Crypto markets have been underperforming over the past few weeks as a lack of price momentum weighs on investor confidence. Price action has been volatile since the deleveraging event in early August, largely driven by technicals (supply and demand). Crypto markets have lagged behind U.S. equities on a risk-adjusted basis, especially as U.S. equities have largely recovered their losses since then. Institutional investors remain focused on Bitcoin, with Bitcoin’s market cap dominance reaching its highest level since April 2021 (57%).
Among major cryptocurrencies (by market cap), Ethereum (ETH) has significantly underperformed its peers, recently trading 1.6 standard deviations below its three-month average. This performance has been attributed to either reduced Ethereum activity (pushing revenues lower) or ETH’s unfavorable token inflation dynamics, which I believe is only partly to blame.
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More likely, the lack of a particular narrative in this space and the limited supply of capital has increased scrutiny of Ethereum compared to other smart contract platforms. My view is that crypto natives are also currently driving the market, and this group of people may flock to Altcoin and other cryptocurrencies that are increasingly difficult to exit. This may cause most of the wealth to be stranded instead of flowing to other parts of the crypto ecosystem. Regardless, in order for ETH to catch up, I think Ethereum needs a new catalyst to help reignite developer and investor enthusiasm.
September’s seasonal bearishness is typically associated with the end of the fiscal year for many mutual funds, which could be a trigger for this market group to cut risk to achieve tax-loss harvesting. However, I believe that this year’s poor market behavior (observed in both traditional risk assets and cryptocurrencies) has also been exacerbated by uncertainty about how the election outcome will affect the overall economy. This may have kept many investors on the sidelines, especially with the macroeconomic environment already quite ambiguous.
Indeed, open interest in the crypto space is quite light, as evidenced by stagnant open interest levels for perpetual futures — in the first 10 days of September, BTC open interest averaged around $14.8 billion and ETH averaged around $7.2 billion. This has been largely unchanged since mid-August, but remains higher than any month between 2022-2023. Meanwhile, funding rates are stuck in the (positive) low single-digit territory.
In my view, the interest rate decision that the Federal Reserve will announce on September 17-18 is more of an obstacle to capital deployment than a directional driver.
However, while the deflationary trend now appears more firmly established, the Fed is focused on U.S. labor data, which is being closely watched for signs of a potential recession. Fears of a slowing economy may help explain why cryptocurrencies have failed to gain strength despite the significant weakness of the multi-dollar index (DXY) in July and August, as well as concerns about Bitcoin-specific oversupply. As such, I believe that cryptocurrencies appear to still trade primarily in a technically driven market, dominated by supply and demand factors rather than fundamentals. However, it is worth noting that the shape of the U.S. 2-year 10-year yield curve, which is often used as a leading indicator of recessions, recently ended one of the longest inversions on record.
Examining ETH’s underperformance
Among cryptocurrencies with higher market capitalization, ETH has been underperforming the likes of BTC and SOL, even after the launch of the Ethereum spot ETF in the United States at the end of July.
Why this is happening has been hotly speculated among institutional investors.
The common view is that this performance is the result of a decline in total Ethereum transaction fees and transaction counts, especially after the Ethereum Cancun upgrade in mid-March.
The introduction of blobs has led to unprecedented levels of transaction activity on Ethereum’s Layer 2 scaling solutions (L2s) — which has not only impacted the value of ETH, but has also actively driven a reversal of ETH’s deflationary supply conditions.
Overall, it is difficult to say whether ETH price is forming a bottom.
The total locked value on Ethereum has fallen from $67 billion in June to $44 billion, returning to the level of mid-February this year.
I think the coin still needs a catalyst to help reverse its current market structure, but both traditional and crypto markets in general are pretty quiet right now.
If this goal is achieved, demand for spot ETH ETFs may play a supporting role. It is worth mentioning that we need to analyze these factors comprehensively and objectively and take corresponding measures to deal with the current predicament.
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