Fidelity Report: 47% of Investors Expect Ethereum to “Surpass” Bitcoin

Fidelity Digital Assets released its 2023 Q2 Signal Report on July 18, claiming that Ethereum’s outlook for the next 12 months and the long term is positive. Ethereum has risen 62% so far this year. While the investment firm is bullish on Ethereum in the short term, this does not mean that it believes the month-long bullish channel will continue.

While institutional investors like Fidelity Digital Assets may be optimistic about the price of ETH, let’s compare their analysis with network and market data to see if they are correct.

Ethereum/USD 1-day price index. Source: TradingView

In addition to technical indicators, Fidelity's bullish case for Ethereum's prospects also includes the network's higher burn rate relative to token issuance, "new address momentum," and growth in the number of network validators.

Fidelity “2023 Q2 Signal Report,” July 18. Source: Fidelity Digital Assets

According to Fidelity’s report, net issuance since the September 2022 merger has resulted in a net supply reduction of more than 700,000 Ethereum. In addition, analysts claim that Glassnode data shows an increasing number of Ethereum addresses making first transactions, which proves that the network is being actively used.

The report also noted that the number of active Ethereum validators increased by 15% in the second quarter.

Anticipation around EIP-1153 has also fueled the Ethereum network , as the “transient storage opcode” improves smart contract efficiency, reduces costs, and expands the Ethereum Virtual Machine design. The change is particularly meaningful for decentralized exchanges (DEX), where Ethereum’s dominance has fallen from 60% six months ago to 46%, according to DefiLlama.

Dencun upgrade expected to reduce transaction costs

Another potential bullish factor for the Ethereum network is the expected upgrade of the leading DEX Uniswap. According to a presentation at the Ethereum community meeting on July 17, the upcoming Uniswap v4 will allow users to build unlimited types of pools using programmable buttons (pegs), native ETH support, and a singleton contract that performs internal transactions before settling the final balance.

The announcement raises the possibility that EIP-1153 will be included in the next “Dencun” upgrade, which has caught the attention of Slingshot and DeFi Pulse co-founder Scott Lewis.

If approved, this will be crucial to making up for the market share lost by the Ethereum network due to high gas fees, as the seven-day average transaction cost has exceeded $4 since February. As a result, Ethereum’s total locked value has fallen to its lowest level since April 2020, at 13.55 million ETH, according to DefiLlama data.

In addition, decentralized application activity has decreased, with DappRadar's unique active wallet 30-day data showing: Uniswap, minus 28%; 1inch Network, minus 14%; MetaMask Swap, minus 8%; OpenSea, minus 5%. In contrast, BNB Smart Chain's PancakeSwap users grew by 10% and Polygon's Uniswap users grew by 8% during the same period.

Derivatives indicators remain stable

Ethereum quarterly futures have been sending uneasy signals from professional traders. These fixed-month contracts typically trade at a 5% to 10% premium compared to the spot market to compensate for delayed settlement, a condition known as contango.

Ethereum 3-month futures premium. Source:   Laevitas

Data from Laevitas shows that the Ethereum three-month futures premium is currently 4%, below the neutral threshold and lower than the 5.5% level on July 14. This indicator clearly shows that traders are less inclined to use leverage to take bullish ETH positions.

More worryingly, Ethereum’s 59% year-to-date gain may have made investors too optimistic. A recent CryptoVantage survey of 1,000 North Americans who have invested in cryptocurrencies in the past five years found that 46% believe Ethereum is the top contender to surpass Bitcoin.

Which tokens are most likely to surpass Bitcoin? Source: CryptoVantage Survey 2023

That’s a somewhat surprising view, but it could be misleading because the survey didn’t ask whether any coins would eventually overthrow Bitcoin, so respondents didn’t necessarily hold out high hopes for that outcome.

Fidelity’s analysis provides a plausible reason for the firm’s bullish 12-month price performance for Ethereum, but in the short term, recurrently high gas fees and a lack of interest from leveraged buyers suggest an increased likelihood of Ethereum prices falling below channel support.