Analysts at research and brokerage firm Bernstein identified ether’s supply dynamics, restaking protocols, its Dencun upgrade and Uniswap’s fee switch proposal among the catalysts behind its break above the $3,000 mark — but not spot ether exchange-traded funds.

With the spot Bitcoin ETFs launching successfully in January — attracting average daily inflows of around $200 million — attention has turned toward another narrative for crypto markets — the prospect of a spot ether ETF in the U.S. Big-name firms, including Fidelity, BlackRock and Franklin Templeton have applied for a spot ether ETF over the past few months.

Bloomberg ETF analyst Eric Balchunas recently suggested a 70% possibility for approval by May 23 — the final deadline for the Securities and Exchange Commission to rule on a spot ether ETF application from Ark and 21Shares — the first that was filed. Balchunas’ view is also shared by Standard Chartered, with the bank predicting a potential $4,000 target for ether if it mimics Bitcoin’s pre-spot ETF approval performance.

However, Bernstein analysts Gautam Chhugani and Mahika Sapra wrote in a note on Monday the prospect of spot ether ETF approvals by mid-2024 was still unclear — echoing the sentiment of TD Cowen and JPMorgan — with ether's rally led by more idiosyncratic catalysts, besides the ETF.

Catalysts behind ether’s price rally

One underappreciated catalyst is ether’s deflationary supply, according to the analysts — down 0.2% since Ethereum ETH +5.32% ’s transition to proof-of-stake consensus in September 2022, known as The Merge. “This means [the] Ethereum network has been sustainable on just the transaction fees model that provides yield to the staking validators,” Chhugani and Sapra wrote. “And the fee burn mechanism has been offsetting ETH emissions.”

The amount of ether supply locked up via staking or in DeFi smart contracts is another factor, the analysts suggested. The amount of ether supply staked on the Ethereum network reached 25% for the first time earlier this month. 

The amount of ether locked in smart contracts is also at a record high of 35%, according to the Bernstein analysts.

Ether supply in smart contracts. Image: Bernstein Research.

This is creating a reflexive feedback loop of increased demand for the cryptocurrency, with ether supply on exchanges concurrently falling to an all-time low of 11% — slightly below the 12% level for Bitcoin, Chhugani and Sapra noted.

EigenLayer restaking was also cited as a catalyst, reducing the speed to market for other protocols by using the ether stalking model to bootstrap — attracting more staking demand. EigenLayer’s protocol allows users to re-stake validators' ether stakes natively or via liquid staking tokens, allocating those funds to economically secure third-party protocols. EigenLayer currently holds around $8.4 billion in total value locked, according to DeFiLlama data.

Ethereum’s Dencun upgrade — expected on March 13 — is another factor, according to the analysts — reducing data costs for Ethereum Layer 2 networks like Arbitrum and Optimism. “Lower fees and higher throughput on Layer 2 networks would, in the short term, reduce congestion on Layer 1 but would drive overall higher volume to the Ethereum ecosystem of multiple interoperable Layer 1/2/3 chains,” the analysts wrote.

Finally, Chhugani and Sapra suggested the “return of DeFi” was a further catalyst, with the Coinbase vs the Securities and Exchange Commission case “hopefully providing clarity on token regulations,” and Uniswap’s recently proposed fee-sharing mechanism for UNI token stakers “giving rise to hope that token economic designs could get better” — driving activity and value accrual to ether.

Ether outperforms Bitcoin in 2024

Ether has outperformed Bitcoin so far this year, gaining around 34% compared to Bitcoin’s 21% price increase. Ether is currently trading at $3,052, according to The Block’s price page, up 5% over the past week.

Bernstein’s own digital asset portfolio — which includes Bitcoin, Ether, Optimism, Arbitrum, Polygon, Link, Lido, Solana and Uniswap, among others — is also outperforming Bitcoin alone for the first time since its July 2023 inception, Chhugani and Sapra added. Bernstein’s crypto portfolio is up 94% compared to Bitcoin’s 77% gain over the same period.

“We believe this is quite significant as a signal to understand the crypto bull market is getting wider,” they wrote.