If Major Established Financial Entities Contemplate Offloading This Well-liked Cryptocurrency, Is It Worth Following Suit for You?
The past seven months have been challenging for investors in Ethereum (ETH 0.63%). The world's second-most popular cryptocurrency is still facing a loss of over 15% from its peak of $4,000 in mid-March, despite the recent post-election crypto rally. It was only recently that Ethereum was able to surpass the $3,000 mark, after a string of months of struggle.
What was initially perceived as a minor setback has now turned into a more serious issue. Consequently, it's not surprising that large institutional investors have begun selling off their Ethereum holdings as we approach 2025. Are they overreacting to a few months of poor performance, or do they have insider information that we're not privy to?
New Ethereum ETFs perform under expectations
The main source of concern is the underperformance of recent Ethereum ETFs, which hit the market in late July. These ETFs were expected to give Ethereum an extraordinary boost, similar to how the launch of Bitcoin ETFs propelled Bitcoin to a new record high in March.
However, this has not happened. On July 23, the day of the ETFs' official launch, Ethereum was trading at around $3,500. Today, it's trading at roughly $3,340, representing a slight loss. As a result, investment inflows into the new Ethereum ETFs have slowed significantly. This includes hedge fund managers who planned to use the ETFs to gain exposure to Ethereum. While it was never anticipated that the new Ethereum ETFs would surpass the new Bitcoin ETFs in terms of investment, the stark contrast between the two is quite noticeable.
For instance, on Oct. 17, the new iShares Bitcoin Trust attracted $309 million in investments. By contrast, the iShares Ethereum Trust attracted only $23.5 million on the same day. This trend suggests that Bitcoin inflows could surpass Ethereum inflows by a ratio of 10-to-1 in the near future.
Ethereum usage metrics fall short of expectations
Another area of concern is the current state of activity on the Ethereum blockchain. Conceptually, Ethereum is a vast, diverse, and thriving ecosystem, encompassing various niche blockchain applications – such as blockchain gaming, non-fungible tokens (NFTs), and decentralized finance (DeFi).
However, according to the October 15 digital asset report from CoinShares, the truth of the matter is that over 90% of all activity on the Ethereum blockchain is now related to DeFi. This means that Ethereum might not be as diverse as many believe. The less diverse it is, the less investment premium people will be willing to pay for it.
Additionally, the majority of DeFi activity appears to be concentrated on decentralized cryptocurrency exchanges, where users are actively exchanging one cryptocurrency for another. In essence, cryptocurrency speculation is currently sustaining Ethereum's growth, which may not be healthy for long-term expansion.
Are institutional investors abandoning Ethereum?
This situation is having a direct impact on the investment decisions of prominent institutional investors. As reported by CoinShares, which monitors institutional investor inflows and outflows among different digital assets, $10 million was withdrawn from Ethereum in the most recent reporting period. In October alone, a total of $35 million was withdrawn.
All of that money is flowing into Bitcoin at the moment: CoinShares reported that Bitcoin attracted $204 million in investments last month. No other digital asset even comes close to this figure. For instance, Solana attracted $5.6 million in investments, while XRP attracted $1.3 million. It seems that institutional investors have, for the most part, abandoned any cryptocurrency not named Bitcoin.
Ethereum and portfolio diversification
Despite the bleak picture painted above, there is a compelling reason to invest in Ethereum: portfolio diversification. In other words, you shouldn't put all your crypto investment eggs in the Bitcoin basket right now. By diversifying your portfolio, you increase the chances of weathering future market declines.
Given that Ethereum remains the second-largest cryptocurrency in the world, it remains an essential tool for portfolio diversification. Of course, there are alternatives beyond just Ethereum. You could invest some of your money into Solana, which has been touted as a potential 'Ethereum killer' for several years now.
For now, I'll wait to invest in Ethereum until I see signs that ETF inflows are improving. If top institutional investors refuse to invest in these ETFs, it could be a clear indication that something is amiss with Ethereum at the moment.
The underperformance of recent Ethereum ETFs has led to a decrease in investment inflows. For instance, the iShares Ethereum Trust attracted only $23.5 million on October 17, a significant contrast to the $309 million invested in the new iShares Bitcoin Trust on the same day.
Given the current state of Ethereum's usage metrics, where over 90% of all activity is related to DeFi, and the majority of DeFi activity is centered on cryptocurrency exchanges, some institutional investors may be questioning the long-term expansion potential of Ethereum.
