Ether Surges as Institutions Bet on Ethereum Upgrade

Ether (ETH), the native cryptocurrency of the Ethereum blockchain, has been on a bullish run in the past week, reaching new highs and outperforming Bitcoin (BTC) in terms of returns. The main driver behind this rally is the growing institutional interest in Ether, as investors anticipate the positive impact of the upcoming Dencun upgrade on the Ethereum network.

What is Dencun and Why Does It Matter?

Dencun is the name given to the next major upgrade of the Ethereum blockchain, which is expected to take place on March 13, 2024. The upgrade will introduce several Ethereum Improvement Proposals (EIPs) that aim to enhance the performance, security, and scalability of the network.

One of the most anticipated EIPs is proto-danksharding, which will reduce the transaction costs for Layer-2 solutions that run on top of Ethereum. Layer-2 solutions are protocols that enable faster and cheaper transactions by processing them off-chain, while still relying on the security of the main chain. Some of the popular Layer-2 solutions include Polygon, Arbitrum, Optimism, and ZKSync.

By lowering the fees for Layer-2 transactions, proto-danksharding will make Ethereum more accessible and attractive for users and developers who want to use decentralized applications (dApps) and smart contracts. This will also increase the demand and value of Ether, as it is used to pay for gas fees on the network.

How Are Institutions Reacting to Ether?

According to a recent report by Bybit, a leading cryptocurrency exchange, institutions have been increasing their exposure to Ether since September 2023, reaching about 40% of their portfolios by January 2024. This shows a significant shift from Bitcoin, which used to dominate the institutional allocation with 50% in July 2023.

The report also noted that institutions are optimistic about the potential approval of a Spot Ether ETF by the US Securities and Exchange Commission (SEC) by the end of 2024. A Spot Ether ETF would allow investors to gain exposure to the price of Ether without having to buy or store the actual cryptocurrency. This would lower the barriers and risks for institutional adoption of Ether.

Bybit said that institutions started reducing their Bitcoin holdings in early December 2023, when the price of the leading cryptocurrency tested a critical resistance level of $40,000. Since then, their Bitcoin holdings have continued to decline, while their Ether holdings have increased.

It is unclear whether this shift from Bitcoin to Ether represents a short-term tactical adjustment or a medium-term strategic reallocation. However, with the Bitcoin halving coming up in April 2024, which is expected to boost the price and scarcity of the cryptocurrency, institutions may reconsider their positions and rebalance their portfolios accordingly.

How Are Retail Users Behaving Towards Ether?

The report by Bybit also revealed some interesting differences between retail and institutional investors in terms of their asset allocations and preferences. Retail users, who are individual and small-scale investors, have a lower concentration in Bitcoin and Ether, with these two assets making up about 35% of their total portfolios.

Retail users also have a higher tilt towards altcoins, which are cryptocurrencies other than Bitcoin and Ether, and stablecoins, which are cryptocurrencies pegged to fiat currencies or other assets. Altcoins and stablecoins account for about 50% and 15% of retail portfolios, respectively.

The report said that retail users have a very distinct investment style, relative to institutions, with a higher appetite for risk and diversification. Retail users also tend to follow the market trends and sentiment more closely, and are more influenced by social media and influencers.

Another notable difference is that retail users have relatively stronger optimism towards Bitcoin compared to Ether. Retail users did not invest in Ether to the same extent as institutions during the research period, and have not reduced their positions in Bitcoin since December 2022.

This may indicate that retail users are more loyal to Bitcoin as the original and most dominant cryptocurrency, and are less convinced by the value proposition of Ether as a utility token for the Ethereum network. Retail users may also be more wary of the technical and regulatory challenges that Ether faces, such as network congestion, high fees, security breaches, and legal uncertainties.

What Does the Future Hold for Ether?

Ether has been outperforming Bitcoin in terms of price and market capitalization in the past week, reaching a new all-time high of $2,800 on February 26, 2024. Ether’s market cap has also surpassed $300 billion, making it the second-largest cryptocurrency after Bitcoin, which has a market cap of over $1.1 trillion.

Ether’s rally has been fueled by the increasing institutional bullishness on the cryptocurrency, as well as the growing network activity and innovation on the Ethereum blockchain. The upcoming Dencun upgrade is expected to further boost the demand and value of Ether, as it will improve the scalability, efficiency, and security of the network.

However, Ether also faces some headwinds and uncertainties that may limit its growth potential. Some of the challenges include the competition from other smart contract platforms, such as Cardano, Solana, and Polkadot, the regulatory scrutiny and compliance issues, especially in the US, and the technical and operational risks, such as bugs, hacks, and delays.

Ether’s future will depend largely on how well it can balance the trade-offs between innovation and stability, decentralization and regulation, and adoption and competition. Ether may not be able to surpass Bitcoin in terms of market dominance and popularity, but it may be able to carve out its own niche and role in the crypto ecosystem, as the fuel for the decentralized web.