JPMorgan says ether will likely outperform bitcoin next year

JPMorgan expects ether to outperform bitcoin and other cryptocurrencies in 2024, although the bank remains generally "cautious" about crypto markets in the coming year.

"We believe that next year Ethereum ETH +0.091% will re-assert itself and recapture market share within the crypto ecosystem," JPMorgan analysts led by Nikolaos Panigirtzoglou wrote in a note on Wednesday. "The main catalyst is the EIP-4844 upgrade or Protodanksharding, which is expected to take place during the first half of 2024. We believe that this upgrade will likely prove a bigger step towards improving Ethereum network activity, thus helping Ethereum to outperform."

Protodanksharding is an initial step toward the full implementation of Danksharding, a more efficient form of sharding for Ethereum. Unlike the originally planned sharding technique, Danksharding avoids the complex process of splitting Ethereum into multiple shard chains. Instead, it introduces data blobs, temporary data packets attached to blocks, capable of holding more data than blocks but not permanently stored or accessed by the Ethereum virtual machine.

The upgrade is particularly beneficial for Layer 2 networks like Arbitrum and Optimism, JPMorgan analysts reiterated, as it provides an additional temporary data space to increase network throughput and reduce transaction fees for Layer 2 networks on Ethereum. In essence, data blobs enhance the efficiency of Layer 2 networks without altering the Ethereum block size.

Bitcoin halving priced in 

JPMorgan analysts say factors that are seen to be bullish for bitcoin next year, including the possible approval of spot  ETFs and upcoming halving, are already priced in. 

The analysts mentioned that after the 2020 halving, the ratio of bitcoin's market price to production cost decreased and said a similar move after the 2024 halving would be reasonable.

"And given the current ratio of the bitcoin price to production cost is around x2.0 at the moment, this would imply that the 2024 bitcoin halving event is largely in the price," the analysts concluded.

DeFi's 'biggest disappointment'

The "biggest disappointment" of decentralized finance continues to be its inability to encroach into the traditional financial system, which is necessary for the crypto ecosystem to transition from crypto native to real world applications, according to JPMorgan analysts.

"The biggest applications of blockchain to traditional finance, i.e. overnight repo transactions via smart contracts in blockchain platforms hosted by companies such as Broadridge and JPMorgan, take place outside public blockchains," the analysts said. In addition, tokenization is evolving "rather slowly," and it remains at a "largely experimental stage hindered by fragmentation, lack of cooperation and interoperability between platforms, delays in the introduction of central bank digital currencies by the Fed and the ECB and lack of regulations," they added.

Crypto VC funding outlook

While venture capital funding in the crypto space in the fourth quarter of this year has improved compared to a rather subdued rest of the year, the improvement appears "rather tentative" to JPMorgan analysts.

"That said, to the extent this improvement continues into the first quarter of 2024 that would represent a significant development that would herald in our opinion the end of the crypto winter," the analysts said.