February 25, 2024|Commentary

What We See in the Markets: Deciphering Ethereum's Rally


The market’s attention is on ETH this morning, which is up 4% and over $3100, a high since April 2022. The narrative on this rally almost instinctively looks towards the prospects of an ETH spot ETF; after all, the signs pointing to a BTC ETF, which would later be validated, drove BTC’s outperformance against almost everything in Q4. ETH would be the obvious beneficiary of the next ETF, but attributing this rally to an ETF may be a mistake. The road to a BTC ETF was a long one, spanning many years, and it was finally approved only because of a series of lawsuits essentially forcing it into being. It’s not reasonable to expect the ETH ETF to be that difficult, but it might be overoptimistic to expect it to simply be the next domino to fall. Ethereum is sufficiently different enough from Bitcoin that the same arguments which were successful for BTC might not directly apply. Further, there’s the question of staking. An ETH ETF that didn’t include staking would, in that one significant respect, be inferior to holding and staking ETH, which might make adoption challenging. On the other hand, an ETH ETF with staking would probably add quarters or even years to the approval process. It feels intellectually lazy to point at the ETH rally and suggest an ETF was imminent.

This is not a bearish ETH commentary, though. The point is, ETH is making new multi-year highs, and it’s doing it for a reason. The most likely reason here is the fee switch at Uniswap which was approved late last week, sending UNI up about 50% over the past three days. This is a pretty huge deal; Uniswap is the highest-volume DEX in all of crypto and it’s not even close; over the past week, it’s handled $8.7b of volume, more than twice the second-place DEX. During that same period, it’s taken in about $14m of fees. Turning on the fee switch will direct some share of those fees to UNI holders; this is a change that UNI holders, in the governance process, had been hesitant to make because of the uncertain regulatory standing it would place on UNI. For a long time, the bull-case for UNI has been “maybe they will turn on the fee switch.” Now, it becomes an asset investors can hold and take some share of the fee generation. It also becomes an asset that the TradFi analysts can easily plug into a cashflow model; based on the past week of fees and the current price, it implies roughly a 15x P/E ratio, which is on the low side for a fee-generating crypto token (and there are not many examples in the category). This can be a double-edged sword; these same analysts loved SUSHI back in the day, but when volumes on Sushiswap faded, the investment faded as well. With that said, the UNI rally does not feel overdone in the least, as there was real uncertainty if they would ever take this step, and we’re expecting to see more rigorous analyses than the P/E ratio quoted above over the next week. The DeFi sector as a whole tracked the UNI rally, with SUSHI ironically being the biggest beneficiary, up 25%, and most of the sector up around 10-15%, and of course the ETH rally seems at least partially driven by this move.

On the BTC side, price action has calmed down, essentially unchanged over the past week on 35% realized vol. The week preceding last saw outsized inflow into the ETFs, north of $400m per day, while last week’s inflows were closer to around $200m per day. It will be interesting to see where the daily flows stabilize; we’re certainly not at a steady-state yet. The price action of BTC continues to reflect the inflows, and we expect that to persist until another catalyst takes over.

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