Ethereum ETF Struggles Amidst Sluggish Layer 1 ⁣Activity

Since its launch in July 2024, the Ethereum‌ (ETH) exchange-traded⁢ fund (ETF) has faced significant challenges, with net outflows‍ of $610 million. In contrast, the Bitcoin ETF has seen net outflows of $330‌ million over the same period.

Ethereum, the world’s second-largest cryptocurrency, has consistently underperformed Bitcoin since its launch. Its‍ share of the global cryptocurrency market cap ​has also steadily declined, raising⁣ concerns about its long-term​ prospects.

Despite significant growth in Layer 2 usage, Layer 1 Ethereum⁣ activity remains sluggish. However, this trend could⁣ change depending ⁢on the risk-friendly stance taken by the Federal Open Market Committee (FOMC) in September, according to Citi analysts.

Citi analysts believe that if the broader‍ risk-on market environment persists, cryptocurrencies and ETH could find support and potentially reverse the net ETF outflows. However, this would require improved‍ activity on⁤ the Ethereum network.

The dovish FOMC decision ⁤appears to have halted the downtrend in ETH versus BTC, as the ratio has moved⁢ slightly lower since the meeting. Nevertheless, the challenge is still significant, with⁤ only about 30% of trading days seeing ‍net inflows into ‍spot ETH funds.

Citi notes that Layer 1 activity needs to increase for Ethereum’s market share to meaningfully recover. “Layer 2 network activity ⁣has been strong (especially at Base),​ but L1 active addresses have been weak, which may partly explain Ethereum’s underperformance in recent weeks,” the analysts ‍noted.

In contrast, Bitcoin ETFs continue to attract interest, with net inflows reaching $17.2 billion since launch. Bitcoin’s first-mover advantage and status‍ as “digital gold” have⁤ helped it surpass ETH in terms of inflows and ‌market dominance.

The correlation between cryptocurrencies ⁤and U.S. equities has surged in recent ‍weeks, driven by macroeconomic factors such as labor market data and the direction of the Fed’s policy.⁤ Citi expects this correlation to remain strong as ​the market gains‌ clarity on ⁢the economic outlook and potential regulatory changes.

Stocks have emerged as a major macro driver for cryptocurrencies. Notably, the crypto-USD ‍correlation‌ turned positive on August 5, a rare occurrence⁣ in recent years.

Concerns about currency devaluation, which could support both cryptocurrencies and⁢ gold, are not​ prominent at this stage. However, Citi analysts are continuing‍ to monitor for signs that⁢ these concerns may resurface.