Is Ethereum done? Or a massively undervalued crypto asset?

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In the past days no crypto topic captured more headlines than the launch of President Trump’s memecoin $TRUMP. After all, the story had so many jaw-dropping angles: That the coin hit the market just hours before the President’s inauguration, that it shot to a $72 billion market cap within a day before quickly receded to less than half of it, the conflict of interest concerns, the unusual early trading activity, or the fact that the First Lady competed for the same investors by issuing her own memecoin called $MELANIA.

As absorbing as this flood of articles might be, they drown out a much more fundamental effect the $TRUMP hype had on the crypto world: It positioned the Solana blockchain as the main contender to be the backbone of the Web3 economy. The loser: Web3 pioneer Ethereum. This trend was clearly visible over the course of the 2024 crypto surge. Yet the events of the recent days have accelerated it. So the question becomes: Is there a future for Ethereum or did it fall prey to the gales of creative disruption?

The chart above shows the monthly appreciation of Bitcoin, Ethereum, and Solana. While all three went through the same ups and downs, Solana outperformed Ethereum significantly in the ups. It even did better than Bitcoin in the good months, but Bitcoin was the most stable of those assets. In aggregate, the price of ETH increased about 50% over the past year, whereas Bitcoin and Solana had a gain roughly three times that high. The recent launches of $TRUMP and other buzzy memecoins have exacerbated this trend. Ethereum, the second-largest cryptocurrency and first-ever smart contract-capable blockchain, is trailing behind even useless memecoins like $DOGE, $PEPE, and $SHIBU. It also struggles to come close to its all-time high of $4725 per coin. The ETH/BTC ratio has reached cycle lows.

The prime foundational protocol has some foundational problems

Ethereum is a foundational protocol, sometimes also called layer-1. You can compare it to a computer operating system on which specific apps can be built. Those are called layer-2 and they serve a specific use case like moving money around, managing access to your health data, or proving ownership of digital artwork. In that regard you can neither compare it to $DOGE nor to Bitcoin. Valuations for the latter two are driven solely by demand (some would say hype), whereas foundational protocols like Ethereum basically have to manage a double-sided platform. They need to keep two groups happy: developers and buyers.

Ethereum has never lived on speculative investments but on providing capabilities to developers. And it is criticism from exactly that corner that is causing the current depression about the blockchain’s outlook. Developers are flocking to Ethereum’s main competitor Solana, who provides a similar infrastructure but at a fraction of the costs. Crypto mavens point to five shortcomings that are responsible for Ethereum’s current distress:

1. The competition is getting better. Rapidly. In the past, one of Solana’s major problems was its instability. Its blockchain went offline frequently. Not much of a worry for investors simply holding speculative tokens, but a disaster for corporates and layer-2 partners. This seems to have changed. Despite record trading volumes ignited by the memecoin boom, Solana ran smoothly. The blockchain didn’t go down once. It demonstrated that it can handle high volumes, even when they come unexpectedly.

2. Outdated technology: Ethereum is suffering from pioneer legacy. It was the first major blockchain to be Turing-complete and to have layer-2 tokens moving with smart contracts. Critics argue that newer platforms like Solana offer superior speed, lower costs, and better user experience, making Ethereum seem slow and outdated.

3. Sluggish development and lack of adaptability: Ethereum's development is criticized for being slow and unresponsive to user needs and market demands, hindering its ability to adapt to the growing Web3 landscape. The move from Proof-of-Work to Proof-of-Stake took 7-8 years and only established parity with, not an advantage to, Solana. Ethereum has no hierarchical, centralized leadership, so any evolution of the protocol needs to be accepted by the network first.

4. Layer-2 dependence: Ethereum's scaling limitations have necessitated layer-2 networks to improve transaction throughput. Critics now question the purpose of the layer-1 Ethereum if most activity occurs on these layer-2 networks.

5. Unclear positioning: While Ethereum was competing with Bitcoin, the roles were clear. Bitcoin was something you bought and waited until it went up in value. Ethereum, on the other side, was the machine to get stuff done. Activity on this machine in turn pushed up the price of the native token ETH, though that was not its primary purpose. Once Solana, Cardano, and others started to gain traction, the narrative of technical versatility was no longer working. Ethereum pivoted towards the trust and reliability positioning, pointing to its position as the second largest blockchain for years, but this turned out to be a difficult balancing act.

The figures debunking the narrative

The narrative does not look good for Ethereum: Newer challengers like Solana are doing the same thing but quicker and much cheaper. Yet while such narratives do influence some decisions and short-term market performance, they can’t change the hard facts. Ethereum still dominates in many key metrics. Its market cap is more than triple that of Solana’s and more than twice that of its closest follower XRP. The other proclaimed “Ethereum killer” Cardano doesn’t even get to a tenth of Ethereum’s market cap. Ethereum still holds 55% of the total $110 billion Total Value Locked (TVL) in the crypto ecosystem, compared to Solana's 8%. And it dominates stablecoin supply too. 52% of the $185 billion stablecoin supply resides on Ethereum, while Solana holds a mere 2.4%.

User adoption is one of the most reliable indicators of a company’s or a technology’s future success. In that regard the explosion of Solana’s on-chain activity is telling a very clear story. But more important than users are paying users. And here comes the statistic that makes me optimistic about Ethereum’s outlook more than anything else: Ethereum's fee revenue is increasing with network activity. It generates twenty times more fee revenues than it did five months ago. There is no better proof of utility value than people paying fees for your service, in particularly when those fees are so much higher than those of the closest competitors. You can consider it a quality premium over competitors.

Corporate adoption

You could say that Ethereum is too big to fail, only that it is not failing. Its price rose by about 50% in the last year. And the narrative is primarily an interpretation game, hence much of the critique mentioned earlier can also be seen as a strength. Ethereum’s switch to Proof-of-Stake did take long, but it was executed flawlessly. Changing a blockchain’s consensus mechanism is akin to changing a jet engine 30,000 feet above the ground. Add to that the complexity of a decentralized organization and you can only marvel at the fact that there were no significant hiccups. It inspires confidence from corporations, banks, and governments. Solana and Cardano are younger and they are Proof-of-Stake-native. But innovation will not stand still, thus soon they too will have to prove they can pull off a change of such a magnitude. This will be their litmus test and it may take years to pass.

Moreover, enterprise adoption of Ethereum is surging. The Proof-of-Stake update has inspired additional confidence. Major initiatives from heavyweights like BlackRock, Visa, PayPal, and UBS have been built on Ethereum. Coinbase's Base operates as an Ethereum layer-2, and Fortune 100 companies are increasingly involved in Web3 projects, primarily on Ethereum.

While there are reports of players like Citibank eying Solana as a partner, all they are today is non-binding declarations of intent. It is one thing to be chosen by a memecoin issuer, and quite another to serve as the backbone for a licensed financial institution. That is not to say that other layer-1 blockchains will not catch up and improve their corporate adoption, but they will have to overcome obstacles stemming from their track record and organizational structure.

How to interpret the current ETH/BTC ratio

So let’s return to our initial question: Is Ethereum a good investment opportunity? Good is always a relative term. The 50% surge during last year is an amazing figure compared to the performance of almost any other investment asset, but of course it is not as good as Solana’s and Bitcoin’s 150%. Thus, the answer doesn’t depend on Ethereum’s performance alone. What you can do, however, is to look at the possible and likely up- and downside potential of an asset in the long-term.

The best metric to do so in the case of Ethereum is the ETH/BTC ratio. The ratio shows the relative strength of ETH to BTC, thus factoring out the performance of the current crypto-cycle. Today’s ETH/BTC ratio is very poor for Ethereum, which means there is plenty of room for improvement. Regaining its historically best market position relative to Bitcoin could propel ETH to nearly $15,000 apiece, a 390% increase. On the other side, if it falls further to its historic low, it would lose “only” 35%. Hence, the risk-reward ratio looks very appealing.

Of course, the risk-reward potential alone doesn’t tell you much about the likelihood of the price moving up or down. Otherwise every lottery ticket would be a tremendous investment opportunity. And this is where our previous analysis about stability, trust, and market standing comes in. The fundamentals are solid. The adoption is good. The customer willingness to pay a premium is remarkable. No savvy investor should dismiss Ethereum only because of the recent narrative.

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