Is Ethereum's underperformance a bear case or a misread?

Transcript

GM good morning welcome to the milk Road show The Daily crypto show that's as delightful as finding an extra McDonald's Fry at the bottom of the bag I'm your host Jay Hamilton and today we're talking about what the f is going on with eth price action is all over the place soul and Bitcoin are outperforming is it time to sell your eth or is it time to buy the fud here to gu us is Kyle reidhead coowner of milk Road and head of research Kai let's start with the obvious question here why is eth underperforming soul in Bitcoin so poorly right now yeah I mean so just for context if you look at Soul eth chart I think Soul just hit alltime highs versus ethereum uh just

last week especially when the big dip happened uh last Monday it sort of climbed back and is is back at kind of par there but it was dominating for a little bit and then Bitcoin has just been steadily beating eth for the last like I don't know three years years or something like when is it since 200 uh 22 um the eth BTC ratio has just been grinding down and down and down so I guess it's almost two years um and so yeah Bitcoin has been been outperforming so is soul I think um it makes sense to be honest I think we sort of said this was going to be the scenario here I think the reason why is let's start with salana salana just was so undervalued versus ethereum and it continues to do really well it continues to um you know

generate new users new use cases and just get a lot of uh developers and sort of Mind share in the crypto world and so it's catching up right soul got so oversold back when FTX collapsed was down to like eight or nine dollars we said at $20 hey it's time to buy uh and and we've said it a few times on the way up and so I think just U naturally we've always said Soul was gonna outperform eth this cycle and so it's just kind of playing out um now every once in a while throughout the cycle you have periods where it really outperforms and sometimes you have it where it's just a little bit or none at all we just happen to have really outperforming week last week uh when things got oversold uh and so that kind of makes sense for me on

Soul it's probably still got a lot of room to catch up it's so undervalued versus everything else um that I think people are just starting to realize that and a lot of people and a lot of institutions were underexposed to salana so catchup trade continues I don't see why that would stop anytime soon so long as salana continues to do well uh and then Bitcoin um this is quite natural right it's very normal in cycles that Bitcoin leads the way and it outperforms altcoins um we're not in alt season just yet uh and we're not in a full risk on environment just yet either right so typically in any of our past Cycles in crypto Bitcoin has led the way until about the halfway point when we reach the let's call it banana zone is what a lot of people are calling out on Twitter

these days but the time when alts go crazy and the world goes very risk on we're not there yet rates are not down yet liquidity is just starting to Rise um and we're still kind of uncertain about a lot of things whether it be recession or what happened with Japan last week so until we get to that sort of risk on environment I think Bitcoin continues to to outperform form now I thought that Bitcoin would stop outperforming earlier this year in Q2 we're now in Q3 hasn't happened yet that's fine um never thought I would nail it on the on the exact day exact week or even exact month so it doesn't matter to me um but I still think eth will have its moment and ALT in general will have its moment versus Bitcoin Bitcoin dominance is something like 57% right now which is high it's it's been a

long time and I don't think it gets much higher I could be wrong who knows we'll see what happens um but I think why eth is being outperformed right now by these two makes sense I think that will change and we can talk about that a lot in this episode on what's going to change that um but I definitely am not shocked at where we're at currently although I just would have thought we' been higher in all assets to be honest but that's okay Summer lws Okay so that explains what's going on with soul and Bitcoin outperforming eth so far this year but there's also a lot of fud around ethereum and you tend to see a lot of charts of people talking about problems

with ethereum problems with low activity problems with low fees can you explain to us are these problems legitimate or are people looking at the wrong statistics or making the wrong conclusions um yeah good question look first thing I would say is price dictates narrative and so I would bet right now if it's ethereum was crushing it and it was up at 4,000 people would be looking at these charts saying wow they're so bullish and like everything is working for ethereum but because we don't we're not in that phase right now in the market and the price has gone down for ethereum people are taking charts and finding bearish narratives that they can make around it um and by the way one thing to add just of why we've had the outperformance of soul and

Bitcoin uh recently anyway one um because there's a couple things that I missed here which is um ethereum had to recently go through its sort of selling of the grayscale EPF we talk with ETFs in a little bit but um that was a little bit that kind of held it back just like Bitcoin had when its ETF launch as well with with the grayscale Bitcoin ETF um and the other thing was jump a large large I guess Market maker and Fund in the in the space was selling a bunch of it bunch of its eth and so that's what really um drove down eth's price over the last uh over the last week and so we've gotten through that same with Bitcoin had its Supply struggles over the past few months with Germany Mount gaw so um structural supplies which assets go through at different periods

throughout cycle um so quite normal so I think that is the reason why the outperformance of soul and Bitcoin is so large just over the last like couple weeks um which then creates these narratives that eth is broken it's not working so I think what's happened now is the narratives are getting negative very negative about eth they've actually been like this way for a little while I think um when I look at it I think that ethereum is doing exactly what it said it was going to do it's had its row map to scale and it continues to execute on that at a an amazing rate in my opinion and from what I see when I look at the charts it looks like it's doing a really good job at scaling right now and people I think are mixing up what this means or not seeing the bigger picture of it all

um so just to give some context here ethereum has struggled in the past with its um with its scale right it got too expensive in the last bll market so expensive that people couldn't even use it it was like 20 30 40 $50 to do a transaction even more that if using nfts and that obviously is not the future of Finance we're not going to do that right and so ethereum has chosen a bit of a different road map to scale than something like salana which wants to do it all on its L1 what ethereum has done is created l2s and we've seen over the last three years this proliferation of l2s and they're beginning to work out really well I mean bass is probably the biggest success story we've had in crypto other than maybe salana um but it's absolutely crushing it you've got

optimism and arbitrum doing really really well you've got blast creating some really cool things you've got IMX or mutable which is a a web 3 gaming L2 all of these layer tws are sort of doing their own thing and they appear to be working they're providing transactions on ethereum for under one penny which is always the goal and they're settling it back to ethereum now ethereum um I guess if when you look at the numbers here what you see is that ethereum's numbers haven't moved ethereum specifically its transactions per second have stayed at like 12 seconds or whatever it is 12 transactions per second the plan was never really to increase that we want to keep it very decentralized and so even on this chart here where you're looking at activity we can see that ethereum the blue line at the bottom of this chart

has stayed the same it hasn't scaled but when you add on its l2s which are bundling up transactions we see a scaling factor of 25x so it's actually scaled by 25x since 2023 I guess we're looking at we're looking at over the last year I think and so now all of a sudden we're doing TPS of like 300 plus when you look at it right if we go to some other metrics where I think a lot of people are missing here is like let's look at users this is the one that's most commonly used and if you look at users they haven't moved on ethereum right we're sitting around I think it's around 4 million or something active monthly users and it's just stayed the same on ethereum for like since 2021 it hasn't moved and so people are like okay this is bearish ethereum but when you

actually look at the entire ethereum ecosystem remember the goal of ethereum it's scaling road map was to push users to the l2s and instead transact there so they can get under one cent transactions and they'll settle back on ethereum and if you see we are at just ridiculous all-time highs in terms of active users in the ethereum ecosystem the overall ecosystem right and we've been doing it month over month over month we just grow and we grow and we grow and we're sitting at now over what this says 30 million active users uh in the month of June uh July was a bit lower but whatever it's fine um we can't go up every single month but to me that chart looks incredible for the ethereum ecosystem overall remember we're not ethereum is not trying to scale ethereum it's trying to scale the entire ethereum

ecosystem and so when we look at what ethereum is doing and we look at ethereum the asset we need to think of the whole broader picture and so you have all these charts on Twitter Twitter of like salana versus ethereum and just showing it's salon's numbers going up but ethereum staying the same they look at Tron they look at every chain you want and everything is going up versus ethereum but it's because they're missing the bigger picture here which is that ethereum is going up too it's just pushing all its activity to the layer twos it's a different road map a different way to scale than every other chain I think a lot of people are missing that and the key thing here is that some people say well this is parasitic to ethereum or this is parasitic to eth the asset itself and I

think thing to understand is that all of these layer twos all of the apps that are on them what do they use they use eth the asset layer twos use eth they bridge over the the eth and they use eth there okay it is the money that's used in all the apps okay everything that's in smart contracts whether it's in a or on maker on whatever they are all using eth they still price nfts and things like that in eth they have to pay their transactions layer 2s literally have to pay ethereum in eth and so people think that layer 2's are pair itic and I I don't necessarily agree yes it's been parasitic to the fees of ethereum I guess if you want to say that one big thing to note and to look at recently and this is another one of the big fud

is that ethereum was once deflationary right uh we can actually show this this chart as well Jay if you want to pop that up on the screen but for a while there after we did the merge ethereum fees were just going uh up and up and up and the the supply of ethereum was going down down down down down right until we had this upgrade EIP 444 which was back in I think March where it made the layer is really really cheap and that's when we started to scale the ethereum osystem what happened was we we reduced the fees a lot and so a bunch of these layer twos didn't have to pay as much to ethereum anymore and now ethereum is no longer deflationary this is probably the real reason that people are so bearish on eth at the moment now what we're doing is

we're comparing the supply or the inflation rate let's call it of eth versus Bitcoin people are still bullish on bitcoin right even though it's inflating at 1.57% per year ethereum is still if we look at over the last year it's still negative it is still deflationary since the merge uh and since the burn started or since the merge sorry and if you look at salana which everyone's super bullish on right because it's got all this activity it's doing so well it's like a 7% inflation rate right and so why are we getting so caught up in the fact that ethereum in the last two months or three months is no longer deflationary it makes no sense once again as we always say in investing zoom out right if we lower the fees on ethereum we're allowing for more demand to come in and

we just need to wait for that to Happ it's kind of like the Broadband moment of the internet if we think back in like I don't know early 2000s there was all these people using the internet but we were on dialup it was really slow and so they built all these cables they built broadband and they didn't use it it was everyone's like did we waste all of our money hell no just took a bit of time for more apps and more websites and more things to happen on the internet and then we used up all that Broadband real quick the same situation is happening with ethereum right now we can see the users are going up like crazy transactions are going up like crazy once again on the ethereum ecosystem as we can see in this chart we're at all-time highs on transactions too so

activity is skyrocketing the ethereum ecosystem it's just the fees are lacking a little bit as a result but the fees are still way better than salana and way better than Bitcoin and so I think there's just this mixup in how we're valuing these assets are we really valuing these assets off fees I'm not sure that we are and if we are then it doesn't make sense that salana is catching up to ethereum right I think we're more valuing these assets off of what they're building what its potential is it's Network effects it's moneyness as an asset which is the only thing that Bitcoin has value from and so it's a mix but people take one chart and go okay ethereum is is not deflation anymore this is super bearish it's all over and I think people just need to zoom out and

go look this was the plan all along it's working just give it time and like let's see what happens here but we don't need to trip out after like two three months of fees going the opposite way okay so we've got users and transactions people making the mistake of just looking at ethereum not looking at the entire ecosystem very easy mistake to make make sure your charts are accurate uh when you look at the price action what are the things that are in your mind holding the price down right now other than obviously sentiment which you mentioned as well what are the other factors that you're taking into consideration yeah so I mean mentioned sentiment mentioned already that jump

was selling and then we also have the gray scale ETF right uh and so we basically had to unwind that trade for a while still happening today has not gone anywhere yet however interestingly as we record today yesterday so on Monday August uh 12th was the first day that we've ever had zero outflow from the grayscale ETF now it's probably not done there's still more to go I'm sure we're only about 25% of the way uh of of basically what's happened is with the Bitcoin grayscale ETF 50% of the assets uh moved out of scale and then it's sort of leveled out we're currently 25% of the way there uh and so we've still got more to go probably on this grayscale EF uh in terms of outflows and then once that's done there really doesn't seem to

be much else that's holding back ethereum other than the narrative right the narrative what of people thinking that there's no growth when there is The Narrative of this fees which I think is just going to take some time to play out so for me when I look at this I think everything is actually all good with ethereum and the activity the transactions the ecosystem itself looks very bullish we're sort of finally about to be through our sort of Supply overhang that we've talked about similar to what happened with Bitcoin and then we have this e ETF and when I think about this eth ETF and how big of a deal this is is if trafi wants to get exposure to crypto they have two options at least in the US you can buy your Bitcoin ETF you can buy your eth ETF I guess you could also buy coinbase okay

but if they want real exposure to the underlying assets Bitcoin they've already had the opportunity to do that well well some right we still need to get more on board we haven't opened this up to the Pension funds Etc so they're still to come and they're going to buy Bitcoin but the way that trafy works is they never just buy one asset they diversify and so they'll take X perent of their portfolio of their risk asset portfolio will go into Bitcoin and probably half that percent or whatever it is a quarter of it Whatever It Is will go into eth right for a few reasons one just because it's the two options and they want to diversify the other reason is trafi understands Tech platforms Bitcoin is digital gold okay not a lot of trifi invests in Gold to be completely honest but they they get it

they wrap their head around they understand it's a technology play on the new gold but ethereum is very easy to wrap their heads run for a lot of trefi people which is it's a new app store but a decentralized one right it's the next apple let's call it but a whole different thing and so one they can understand it better and so I think we'll start to see people buying as a result of that we've already seen pretty good flows from ethereum it's not amazing but it's been pretty good based off what we thought was going to happen against against Bitcoin obviously it's been a very tough time the last few weeks since it's launched with the Japan trade unwinding and all that um but I think the other thing is if trafi wants exposure to just crypto in general what's their option it's not Bitcoin

because nothing's being built over there but it is ethereum because everything is being built there if they want exposure to l2s they just buy ethereum right now there isn't an optimism or a base ETF there isn't a maker ETF or an Ava ETF if they want uh access to defi right they don't have access to salana yet unfortunately now one day I'm sure that'll come but if they want exposure to just crypto the asset class they're going to buy eth for that and I think that's what this EF really represents and so I think we're going to see a lot of inflows once markets turn right you got to remember that we're still in this phase of like the Japan trade unwinding we're still in this phase of are we in recession etc etc and so yes all assets are doing bad right now and eth did a

little bit worse than the rest because jump also sold and we also had that grayscale outflows and so it makes sense what's happening right now and I think once we start to go more risk on there's just there's no other option for trafi right now but to buy e if they want exposure to crypto and we're pretty sure if that we go risk on crypto is going to do really well it always does and so there's an obvious setup here that to me makes complete sense but I think just a lot of people are missing um and I mean I kind of get why we've had this delay in terms of eth and it's it's underperformance it's like I get it but I think if we look at the bigger picture it's still growing the the network effects are still expanding there's so many developers on

ethereum everything that they've said they were going to do just continues to happen uh including getting an EF and so I just I don't know why people can be bearish right now um it just kind of blows my mind if we were to flip the script what would be the arguments on the be side for ethereum that you would agree with that people hold yeah for sure it's a great question um so so a few things I mean one maybe people don't care about crypto and crypto is not going to be a thing and things aren't going to move on chain and if that's the case then obviously people aren't going to buy eth uh I find that one very like unlikely at this point although I guess obviously if Trump doesn't win the election we still don't

know Kamal Harris's opinion on crypto or what they're going to do uh and so that could hold things back but again that's just one country um so we'll see what happens there but that could be a thing that holds it back without a doubt and probably already is right now um I guess the big thing is that Bitcoin doesn't really have competition in terms of something fighting for money other than I guess ethereum would be its competition because it's a bit of both a smart contract platform but also trying to be money um whereas ethereum has tons of competition right we've already talked about salana which seems undervalued versus eth it's eating some of the market share of ethereum uh and so like there is a lot of competition with salana there could be Tron there could be ton there could be uh I mean

all the new ones like Aptos and sui Etc so like there is a lot of competition now what you need to look for is like where are the developers where are the apps being built Etc ethereum still holds a large share of that and so that competition is light at the moment but that could change um what would change that I don't know obviously telegram going on ton is a big thing if some of the other big tech companies decide to go on salana or Aptos or SE or whatever that might change things a little bit um but again we've got things like Black Rock Etc that are already building over on eth same with coinbase and so it's tough to think that everything's just going to change real quick uh but I think it definitely could you never really know um there's also I guess just

trafi doesn't get it maybe they don't get ethereum maybe they don't get that it's a tech platform um but I mean you got to just remember like Black Rock and Fidelity and all these companies that have ETFs their job is to go and make sure these people get it they don't they can't let their ETFs not succeed they have to find a way to make it work and so you've got an army of trfi uh advisers that are going to go out there and teach everyone in the world why Bitcoin is good why eth is good and so um find some of these hard to believe but they definitely can come true um I guess the last one is maybe the fees never come back maybe l2s really are parasitic and they do take all the fees away from eth um we'll see again this is

something it's an unknown it is my opinion that fees will continue to come back I think we just need demand it feels again like the Broadband moment of the internet um and so it feels shortsighted to go that way but it is a a valuable and and definitely could be right we don't know yet we need to let time play out um so those are some of the things that I look at and I I kind of Wonder um but I take the positive side to almost all of those I want to know everybody listening in how are you feeling about eth right now are you bullish are you bearish after listening this episode or just in general what's your sentiment have you sold it for soul have you sold it for BTC or maybe you're in something else would you like us to us to talk more

about the l2s are you interested in that look the show is always for you guys and we want to know what you want us to focus on Kai any final thoughts before we wrap up yeah in terms of should you swap your eth into Soul or your eth into Bitcoin um look the way that our portfolio is set up we've luckily had exposure to salana since early 2023 so we haven't needed to do any of that um our portfolio has done really really well in terms of salana at least mine has and uh and now that's become a massive massive holding of ours um not even because we put you know 50% of our Holdings into it back in 2023 but because it's grown so much so it's now become 50% at least at least in my uh in my Holdings and so for me it doesn't

make sense to move any eth into Soul if you don't hold any Soul probably should hold some I mean we've been bullish on that for forever and we keep talking about that I still think it has a lot long ways to go um but I think we are at least I think we're kind of at a bottom here with eth or close to it again waiting for that risk-on moment where all assets are going to rise and when that happens I think eth outperforms Bitcoin I still think Salon outperforms eth um but would you just put everything in a salon at this point like absolutely not I think you need to diversify and I think the best thing you can do to to diversify is one if you want to hold Bitcoin hold that and then two what are the two ecosystems that are dominating

crypto right now it's ethereum ecosystem and salana and so it makes sense for you to hold both and you got to remember that narratives will will pick up at certain times salana has picked up a lot of Mind share right now in the space and so it's outperforming at some point that's going to switch it almost always does and so ethereum will have its moment too just because things are getting very bearish right now and there's a lot of fud that's not the time to be selling if we looked at these charts and the ethereum ecos system was not growing every single month month over month in terms of users in terms of transactions in terms of the way that it's scaling then yes I would say get the hell out if it didn't get an ETF I'd be saying let's go like things have

changed we need to get out I'm not uh biased to eth because I hold some I'm not obsessed with eth I'm not an eth maxi I just look at the numbers and I look at the fundamentals and there's no reason to be bearish on eth and be selling it for everything else again the numbers all look good in the ethereum ecosystem so we just got to give it time to play out but I think the numbers look good on both salana and eth and so I don't think you should be one or the other I think you should be buying both but what I like to do is buy when things are undervalued or are being sold off ethereum has gotten beat up and so if I have extra cash I'm definitely putting a larger percentage of that into ethereum right now I'm not selling

ethereum to salana that makes no sense for context I'm this for the whole cycle I think we have another 12 to 16 months left and so my bet is I'll be selling then not now if I'm a Trader maybe you want to move things around I don't know but that's not what I do I'm looking to play for the entire cycle where I think both ethereum and salana are going to do really well over the next 12 to 16 months you know who else is playing for the long-term Kai the Milkman and if you guys want to help us grow make sure you subscribe to the show because this news what we're talking about today it's going to be different a week from now it's going to be different two weeks from now and you want to make sure you stay up to date on the markets and you

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