoin ETFs have been. While newly launched ETFs have raised billions of dollars, the $2.7 billion outflow from the Grayscale Ethereum Trust (ETHE) completely offset that growth.

These are all good reasons to be concerned. But I think they miss the broader point.

From a macro perspective, blockchains like Ethereum and Solana are trying to create a “public computer” — a global database that others can use to build applications. But when you look at which applications have had breakout success, they’re almost all dominated by Ethereum:

• Stablecoins:More than half of all stablecoins are issued on Ethereum.

• Decentralized Finance (DeFi):More than 60% of DeFi assets are locked up on Ethereum.

• Polymarket:Groundbreaking prediction market finally settled on Ethereum.

There are many other examples.

When BlackRock wanted to build a tokenized money market fund this year, it was built on Ethereum; the fund now has over $500 million in assets under management.

When Nike launched a Web3 gear platform called .Swoosh, it was launched on Ethereum.

When the next big traditional company wants to do a blockchain product, I bet they’ll choose Ethereum, too.

Ethereum has the most active developers, the most active users, and a market cap 5x that of its closest competitor. It’s the only programmable blockchain with some regulatory support in the U.S., with a thriving regulated futures market and a multi-billion dollar ETF market.

It’s like the Microsoft of blockchain. Everyone wants to talk about Google, Slack, and Zoom, and for good reason: They each brought game-changing technology to the market. But Microsoft is still bigger than them all combined.

This doesn’t mean I’m bearish on Solana or other chains. They are making a big impact and there’s a lot to be excited about. But I think people are too quick to discount Ethereum and the real-world success we’ve seen in its ecosystem.

None of Ethereum’s challenges seem life-or-death to me, while its opportunities abound. I suspect the market may re-evaluate Ethereum as we get closer to the November election and any regulatory clarity that emerges. For now, it looks like a potentially contrarian investment until the end of the year.