Zaheer Ebtikar, Chief Investment Officer (CIO) and founder of Split Capital – a hedge fund specializing in investments in liquid tokens – assigned Ethereum’s impoverished performance over recent months due to strategic missteps by the Ethereum Foundation and structural changes in crypto capital flows. In an analysis shared via X (formerly Twitter), Ebtikar writes: “Regardless of the countless (likely) bad decisions made by the ETH & co foundation, there is another structural reason why ETH is trading like a dog this cycle.”

Why is Ethereum price lagging?

Ebtikar began by emphasizing the importance of understanding capital flows in the cryptocurrency market. He identified three main sources of capital flow: retail investors who engage directly through platforms such as Coinbase, Binance and Bybit; private capital from liquid and venture funds; and institutional investors who invest directly through exchange-traded funds (ETFs) and futures contracts. However, he noted that retail investors are “difficult to quantify” and “are not currently fully present in the market”, thus excluding them from his analysis.

Focusing on private capital, Ebtikar highlighted that the segment represented the largest capital base in 2021, fueled by cryptocurrency euphoria that attracted over $20 billion in net up-to-date inflows. “Today, private capital is no longer the main capital base as ETFs and other traditional instruments have taken over as the largest net new buyer of cryptocurrencies,” he said. He attributed the decline to a series of impoverished venture investments and overhangs from previous cycles that “left a bad taste in the mouths of LP producers.”

These venture firms and liquid funds have realized that they cannot wait for the next cycle and must be more proactive. They started taking more “shots on target” in liquid play, often through private transactions involving locked tokens like Solana (SOL), Celestia (TIA), and Toncoin (TON). “These closed transactions also represented something more interesting for many companies – there is a world beyond Ethereum-based investments that is actually growing and useful and has enough market cap growth compared to ETH that could justify underwriting the investment” – Ebtikar explained.

He noted that investors realized that obtaining funds for venture and liquid investments would be increasingly tough. Without the return of retail capital, institutional products have become the only viable route to bidding on ETH. Mindshare began to fall apart as the 2021 three-year vintage approached, and products like BlackRock’s spot Bitcoin ETF (IBIT) gained legitimacy as the de facto benchmark for cryptocurrencies. Private capital had to make a choice: “Abandon your core ETH portfolio and move down the risk curve, or hold your breath until the traditional players start bailing you out.”

This led to the creation of two camps. The first consisted of pre-ETF sellers of ETH between January and May 2024 who gave up ETH and converted to assets such as SOL. The second group, selling ETH after ETF from June to September 2024, realized that ETF inflows into ETH were faint and that much more would be needed for the ETH price to gain support. “They understood that ETF flows were weak and it would take much longer for the ETH price to become supportive,” Ebtikar noted.

Turning his attention to institutional capital, Ebtikar noted that when spot Bitcoin ETFs such as IBIT, FBTC, ARKB and BITW hit the market, they exceeded expectations. “These products have exceeded every realistic goal that investors and experts could have imagined based on their success,” he said. He emphasized that Bitcoin ETFs have become one of the most successful ETF products in history. “BTC has gone from being a dog in the average portfolio and has now become the only funnel for raising net new capital in cryptocurrencies, and at a record pace,” he said.

Despite Bitcoin’s surge, the rest of the market has not kept up. Ebtikar questioned why this is happening, pointing out that crypto-native investors, retail investors and private capital have long since reduced their Bitcoin holdings. Instead, they are “stuck with altcoins and Ethereum as the core of their portfolio.” As a result, when Bitcoin received its institutional offering, few in the crypto space took advantage of the up-to-date wealth effect. “Few in crypto have been the beneficiaries of the newly created wealth effect,” he noted.

Investors began to re-evaluate their portfolios, unable to decide on their next moves. Historically, crypto capital has moved from index assets like Bitcoin to Ethereum and then down the risk curve to altcoins. However, investors speculated on potential flows into Ethereum and similar assets but were “fundamentally wrong.” The market began to diversify and the dispersion of asset returns increased. Professional cryptocurrency investors and traders moved aggressively down the risk curve, and funds followed suit, generating returns.

The asset they decided to reduce their exposure to was Ethereum – the largest asset in their core portfolios. “Slowly but surely, ETH started to lose momentum to SOL and the like, and a non-trivial percentage of that flow started to really shift down to memecoin,” Ebtikar noted. “ETH has lost its moat among crypto-savvy investors, the only group of investors that have been interested in buying in the past.”

Even with the introduction of spot ETH ETFs, institutional capital has not paid attention to Ethereum. Ebtikar described Ethereum’s situation as suffering from “middle child syndrome.” He explained: “The asset is not in vogue among institutional investors, the asset has lost favor in crypto private capital circles, and there is no sign of retail offering anything of this magnitude anywhere.” He emphasized that Ethereum is too substantial for domestic capital to support it, while other index assets such as SOL and huge companies such as TIA, TAO and SUI are attracting investor attention.

According to Ebtikar, the only way forward is to expand the circle of potentially interested investors, which can only happen at the institutional level. “The greatest chances for ETH to make a significant return to the market (apart from changes in the trajectory of the basic protocol) lie with institutional investors who will take over the assets in the coming months,” he suggested. He acknowledged that while Ethereum faces significant challenges, it is “the only other asset with an ETF and that will likely be the case for some time.” This unique position offers a potential path to recovery.

Ebtikar mentioned several factors that could impact Ethereum’s future trajectory. He cited the possibility of a Trump presidency that could bring changes to the regulatory framework affecting cryptocurrency. He also pointed to potential changes in the Ethereum Foundation’s direction and focus, suggesting that strategic changes could reignite investor interest. Additionally, he highlighted the importance of marketing the ETH ETF by classic asset managers to attract institutional capital.

“Given the possibility of a Trump presidency, the change in direction and primary focus of the Ethereum Foundation, and the marketing of the ETH ETF by traditional asset managers, the father of smart contract platforms has quite a chance,” Ebtikar noted. He expressed cautious optimism, stating that all is not lost for Ethereum.

Looking ahead to 2025, Ebtikar believes it will be a critical year for cryptocurrency and Ethereum in particular. “2025 will be a very interesting year for cryptocurrencies, and especially for Ethereum, as most of the damage from 2024 may be repaired or made even worse,” he concluded. “Time will tell.”

At the time of publication, ETH was trading at $2,534.

Featured image created with DALL.E, chart from TradingView.com