Fidelity Digital Assets recently published their “Q2 2023 Signals Report,” expressing a positive outlook for Ether (ETH) in the next 12 months and the long term. While Ether has already gained 62% year-to-date, the investment firm’s bullish stance does not necessarily imply that the ongoing bullish trend will be sustained. To determine the accuracy of Fidelity’s analysis, it is essential to compare their findings with network and market data.
Fidelity’s optimistic view of Ether is primarily based on several factors. Firstly, they highlight the network’s higher burn rate compared to coin issuance. Since the Merge in September 2022, there has been a net supply decrease of over 700,000 Ether. Additionally, Fidelity points to Glassnode data that shows an increasing number of Ethereum addresses engaging in transactions for the first time, indicating healthy network adoption.
Furthermore, the report reveals a 15% growth in the number of active Ethereum validators during the second quarter. These validators play a crucial role in ensuring the network’s security and decentralization. Fidelity considers this growth as a positive sign for the Ethereum ecosystem.
The anticipated implementation of EIP-1153, a transient storage opcode, is another factor contributing to the positive outlook for the Ethereum network. This upgrade is expected to improve smart contract efficiency, reduce costs, and enhance the design of the Ethereum Virtual Machine. It holds particular significance for decentralized exchanges (DEXs), which have seen Ethereum’s dominance decline from 60% to 46% over the past six months, according to DefiLlama data.
The upcoming Uniswap v4 upgrade, which allows users to create various pools using programmable buttons and native ETH support, also adds to the potential bullishness of the Ethereum network. If the implementation of EIP-1153 is approved, it could help Ethereum regain market share lost due to high gas fees. The average transaction cost has remained above $4 since February, leading to a decrease in Ethereum’s total value locked, which is currently at its lowest level since April 2020.
However, despite these positive developments, decentralized application activity on Ethereum has declined. DappRadar’s data shows a decrease in unique active wallets for popular platforms such as Uniswap (-28%), 1inch Network (-14%), MetaMask Swap (-8%), and OpenSea (-5%). In contrast, BNB Smart Chain’s PancakeSwap has gained 10% in the same period, and Polygon’s Uniswap users have increased by 8%.
Concerns and Over-Optimism
Ether’s quarterly futures market has been signaling unease among professional traders. Typically, these futures contracts trade at a premium of 5% to 10% compared to spot markets to account for delayed settlement, known as contango. Data from Laevitas shows that the current premium for Ether three-month futures stands at 4%, below the neutral threshold and lower than the 5.5% level observed on July 14. This suggests that traders are less inclined to use leverage for bullish ETH positions.
Another concern arises from the survey conducted by CryptoVantage, which revealed that 46% of 1,000 North American cryptocurrency investors named Ether as the top contender to surpass Bitcoin. While this perspective may be surprising, it is important to note that the survey did not inquire about the likelihood of any coin eventually flipping Bitcoin. Therefore, the respondents’ views may not necessarily indicate strong odds for this outcome.
Fidelity Digital Assets’ analysis provides valid reasons for their bullish stance on Ether’s price performance over the next 12 months. However, in the shorter term, the persistently high gas fees and lack of interest from leverage buyers indicate an increased likelihood of the Ether price breaking below the channel support. Despite the positive network growth and adoption, it is crucial to consider these concerns and assess the market dynamics carefully.