Ethereum Monthly Outlook: Expectations and Opportunities

The approval of the Bitcoin spot ETF in the United States has strengthened BTC's image as a store of value asset and consolidated its position as a macro asset. In contrast, Ethereum's positioning in the crypto space remains unclear. Some competing public chains have affected Ethereum's status as the preferred deployment platform for DApps. The growth of Ethereum Layer 2 and the reduction in ETH burn seem to have also impacted its value accumulation method.

However, the long-term prospects for Ethereum remain optimistic, as it has unique advantages in the smart contract platform, including a strong developer ecosystem, widespread application of the EVM platform, the importance of ETH as collateral in DeFi, and the decentralization and security of the mainnet. As the trend of tokenization accelerates, ETH may gain more positive momentum in the short term compared to other L1s.

Historical data shows that ETH embodies the dual characteristics of store of value and technological innovation. It is highly correlated with BTC, aligning with store of value features, but can also perform independently during BTC's long-term upward trends, following market rules driven by technology. It is expected that ETH will continue to integrate these two characteristics and may reverse its current performance in the second half of 2024, achieving unexpected growth.

ETH plays multiple roles, known as Ultrasound money, and is also seen as an internet bond providing non-inflationary staking yields. With the rise of Layer 2 scaling and re-staking technology, new concepts such as "settlement layer assets" and "general proof of work assets" have also emerged. However, these singular statements do not fully capture the vitality of ETH. The increasing use cases of ETH complicate the assessment of its value, making it difficult to define a single measuring standard.

Spot ETFs are extremely important for Bitcoin as they clarify the regulatory framework and attract new capital. These ETFs reshape the industry landscape and disrupt the cycle model of funds moving from Bitcoin to Ether and then to high-risk assets. Once the Ethereum spot ETF is approved, it will gain access to capital sources currently only available for Bitcoin. The logic for approving the Bitcoin spot ETF also applies to Ethereum, as CME futures prices are closely linked to spot prices.

Some high-performance integrated chains are gradually encroaching on Ethereum's market share, offering high-speed and low-cost transactions. Compared to the previous bull market, the differences between these L1s and Ethereum are more pronounced, no longer relying on EVM, with DApps designed anew and an overall strategy to enhance application synergy. However, it is too early to judge success solely based on activity metrics driven by incentives.

From the perspective of stablecoin supply, activity is still concentrated on Ethereum. Many new chains lack the trustworthiness and reliability to support large-scale capital. Large capital holders are less sensitive to high transaction fees on Ethereum and tend to reduce risk by minimizing liquidity disruptions and minimizing bridging trust. The supply of stablecoins is growing faster on Ethereum Layer 2 than on Solana.

Discussion on Layer2 development: it reduces the demand for Layer1 block space and may support non-ETH gas fees within the ecosystem. However, analysis shows that this impact on ETH is not negative. The staking cost of ETH is low, allowing for long-term accumulation without the need to sell. The rise of Layer2 has intensified ETH liquidity tightening, with over 3.5 million ETH migrating to Layer2. Core financial services and governance activities still rely on Layer1, ensuring the fundamental demand for ETH.

Ethereum has some difficult-to-quantify but important advantages. ETH plays a central role in DeFi, widely used in L1 and L2. The Ethereum community advances decentralization while maintaining innovation, with a cumbersome decision-making process that ensures security and fairness. L2 innovations are rapidly progressing, enhancing ecological diversity. The EVM has been widely spread to other blockchains, and Solidity remains the most popular smart contract language.

The trend of tokenization will first benefit Ethereum. For traditional enterprises looking to enter the blockchain space, having sufficiently skilled developers is crucial, and Solidity has become the preferred choice. The supply dynamics of ETH are very different from BTC, and staking has become an important way to reduce selling pressure.

ETH and BTC have a close relationship, but they can briefly decouple during specific periods. A special phenomenon emerged in 2023: when BTC rises, the correlation between the two weakens, and when it falls, the correlation strengthens. This pattern changed after the U.S. approved the Bitcoin spot ETF. If the Ethereum spot ETF is approved, the trading pattern of ETH may adjust again.

In summary, ETH may have upside surprises in the coming months. Staking and L2 growth are becoming ongoing absorption points for ETH liquidity. The widespread application of EVM and L2 innovations have solidified ETH's position in DeFi. The importance of the U.S. spot ETH ETF cannot be underestimated. The structural demand drivers for ETH and technological innovations within the ecosystem will allow it to traverse multiple narratives and maintain its unique position.