Market Structure and Ethereum Network Issues

• Coinbase says that Ethereum’s underwhelming performance is tied to the current broader market structure where investors’ liquidity is trapped in smaller altcoins.
• However, Ethereum’s fundamentals have also dipped, with TVL now at $44 billion, a six-month low, while network activity has also taken a nosedive.

When the Ethereum ETFs launched, ETH holders were confident that the token would hit a new all-time high this year, just like Bitcoin had after the launch of its ETFs. And while ETH rallied on the ETF launch, it has failed to maintain the momentum and is underperforming the market. According to Coinbase, Ether’s woes could be macro, with the exchange blaming the current crypto market structure for the altcoin’s underperformance.

In its report, the American exchange revealed that Ethereum had dipped 1.6 standard deviations below its three-month average. The report, published by David Duong, the exchange’s Global Head of Research, stated:

Our view is that crypto natives are also driving the market at the moment, and this cohort may be crowded into altcoins and other crypto positions that are getting more difficult to exit. This could be leaving wealth mostly stranded, instead of flowing to other parts of the crypto ecosystem.

Coinbase added that Ether needs a catalyst to reignite enthusiasm from both the developers and the investors.

Zooming out from Ethereum, the entire crypto sector has had a sluggish few months, and zooming out even further, the entire securities and assets sectors have recorded a downturn over the past few weeks. Coinbase believes this could be due to a slowdown in investment inflows as most mutual funds ended their fiscal years in September. The upcoming election, which pits crypto crusader Donald Trump against ‘hot-and-cold-with-crypto’ Kamala Harris, hasn’t helped things.

Coinbase: Ethereum Needs an Urgent Boost

According to the Coinbase report, Ethereum’s underperformance is curious, especially since it follows the much-anticipated ETH spot ETFs which launched in July.

Some say that the decline is tied to “the decline in both Ethereum’s total transaction fees and transaction count, particularly following the Dencun upgrade in mid-March.” The upgrade sparked unprecedented transactions on Ethereum Layer 2 networks to the detriment of the mainnet. However, Coinbase argues that this is misleading, especially since it’s been five months since the upgrade.

The Exchange believes that a more reasonable explanation is that the contagion that started with the Japanese yen in early August triggered mass deleveraging in most asset classes, and among the asset classes that investors were forced to sell, Ether may have been among the most vulnerable.

However, Ethereum is not without its internal challenges. For instance, the total value locked has dipped from $67 billion in June to just over $44 billion today, the lowest it has been since February.

The report concluded:

Ultimately, we think a narrative change is needed for ETH to overcome these hurdles in the short term. That could involve more experimentation on the mainnet to compete with alternative L1s or the onboarding of more real-world assets onto the platform.

ETH trades at $2,404, gaining 3% in the past day and 6.6% in the past week.

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