Ethereum  is showing poor price performance relative to its peers, which provides clues about its future.

According to Richard Durant, a finance graduate who heads asset manager Narweena, there are seven key factors that are impacting the price. The main one, in his opinion, is US monetary policy, he said in a detailed analysis.

Interest rates in the economic powerhouse remain at their highest levels in 20 years, which, according to the specialist, “continues to drain liquidity from the system.” “This has had a dramatic impact on some assets and stocks, although many are not affected,” he said.

This can be seen in the following chart which shows the correlation between lower global liquidity and the falling price of ether (ETH) as measured in bitcoin (BTC).

Correlation between liquidity and ETH performance. Source: Seeking Alpha.

In his view, ETH is a risky asset that is trading in line with other major assets such as the Nasdaq stock index. Although for the specialist, the latter has had a better performance in recent months due in part to the rise of artificial intelligence (AI).

“As recent inflation data points towards a possible easing of monetary policy, there is a chance that Ethereum’s performance will strengthen in the future,” he said.

In his view, ETH is a risky asset that is trading in line with other major assets such as the Nasdaq stock index. Although for the specialist, the latter has had a better performance in recent months due in part to the rise of artificial intelligence (AI).

“As recent inflation data points towards a possible easing of monetary policy, there is a chance that Ethereum’s performance will strengthen in the future,” he said.

Ethereum needs to improve its narrative against the competition

The specialist also highlights that Ethereum lacks the digital gold narrative of bitcoin and, as such, depends more on demonstrating its use in the real world. For this reason, he highlights, secondly, another key factor in the foundations of this network.

“Technical progress has been slow and real-world adoption is still limited,” Durant said of the ETH network, which seeks to be a hub for decentralized applications. “Ethereum is prioritizing decentralization and as a result, scalability remains an issue,” he said.

This is partly due to competition with networks that offer faster, cheaper transactions, which leads to the third key point. “Ethereum is competing against many networks, some of which have managed to craft compelling narratives at various times,” he stressed. Therefore, it is crucial for its performance to position itself better.

Fourthly, the number of active ETH addresses suggests that the proportion of buyers has increased alongside the price in recent months, although it has been quite modest. “Unlike in 2020, the price has led the demand and not the other way around, which I think is somewhat worrying,” the financial specialist commented.

The price of ETH is shown in red, and the number of active addresses of the cryptocurrency is shown in blue. Source: Seeking Alpha.

The number of active addresses is 16% below the all-time high it reached in 2021. For Durant, the reason is that a growth engine similar to the hype caused in that cycle by the development of NFT and DeFi has not emerged . In addition, this sector is being driven by networks such as Solana that offer more profitable transactions.

Fifthly, the analyst warns that “artificial intelligence and autonomous agents could be an emerging driving wind for Ethereum.” Without going any further, Grayscale launched this week an investment fund in niche cryptoassets which shows the growing interest in the market.

In this sense, it may be key for Ethereum to emerge as a site that promotes these developments. However, for Durant, “it is too early to say how big the impact of AI will be.”

As seen below, the sixth factor is the issuance of the cryptocurrency, which has become inflationary again this year with the Dencun upgrade by reducing transaction fees. This has put an end to the deflationary period it had since 2022 with the Merge upgrade that changed the network to proof of stake.

The price of ETH is shown in red, and the inflation of its supply is shown in blue. Source: Seeking Alpha.

The increased issuance implies greater downward pressure on the price in the long term if validators sell their issued ETH. However, according to Durant, the impact on the market may be exaggerated.

“Inflation is modest and I don’t think this will be a major driver of ether price going forward,” he said. In his view, “the significance of supply changes is often exaggerated, particularly when viewed in isolation.”

In line with this, Kennan Mell, a software engineer and technology investment specialist, has stated that bullish expectations for Ethereum should not be changed by its inflation . He attributes this to the fact that ETH’s fundamentals are not centered on deflation, but on its capacity for application development.

“After Ethereum was marketed as a deflationary asset for the past two years, some investors may view the shift to inflation as a failure of their investment thesis,” Mell said. However, the annual inflation rate is less than 1%, which is lower than gold, so he does not expect a negative impact.

Ethereum ETFs could boost price this year

Finally, in seventh place, the launch of Ethereum exchange-traded funds ( ETFs ) in the United States, expected next week , is another key point for the market. For Durant, there may be a positive dynamic similar to that of Bitcoin, attracting large capital inflows that drive the price, beyond exits in some due to competition.

He believes that the fact that ETFs do not offer rewards for staking coins , an attribute that was removed in order for them to be approved, may limit their appeal. According to Citibank, the instruments could raise around $5 billion in the first six months, which represents 30% of BTC's.

With this scenario in place, the financial specialist concludes that even if Ethereum is widely adopted, the current roadmap clouds the valuation based on fundamentals . “I don’t expect Ethereum’s value to continue to increase rapidly in the long term, even if short-term factors support it,” he concluded.

This assessment is different from others that project that ETH will continue on an upward trend due to the development of its network. An example of this is the fund issuer VanEck, which predicts its price to reach USD 22,000 by 2030.

Meanwhile, various entities agree that, with the influence of ETFs, the cryptocurrency will reach new record prices towards the end of 2024. The fund issuer Bitwise expects it to exceed USD 5,000 by then, while others have been more bullish, such as the bank Standard Chartered, which is aiming for USD 8,000.