By Scott Chipolina for The Financial Times
One common — and not always unfair — criticism made by crypto enthusiasts is that the wider world conflates bitcoin and cryptocurrencies.
If the subject comes up over Christmas, chances are family and friends will use the two interchangeably. In their minds bitcoin IS the crypto market. Yet people working around it, or even have more than a passing interest, know there is much more going on. ___STEADY_PAYWALL___
Right now, bitcoin is in a happier place than it has been for 18 months, supported by speculation that the SEC will approve a bitcoin exchange traded fund after Christmas. But the rest of the market doesn’t quite have that same warm fuzzy feeling.
A large chunk of “the rest” is ether, the second largest cryptocurrency on the market, because of the blockchain it represents, ethereum.
Ethereum has always been a more ambitious project than the bitcoin blockchain, which is a database for transactions. It can hold assets and lets programmers code functions for buying and selling into smart contracts. That means it is the foundation for so much of the industry’s non-bitcoin activity ranging from decentralised finance (DeFi) projects and NFTs to gaming.
Historically, these markets have given ethereum a unique position of strength over competing blockchains: if one sector of the industry explodes, so should ether.
But while ether has climbed a respectable 93 per cent this year, it has underperformed bitcoin (up 162 per cent), Solana (up over 550 per cent), and Cardano (up 154 per cent).
“This year ether has been totally outshined by the excitement related to bitcoin,” said CK Zheng, co-founder and chief investment officer at crypto hedge fund ZK Squared Capital.
For ether, the problem is that these cutting-edge crypto projects, like decentralised finance, NFTs and gaming — the ethereum network’s bread and butter — still haven’t shaken off their past.
Projects like DeFi crypto exchange Uniswap have yet to generate any mainstream buzz, crypto-inspired games like Axie Infinity are today synonymous with North Korean hacking exploits, and NFTs have only recently made headlines for blinding party goers in Hong Kong.
As far as the non-bitcoin crypto market is concerned, the coins that have performed best this year are the ones exploring the links between crypto and artificial intelligence.
“The demand for AI investments has found its way into crypto,” said Ram Ahluwalia, chief executive at investment adviser at Lumida Wealth Management. “Crypto tokens linked to AI have emerged as one of the strongest crypto investing themes,” he added.
Whether there are overlaps between crypto and AI is a theme for another day. For now, they are the kingfishers catching the sunlight. “It’s not surprising to see the far superior returns of AI-related tokens compared to other tokens,” added Zheng, adding that these tokens will be “the most exciting theme going into 2024.”
But ethereum’s lacklustre year behind bitcoin is not all down to being superseded by the latest tech hype cycle. US regulators are still pursuing cases that could end up defining ether and other crypto tokens as securities.
And ethereum also has to face up to its own disappointments. In September last year the network underwent a supposedly revolutionary surgery with the “Merge”. It was a technical operation, blending one ethereum blockchain with another, but came with big promises.
Before the Merge, if the ethereum network were a country, it would have ranked in the world’s top 35 by energy consumption, surpassing nations like Belgium and Finland.
The Merge virtually eliminated the network’s carbon footprint, and when I dedicated 2,500 words to ethereum’s supposed revolution, everyone I spoke to told me it was the removal of the biggest obstacle to mainstream adoption. Ether would even come on to the radars of ESG-conscious investors.
In fact, the anticipation for a record-setting future was so intense that YouTube’s former head of gaming Ryan Wyatt told me that crypto could soon focus on “onboarding the next billion users.”
But the price of ether fell in the months after the Merge, and while it has recovered, those billion users haven’t materialised.
“If the expectation was that the Merge would boost investments from ESG-minded investors I think that expectation would be premature,” said Alex de Vries, co-founder of Digiconomist, a website that tracks the environmental impact of the crypto industry.
Instead, ether is at risk of being eclipsed by bitcoin. At the time of the Merge, bitcoin’s market capitalisation represented roughly 40 per cent of the entire crypto market and ethereum’s share was 18 per cent, according to industry data aggregator CoinMarketCap.
Today ethereum accounts for 17 per cent while bitcoin’s share has expanded to 52 per cent.
If conversations with family and friends this Christmas do veer down the cryptocurrency road, good luck in explaining it. And even better luck in explaining how it’s not all about bitcoin.
