Ethereum Underperformance Masks Positive Fundamentals Amid Bitcoin's ETF-Driven Surge

Ethereum Shows Resilience Despite Underperformance

Ethereum (ETH) has underperformed in the crypto market this year, declining roughly 22% year-to-date. However, its fundamental outlook remains promising. Despite weaker network activity, with user growth shifting to Layer 2 (L2) networks and Solana, Ethereum's total value locked (TVL) has seen an uptick. Additionally, ETF flows and search interest have shown positive trends.

Citi strategists highlight that Ethereum's performance could be influenced by regulatory optimism in the U.S., particularly with entities like Trump-linked World Liberty Financial holding significant ETH positions. This, they suggest, could incentivize stronger U.S. support for the crypto industry.

Bitcoin's ETF-Driven Rally Gains Momentum

Bitcoin, meanwhile, has benefited significantly from the launch of spot Bitcoin ETFs in January 2024. These ETFs have attracted $40.6 billion in net inflows, with a notable surge following Donald Trump's election victory. These inflows now account for 40% of weekly Bitcoin price movements, underscoring the asset's sensitivity to ETF activity.

Ethereum ETFs have also turned positive since their July launch, with $3.2 billion in net inflows, further signaling improving investor sentiment.

Mixed Signals in On-Chain and Off-Chain Metrics

While Bitcoin and Ethereum see strong ETF inflows, on-chain and off-chain metrics present a mixed picture. Bitcoin volumes remain robust, and decentralized exchange (DEX) activity is outpacing centralized exchanges. Stablecoin market cap growth has also resumed after a period of stagnation.

However, Ethereum's network activity remains volatile, with funding rates at multi-year lows. Smaller wallet holders are less active, while larger wallets appear to be selling, raising questions about near-term momentum.

Macro Drivers and Shifting Correlations

Citi strategists emphasize that equities continue to dominate as the primary macro driver for crypto. A rare positive correlation between crypto and the U.S. dollar emerged on November 8, though such trends are historically short-lived. Conversely, the crypto-gold correlation has turned sharply negative since the U.S. election.

Concerns over monetary debasement, which could strengthen crypto's correlation with gold, are currently muted. However, strategists are closely monitoring for shifts in investor sentiment.

Outlook: Regulatory Clarity and Market Sentiment

The relative performance of Ethereum and altcoins may serve as a barometer for industry optimism regarding U.S. regulatory clarity. While Bitcoin's ETF-driven rally highlights its resilience, Ethereum's improving fundamentals suggest potential for recovery. Investors should watch for further developments in regulatory frameworks and macroeconomic trends to gauge the crypto market's direction.