Market Byte: Ether “Underperforms” with 80% Gain in 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.
Exhibit 1: ETH/BTC price ratio trended lower in 2023
Exhibit 3: Ether performance in line with Smart Contract Platforms Crypto Sector
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
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.
[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.
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