Ethereum's native token, ETH, delivered a robust 82% price gain in 2023. However, this strong absolute performance was overshadowed by its significant underperformance relative to Bitcoin and even some other smart contract platform tokens. This divergence reflects a year defined by Bitcoin-specific catalysts and a slower-than-anticipated recovery in certain on-chain activities within the Ethereum ecosystem.
Despite this relative lag, Ethereum’s performance on both an absolute and risk-adjusted basis substantially outperformed traditional asset classes. Looking ahead, the continued evolution of Ethereum’s Layer 2 (L2) ecosystem holds the potential to attract new users and support the token's valuation in 2024.
Understanding Ethereum's Relative Underperformance
Calling an asset that appreciated over 80% an "underperformer" seems counterintuitive. Yet, in the context of the crypto market's 2023 rebound, ETH did indeed trail behind the leader. While ETH's gains came with relatively low price volatility, they paled in comparison to Bitcoin's impressive 162% surge. This dynamic caused the ETH/BTC price ratio to trend downward throughout the year, reaching its lowest point since mid-2021.
Grayscale Research identifies several core reasons for this performance gap.
Bitcoin-Specific Catalogs Drove Outsize Flows
The year 2023 was marked by several positive developments unique to Bitcoin. Progress toward the potential approval of a U.S. spot Bitcoin ETF and instability in the American regional banking sector both highlighted Bitcoin's role as an alternative, decentralized monetary system. These events appear to have driven significant inflows into Bitcoin-focused crypto investment products throughout the year, which contributed to its larger price returns.
Analysis indicates that net inflows into Bitcoin-focused exchange-traded products (ETPs), including U.S. futures products and international spot products, totaled approximately $2 billion in 2023. In stark contrast, net inflows into Ethereum-focused ETPs amounted to a mere $24 million during the same period. This vast disparity in institutional flow highlights the singular focus investors placed on Bitcoin this year.
Ethereum Traded in Line with Its Broader Sector
It's important to view Ethereum's performance within its proper context: the smart contract platform sector. While its gains were lower than Bitcoin's, most smart contract platform tokens also underperformed the leading cryptocurrency. The FTSE Grayscale Smart Contract Platforms Crypto Sector Index rose roughly 94% in 2023, only slightly higher than ETH's standalone performance.
Throughout much of the year, until around October, Ethereum’s performance was actually stronger than many of its peers. However, tokens like AVAX and SOL saw remarkable rallies later in the year, closing the performance gap. On a full-year basis, ETH’s performance ranked near the middle of the pack among the 40 tokens within this crypto sector.
Slower Recovery in Key On-Chain Activity
A third factor was the pace of recovery for on-chain activity on the Ethereum mainnet compared to other chains. In certain categories, like non-fungible token (NFT) trading volume, other networks saw faster growth. For instance, since the start of the fourth quarter, Solana's NFT trading volume grew at a significantly faster rate (~15x) compared to the growth on Ethereum (~2x).
Furthermore, digital collectible transactions on Bitcoin surged due to the rise of Ordinals. In a striking development, Bitcoin's daily transaction fees even exceeded those on Ethereum in late December, driven entirely by high volumes of Ordinal inscriptions. While Ethereum's NFT ecosystem remains fundamentally strong, Solana and Bitcoin have recently captured notable market share in this specific area of on-chain activity.
Ethereum's Performance in a Wider Context
Despite trailing behind Bitcoin and some other crypto assets, Ethereum's 82% gain significantly outperformed all major traditional asset classes in 2023. More importantly, it achieved this with lower volatility, meaning it delivered superior risk-adjusted returns compared to equities and commodities.
This strong absolute performance should be viewed as evidence of a broadening crypto recovery, not as a weak result. The focus on its relative underperformance is a crypto-native narrative; from a traditional finance perspective, an 82% gain is exceptional.
The Road Ahead for Ethereum in 2024
Despite the intense competition and focus on other blockchains in 2023, Ethereum's future remains bright. The network continues to benefit from the deepest network effects in the industry, boasting the largest ecosystem of decentralized applications (DApps), the most developers, and the highest protocol revenue.
Ethereum’s development path is focused on a "modular" approach. This strategy involves building a vibrant ecosystem of Layer 2 blockchains on top of the foundational Layer 1 chain to allow for scalable activity. This multi-layered structure is key to its long-term growth.
A major step forward for this scaling vision is expected in 2024 with the implementation of EIP-4844 (Proto-Danksharding). This upgrade is anticipated to reduce the cost of confirming transactions on Layer 2 scaling solutions by 10 to 100 times. This drastic reduction in fees will make using Ethereum's L2s a far more cost-effective experience for users.
If Ethereum can successfully leverage its evolving L2 ecosystem to attract a new wave of users, it could reclaim center stage in 2024. The competition within the smart contract platform sector is arguably the most intense across all crypto sectors.
Low-cost "monolithic" blockchains like Solana can offer a compelling and seamless experience for new users, especially when paired with well-designed wallets and ecosystem apps. In contrast, Ethereum's modular environment can be more complex to navigate, requiring users to actively bridge assets between the mainnet and its various L2s.
However, the development of these networks is still in its early stages. It remains to be seen which blockchain design choices will achieve the best product-market fit and accrue the most value to their native tokens over time. As the industry matures, the end-user experience is expected to become more abstracted; users will primarily interact with applications while the blockchain infrastructure operates seamlessly in the background. At that point, Ethereum's other features—such as its proven security and deep decentralization—may become more powerful attractors for developers and, ultimately, support a higher token valuation.
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Frequently Asked Questions
Why did Ethereum underperform Bitcoin in 2023?
Ethereum's relative underperformance was primarily due to Bitcoin-specific catalysts, including positive progress toward a spot ETF and its perceived role as a safe haven during regional banking instability. These factors drove disproportionately large investment flows into Bitcoin-focused products. Ethereum also saw a slower recovery in some on-chain activities like NFT trading compared to chains like Solana.
Was Ethereum's performance in 2023 actually bad?
No, absolutely not. An 82% gain is a tremendously positive annual return. The term "underperformance" is only used in a relative sense compared to Bitcoin's 162% gain. On an absolute basis and especially on a risk-adjusted basis, Ethereum significantly outperformed all major traditional asset classes like stocks and bonds.
What is Ethereum's main advantage over competitors?
Ethereum's primary advantage is its extensive network effects. It has the largest and most active ecosystem of developers, decentralized applications (DApps), and users. It also boasts a proven track record of security and decentralization, which are critical for long-term reliability and trustlessness. Its modular scaling approach via Layer 2s is designed to maintain these strengths while improving scalability.
What is EIP-4844 and how will it help Ethereum?
EIP-4844, also known as Proto-Danksharding, is a major Ethereum upgrade expected in 2024. It introduces a new way to handle data for Layer 2 rollups. This is projected to reduce transaction costs on L2s by a factor of 10-100, making the Ethereum ecosystem much more affordable to use and thus more competitive.
How can investors approach the smart contract platform sector?
Given the high level of competition and uncertainty about which platforms will ultimately succeed, diversification can be a prudent strategy. Instead of betting on a single token, investors might consider gaining exposure to the entire smart contract platform sector to capture the overall growth of decentralized application adoption.
Will Layer 2 solutions solve Ethereum's scalability issues?
Layer 2 solutions are already significantly improving Ethereum's scalability by processing transactions off-chain and then posting compressed data back to the mainnet. Upgrades like EIP-4844 are designed to make this process even cheaper and more efficient. While it's an ongoing process, L2s are the cornerstone of Ethereum's strategy to achieve global scale without compromising on decentralization.