Ether Could Surprise to the Upside in the Coming Months, Coinbase Says

• Coinbase said ether has the potential to surprise to the upside in the coming months.

• The cryptocurrency unlikely to be displaced as the center of decentralized finance, the report said.

• The market may be underestimating the timing and odds of a potential approval of a U.S. spot ether exchange-traded fund.

Ether (ETH) has underperformed the broader crypto market this year, but its long-term positioning remains strong and it has the potential to surprise to the upside, Coinbase (COIN) said in a research report on Wednesday.

The second-largest cryptocurrency by market value has risen 29% year-to-date, less than two-thirds the surge its larger rival bitcoin (BTC) which has gained 50%. The CoinDesk 20 Index (CD20), a measure of the broader crypto market, has advanced 28%.

“Ether may have the potential to surprise to the upside in the coming months,” the report said, noting that the cryptocurrency does not have “major sources of supply side overhangs” such as token unlocks or pressure created by miners’ sales.

“To the contrary, both staking and layer 2 growth have proven to be meaningful and growing sinks of ETH Liquidity,” wrote analyst David Han. “ETH’s position as the center of decentralized finance (DeFi) is also unlikely to be displaced in our view due to the widespread adoption of the Ethereum Virtual Machine (EVM) and its layer 2 innovations.”

The EVM is the Ethereum blockchain’s native processing system that allows developers to create smart contracts and lets nodes interact with them. Layer 2s are separate blockchains built on top of layer 1s, or the base layer, that reduce bottlenecks with scaling and data.

Moreover, the importance of potential spot U.S. ether exchange-traded funds (ETFs) cannot be understated. “We think the market may be underestimating the timing and odds of a potential approval, which leaves room for surprises to the upside,” Coinbase said

“Even if the first deadline of May 23, 2024 encounters a rejection, we think there is a high likelihood that litigation could reverse that decision,” the note said. “In the interim, we believe the structural demand drivers for ETH as well as the technological innovations within its ecosystem will enable it to continue straddling across multiple narratives.”