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Exploring the Reasons Behind Ethereum’s Underperformance
Zaheer Ebtikar, the Chief Investment Officer (CIO) and founder of Split Capital, a hedge fund specializing in liquid token investments, recently attributed Ethereum’s underperformance to strategic missteps by the Ethereum Foundation and shifts in crypto capital flows. In a detailed analysis shared on X (formerly Twitter), Ebtikar highlighted the structural reasons behind Ethereum’s lackluster performance in recent months.
Understanding Capital Flows in the Crypto Market
Ebtikar emphasized the importance of understanding capital flows within the crypto market, focusing on three primary sources: retail investors, private capital, and institutional investors. He noted that while retail investors are hard to quantify and not fully present in the market currently, private capital was the dominant force in 2021, with over $20 billion in net new inflows driven by crypto euphoria.
However, Ebtikar pointed out that private capital has now taken a back seat as ETFs and traditional vehicles have become the largest net new buyers of crypto. This shift was attributed to poor venture investments and overhang from previous cycles, leading to a decline in private capital’s influence.
As venture firms and liquid funds sought more proactive investment opportunities, they turned to locked token deals involving assets like Solana, Celestia, and Toncoin. These alternative investments outside the Ethereum ecosystem offered growth potential and market cap growth that justified the shift away from ETH.
The Rise of Institutional Capital and Bitcoin ETFs
Ebtikar observed a shift towards institutional capital entering the market through products like spot Bitcoin ETFs, which exceeded expectations and became some of the most successful ETF products in history. While Bitcoin experienced a surge in institutional interest, the rest of the market, including Ethereum, failed to keep pace.
With crypto-native investors reducing their Bitcoin holdings and focusing on altcoins and Ethereum, the market dynamics started to change. Ethereum, once a core holding, began to lose steam to assets like Solana, leading to a dispersion in asset returns and a move down the risk curve by professional investors.
The Challenges Faced by Ethereum
Ethereum found itself in a challenging position, with institutional investors favoring other assets like Solana and large caps over ETH. Despite the introduction of spot ETH ETFs, institutional capital remained uninterested in Ethereum, causing it to lose its appeal among key investor groups.
Ebtikar suggested that Ethereum’s best chance for a comeback lies in attracting institutional investors in the coming months. While facing significant challenges, Ethereum’s status as the only other asset with an ETF presents a potential avenue for recovery.
Looking Ahead to 2025
As 2025 approaches, Ebtikar believes it will be a critical year for crypto and Ethereum. The potential for regulatory changes, shifts in the Ethereum Foundation’s focus, and increased institutional interest could shape Ethereum’s future trajectory. Despite the challenges, Ebtikar remains cautiously optimistic about Ethereum’s prospects.
As the crypto market continues to evolve, only time will tell how Ethereum navigates the changing landscape and whether it can regain its position as a leading smart contracting platform.
At the time of writing, ETH is trading at $2,534.
Featured image created with DALL.E, chart from TradingView.com