Bitcoin was once the undisputed king of the crypto world, accounting for more than 90% of the market at the start of 2017.

Today, the original cryptocurrency is facing a massive challenge from Ethereum, the second largest digital asset.

The gulf between the two cryptoassets – once vast and seemingly unbridgeable – is rapidly becoming narrower with a number of tailwinds working in Ethereum’s favour.

ETH market cap is now half the size of BTC

Ethereum has outperformed its crypto counterpart by a staggering degree so far in 2021. This past month alone, Vitalik Buterin’s brainchild has nearly doubled in value, topping $4,370 on 12 May and crossing half a trillion dollars in market cap to surpass financial behemoths JP Morgan ($480bn) and Visa ($496bn).

Though it has since experienced a dramatic pullback (along with the wider crypto market) from its latest all-time-high, at $3k per coin today Ethereum is a far cry from the $176 price it was commanding a year ago.

Bitcoin, on the other hand, has seen its dominance fall from 70% on 1 January 2021 to 40% today.

Fadi Aboualfa, Head of Research at Copper, says institutional interest is increasingly spilling over from Bitcoin and into the second most trusted blockchain technology. “What’s been really interesting to see in recent months is the growing conviction around Ether as an asset class among sophisticated investors.”

A sure-fire signal of enhanced institutional interest in Ethereum is the volumes on the Chicago Mercantile Exchange (CME), an institution-focused derivatives exchange that has offered Ethereum futures as of February 2021.

Unlike cryptocurrency exchanges, CME is regulated in the US and has a rich history with traditional derivatives, which makes it a trusted venue for accredited investors. Back in March, CME ETH futures trading volume were relatively low but surged in April, reaching a daily high of over $500m.

Adding support to the notion that Ethereum is becoming increasingly appealing to institutions is a new report by the digital asset management firm, Coinshares. According to the firm, institutions purchased more than $30m worth of ETH during the last week of April –  bringing their total holdings to a record $13.9bn.

Aboualfa now speculates that institutional investors may be positioning themselves in front of upcoming Ethereum exchange-traded fund (ETF) launches. Though US regulators have yet to approve a crypto ETF, at least eleven companies are looking to launch one.

On 7 May, VanEck became the latest company to submit an application with the SEC. The asset manager’s request proposes an Ethereum ETF that would allow retail and institutional traders to gain exposure to the digital asset without requiring them to directly invest in it. If approved, this would be the US’s first Ether ETF, but not the first in North America.

Three Ethereum ETFs are already in operation and available in Canada on the Toronto Stock Exchange (TSX).

What’s driving increased institutional adoption?

According to Fadi, Ether’s popularity among institutional investors has been driven by a spate of factors, namely:

1. The rise in popularity of decentralised finance (DeFi) and non-fungible tokens (NFTs)
2. Improvement in the cryptoasset’s infrastructure as it phases through technical hurdles and upgrades from proof-of-work (PoW) to proof-of-stake (PoS)
3. Mainstream acceptance of crypto investing

“Ethereum is an infinite canvas for infinite ideas” - Anthony Sassano

Ethereum has emerged as the backbone for two of the fastest-growing industries within the crypto world -DeFi and NFTs.

“There's a huge allure to actually doing things with a cryptoasset outside of holding, sending or receiving it.” Fadi says. “Despite ongoing issues with congestion on the network, institutional investors have been transfixed by the innovation happening on Ethereum. From stablecoins running on top of it to the numerous DeFi and NFT projects, the Ethereum network is undeniably the most utilised in the entire crypto space.”

Fadi also highlights the growing belief among institutional investors that ETH has a sort of correlative-value relationship with the DeFi ecosystem. “In the same way that MicroStrategy serves as a proxy for Bitcoin, some investors view Ethereum as a way of getting indirect exposure to the burgeoning DeFi market without all the complexities associated with decentralised protocols.”

[caption id="attachment_6333" align="alignnone" width="596"] Graph snapshot: 17 May 2021[/caption]

Today, the total-locked value (TVL) in DeFi exceeds $82bn with Ethereum still holding the mantle as the most popular smart contract blockchain application for DeFi protocols. “Including the $40bn+ of stablecoins, it’s easy to see why the price of Ethereum sky rocketed. The value capture on the network was valued more than the network itself. It was a market asymmetry that’s adjusted itself” said Fadi.

The next network upgrade in July could send ETH ether even higher

Toward the end of 2020, Ethereum launched its Beacon Chain, the first mainnet of a totally new and scalable Ethereum 2.0.

Ethereum 2.0 will take place over the course of multiple years and looks set to strengthen Ethereum’s overall value proposition by enhancing the network’s speed, efficiency, security, and scalability for processing transactions.

“While the full transition could take several years to complete, Ethereum’s evolution to a proof-of-stake blockchain is being observed with enthusiasm by institutional investors.” Fadi added.

The cryptoasset’s transition from a PoW to a PoS blockchain means blockchain users can earn rewards for helping run the network based on the amount of ETH they lock into it, as opposed to the amount of computer power they provide.

Fadi believes that this upgrade will add substantially to Ethereum’s appeal because “rather than just being a pure commodity, ETH becomes something of a yield-generating asset, where you can lock it for an interest rate, and you can raise debt against it.” Moreover, with Elon Musk helping to resurface the environmental debate surrounding Proof-of-Work, the switch to a less energy-intensive consensus mechanism may quell the criticism from environmentalists and enable another wave of adopters to join.

Crucially, Fadi also points to the introduction of Ethereum Improvement Proposal (EIP) 1559 this summer, as a key driver of increased interest in ETH.

EIP was first proposed by Vitalik Buterin in 2018 and strives to introduce a base fee amount to Ethereum transactions. Crucially, this will add a deflationary mechanism to the economics of Ethereum and potentially pave the path for Ether’s transition to a store of value asset – similar to Bitcoin.

“Bitcoin’s popularity among sophisticated investors is largely due to its recognition as a scarce asset with a supply limited to 21 million tokens. Ethereum theoretically has an unlimited supply, which has led to it being largely ignored as a store of value, but this could change with the implementation of EIP 1559 in July.”

There is room for more than one dominant player...

Ethereum’s recent bull run, along with the spike of altcoins such as Binance Coin and Cardano, suggest that investors are getting more comfortable with a variety of digital assets.

Earlier this year, Switzerland-based investment product provider 21Shares unveiled a suite of ETPs providing exposure to cryptoassets such as Polkadot, Stellar and Cardano.

The asset management firm’s CEO, Hany Rashwan, said that Swiss and European institutional investors had been approaching the firm relentlessly requesting “simple and effective access to new blockchain technologies.” He also commented that after having gained exposure to Bitcoin, there is a natural transition for investors to explore other cryptoassets.

Fadi commented: “After having sat out on Bitcoin’s adolescent years and witnessed its astronomical growth from the sidelines, some financial institutions and accredited investors are feeling the pressure to be early movers with other cryptoassets. Granted, the infrastructure was simply ready for large players in 2017. This is where Copper has been able to bridge the gap for sophisticated traders that wish to leap into the space securely with access to every aspect of the space. From delegating assets rather than transferring them onto an exchange, taking advantage of DeFi and even staking, there are no more hurdles. The only decision necessary is to invest.”

Looking ahead, Fadi says that while Bitcoin will continue to dominate the wider crypto conversation, it remains to be seen whether ETH will lead the next stage of blockchain implementation. “Ethereum is an immensely powerful asset that has not only created a new landscape for innovation, but shakes the boundaries of what we thought money could do.”

Just a few weeks back, in a major development for the world’s largest smart contracts platform, Ethereum was awarded a huge stamp of approval by the European Investment Bank - which issued its first ever digital bond on the Ethereum blockchain.

“Ethereum making inroads in the segment of public bonds certainly grants major credibility to the blockchain as the dominant global settlement layer. Yet despite all of ETH’s potential, the slow transition to ETH 2.0 has brought competing projects under the spotlight. “

“The rise of BNB, Cardano, Polkadot and other blockchains are very real evidence of Ethereum's unsteady position as leader of the smart contract platform ecosystem. While Ethereum could very well remain the frontrunner in the smart contract race for years to come, the multi-chain world is here. And it won’t be going away.”