In its September 2024 outlook, Coinbase researchers pointed out that the cryptocurrency market is largely driven by supply and demand rather than fundamentals. Ethereum’s underperformance, compared to other leading crypto assets such as bitcoin (BTC) and solana (SOL), has raised concerns among institutional investors.

Coinbase attributes part of this decline to Ethereum’s Dencun Fork in March, which has affected network activity and revenue, leading to a 1.6 standard deviation drop below its three-month average. Coinbase researchers note that while Ethereum’s layer two (L2) scaling solutions have increased transactional activity, this has not translated into positive price action.

“The thinking is that the introduction of binary large object storage (or blobs) have led to unprecedented levels of transactional activity on Ethereumʼs layer two scaling solutions L2s – to the detriment of Ethereumʼs mainnet,” the report states. The Coinbase Institutional study adds:

Many believe this has not only been extractive to ETH value but that it has actively contributed to the reversal of ETHʼs deflationary supply status.

The study highlights that Ethereum’s inflationary dynamics have also contributed to its underperformance. Despite its ‘ultrasound money thesis,’ Ethereum’s supply has grown by over 240,000 ETH since the Dencun Fork. This reversal from deflationary to inflationary growth is a key factor weighing on investor sentiment.

The analysis emphasizes that Ethereum’s price action may need a catalyst to reignite interest among developers and investors. According to Coinbase researchers, institutional interest remains concentrated in bitcoin, with ether exchange-traded funds (ETFs) underperforming compared to bitcoin ETFs. Additionally, emerging competitors in the layer one (L1) and L2 space could pose further challenges for Ethereum, making it imperative for the platform to introduce innovations that appeal to a broader market.

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