Why is Ethereum (ETH) Price Undervalued Compared to the Broader Crypto Market?

Traders are now concerned that Ether could underperform even if the broader crypto bull market resumes as U.S. fixed income yields are expected to decline. So, what exactly is weighing on Ether price?

Some market participants may attribute the cryptocurrency’s mediocre performance to conditions in traditional financial markets, but Ether also faces its own set of challenges, including declining network fees, unattractive staking rewards, and weak demand for recently launched products like Ether-based exchange-traded funds (ETFs). It’s therefore worth considering whether these factors will further depress Ether’s price in the future.

From a macroeconomic perspective, there is uncertainty surrounding the likely interest rate cut decision by the US Federal Reserve, which is expected in September. Esther George, former Kansas City Fed President, noted that there is still hope for achieving the 2% inflation rate, but the Fed’s credibility could be at risk, especially if the labor market weakens, Yahoo Finance reports.

Additionally, Philadelphia Fed President Patrick Harker has said that the Fed’s interest rate cuts could become more aggressive if the labor market worsens. Typically, more expansionary monetary policy favors risk markets, but if investors fear a coming recession, demand for safe haven assets will increase, causing traders to seek safer investments, which could negatively impact the price of Ether.

Traders are particularly concerned about the tech sector, especially after Nvidia shares lost a record $279 billion in market capitalization on September 3. The chipmaker saw a 14% decline in three days after two cautious reports on the growth of the artificial intelligence sector. In addition, Nvidia was subpoenaed on November 3 as part of an antitrust investigation by the US Department of Justice.

However, several factors unique to Ether may justify its potential undervaluation compared to the broader cryptocurrency sector. For example, reduced activity on the Ethereum base layer has led to lower fees, which poses a threat to the stability of the network. Some may argue that this reflects the successful adoption of layer-2 scaling solutions, but it still poses a risk in terms of long-term incentives.

In the week ending August 31, Ethereum network fees fell to their lowest level in over four years, reaching $3.1 million, according to DefiLlama. This 88% drop in four weeks has prompted criticism of Ethereum’s compensation model. One such critique, posted by AbstractChain contributor Cygaar, blames the “effectively free” data availability costs for rollups for the drop.

Cygaar also highlights the relatively low demand for layer-2 solutions due to the lack of “interesting consumer applications” that could help restore healthy fee levels. The analyst questions whether researchers have overestimated rollup demand and whether gas costs need to be maintained for the long-term security of the network.

In addition to falling network fees, Ether is also facing problems with its spot ETF products, which saw $47 million in net outflows on September 3. In fact, these instruments have seen $475 million in outflows since their debut on the US market on July 23. The lack of investor interest is a concern, especially considering that institutional demand was considered a key element of Ether’s appeal. Another factor contributing to Ether’s price decline is its relatively low staking reward of 3.2%, especially given the current annual inflation rate of 0.7%, according to StakingRewards. The yield is lower than most US government bonds, and the failure to deliver on the “ultrasonic money” narrative promoted by some analysts could disappoint investors.

Ultimately, there are no signs that the factors putting pressure on Ether’s price, such as falling network fees and low demand for spot ETF products, will change anytime soon. While this doesn’t guarantee that Ether’s price will remain below $2,550, it does suggest that ETH is unlikely to outperform the broader crypto market anytime soon.