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Zaheer Ebtikar, chief investment officer (CIO) and founder of Split Capital, a hedge fund specializing in liquid token investments, attributed Ethereum’s underperformance in recent months to strategic missteps by the Ethereum Foundation and structural changes in crypto capital flows. In an analysis shared via dog this cycle. »
Why is Ethereum price lagging?
Ebtikar began by emphasizing the importance of understanding capital flows within the crypto market. He identified three main sources of capital flows: retail investors who engage directly through platforms like Coinbase, Binance and Bybit; private capital from liquid funds and venture funds; and institutional investors who invest directly through exchange-traded funds (ETFs) and futures contracts. He noted, however, that retail investors are “the hardest to quantify” and are “not fully present in the market today”, thus excluding them from his analysis.
Focusing on private capital, Ebtikar highlighted that in 2021, this segment constituted the largest capital base, driven by the crypto euphoria that attracted over $20 billion in net new flows. “Fast forward to today, private capital is no longer the heaviest capital base, as ETFs and other traditional vehicles have taken on the role of the largest new net buyer of crypto,” he said. he declared. He attributed the decline to a series of bad venture capital investments and surpluses from previous cycles, which “left a bad taste in the mouths of LPs.”
These venture capital firms and liquid funds recognized that they could not wait for another cycle and that they needed to be more proactive. They have started to take more shots at liquid gaming, often in private deals involving locked tokens such as Solana (SOL), Celestia (TIA), and Toncoin (TON). “These locked deals also represented something more interesting for many companies: there is a world outside of Ethereum-based investing that is actually growing and usable and has sufficient market cap growth relative to the ETH that could justify subscribing to the investment,” Ebtikar explained.
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He noted that investors were aware that it would be increasingly difficult to raise funds for risky and liquid investments. Without the return of retail capital, institutional products have become the only viable route for a long bid on ETH. Mindshare began to fragment as it approached the three-year mark of 2021, and products like BlackRock’s Spot Bitcoin ETF (IBIT) gained legitimacy as the de facto benchmark for crypto. Private equity had to make a choice: “abandon their core ETH portfolio and move down the risk curve or hold your breath for the traditional players to start bailing you out.” »
This led to the formation of two camps. The first was pre-ETF ETH sellers between January and May 2024, who exited ETH and traded for assets like SOL. The second group, post-ETF ETH sellers from June to September 2024, realized that ETF flows into ETH were poor and that it would take much more for the ETH price to benefit. ‘support. “They understood that ETF flows were lackluster and it would take a lot more for the ETH price to start being favorable,” Ebtikar noted.
Turning his attention to institutional capital, Ebtikar observed that when spot Bitcoin ETFs like IBIT, FBTC, ARKB and BITW entered the market, they exceeded expectations. “These products have shattered any realistic target that investors and experts could have imagined with their success,” he said. He highlighted that Bitcoin ETFs have become some of the most successful ETF products in history. “BTC has gone from being a dog in the average wallet to now the only funnel of net new capital in crypto and at a record rate too,” he said.
Despite the rise of Bitcoin, the rest of the market has not followed. Ebtikar questioned why this was the case, pointing out that crypto-native investors, individuals and private capital had long reduced their Bitcoin holdings. Instead, they were “stuck in altcoins and Ethereum as the core of their portfolio.” Therefore, when Bitcoin received its institutional offering, few people in the crypto space benefited from the new wealth effect. “Few people in crypto have benefited from the new wealth effect,” he noted.
Investors began to reevaluate their portfolios, struggling to decide their next moves. Historically, crypto capital moved from index assets like Bitcoin to Ethereum and then down the risk curve to altcoins. However, traders speculated on potential flows into Ethereum and similar assets, but they were “grossly wrong.” The market began to diverge and the dispersion between asset returns intensified. Professional crypto investors and traders have aggressively moved down the risk curve, and funds have followed suit to generate returns.
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The asset they chose to reduce their exposure to was Ethereum, the largest asset in their core portfolios. “Slowly but surely, ETH started to lose steam to SOL and the like, and a sizable percentage of that flow started to really move into memecoins,” Ebtikar observed. “ETH has lost its moat among crypto-savvy investors, the only group of investors historically interested in purchasing.”
Even with the introduction of spot ETH ETFs, institutional capital has paid little attention to Ethereum. Ebtikar described Ethereum’s predicament as suffering from “middle child syndrome.” He explained: “The asset is not trendy with institutional investors, the asset has fallen out of favor in crypto private capital circles and nowhere is it seen that retailers are offering anything like this. size. » He pointed out that Ethereum is too big for local capital to support, while other index assets like SOL and large caps like TIA, TAO and SUI are attracting investors’ attention.
According to Ebtikar, the only way to move forward is to expand the universe of potentially interested investors, which can only be done at the institutional level. “The best chance for ETH to make a significant comeback (without a change in the trajectory of the main protocol) is for institutional investors to take over the asset in the coming months,” he suggested. He acknowledged that while Ethereum faces significant challenges, it is “the only other asset with an ETF and likely will be for some time.” This unique position offers a potential path to recovery.
Ebtikar mentioned several factors that could influence Ethereum’s future trajectory. He raised the possibility of a Trump presidency, which could lead to changes in regulatory frameworks affecting cryptocurrencies. He also highlighted potential changes in the focus and core focus of the Ethereum Foundation, suggesting that strategic changes could reinvigorate investor interest. Furthermore, he highlighted the importance of marketing the ETH ETF by traditional asset managers to attract institutional capital.
“Given the possibility of a Trump presidency, the shift in focus and primary focus of the Ethereum Foundation, and the marketing of the ETH ETF by traditional asset managers, the father of contract platforms smart technology has many possibilities,” noted Ebtikar. He expressed cautious optimism, stating that all hope is not lost for Ethereum.
Looking to 2025, Ebtikar believes that it will be a critical year for cryptocurrency and in particular for Ethereum. “2025 will be a very interesting year for crypto and especially Ethereum, as much of the damage caused by 2024 can be undone or made even worse,” he concluded. “Time will tell.”
At press time, ETH was trading at $2,534.
Featured image created with DALL.E, chart from TradingView.com
