Ether's latest rally to all-time highs appears to be driven, in part, by the sort of institutional investors who piled into bitcoin in 2020 for its digital gold narrative.
More institutional investors are seeing ether as a store of value, according to Coinbase’s annual review for 2020. The crypto exchange noticed “a growing number” of its institutional clients have taken positions in ether, the native currency of the Ethereum network, for its strong returns. These clients predominantly bought bitcoin in 2020.
“The case for owning ethereum [ether] we hear most frequently from our clients is a combination of, first, its evolving potential as a store of value and, second, its status as a digital commodity that is required to power transactions on its network,” according to the report.
As industry leaders including Coinbase and Gemini continue to take a bullish view of ether, an increasing number of large investors are also exploring the sub-sector called decentralized finance (DeFi), according to analysts and traders.
“I think the more adventurous institutions are exploring ethereum and DeFi after they looked at bitcoin,” Arthur Cheong, founder and portfolio manager at DeFi-focused crypto fund DeFiance Capital, told CoinDesk.
“Just like taking part in MicroStrategy’s $650 million convertible senior note offering last year was basically getting an almost-free call option on bitcoin, going long on ethereum is a way to get indirect exposure to DeFi protocols,” Denis Vinokourov, head of research at digital asset prime broker Bequant, said. “Not everyone is comfortable with the risks that are still associated with DeFi, but the hyper growth of these projects boosts activity on the Ethereum network and, thus, supports capital appreciation.”
Adding to the thesis that institutional investors are growing more interested in ether, the CME announced in December it will launch ether futures contracts next month. An ether-based derivatives products on one of the world's largest regulated futures exchanges catering to an institutional crowd will give customers an opportunity to hedge their spot positions, reduce their overall risk of investing in ether and provide a venue for them to take speculative positions.
CME’s new ether futures contracts could also be one reason behind the drop on the Grayscale Ethereum Trust’s premium to the underlying value. The price gap recently slipped to a record low, according to data from on-chain data site Skew.
"The launch of CME futures will allow the institutional crowd to structure basis plays to those that have been so prevalent with bitcoin,” Vinokourov said. “This competition, together with the fact that a digital assets-based exchange-traded fund (ETF) appears more plausible, given the growing institutional appetite, may also continue to suppress premiums on Grayscale products."
Grayscale is a subsidiary of Digital Currency Group, CoinDesk's parent company.
While there's much evidence that large ether investors have been accumulating ether and helping to push the cryptocurrency to its new all-time high this week, analysts and traders who spoke to CoinDesk largely attribute the rally to renewed demand from crypto natives.
“The ether rally is more organic, and driven more from within the crypto industry than the bitcoin move over the past several months,” Chad Steinglass, head of trading at crypto trading platform CrossTower, told CoinDesk. “There are many crypto specific traders that are looking at the ether/bitcoin ratio and are moving allocations from bitcoin to ether as bitcoin has cooled off recently.”
Ethereum 2.0 staking is another factor that has driven these crypto natives’ appetite to hold ether because of the rewards they gain in the form of annualized interest on their holdings.
Although declining to specify whether the Ethereum 2.0 staking is driven by retail or institutional clients, Kraken's director of banking and payments, Johannes Schmitt, told CoinDesk that more than 380,000 ether have been deposited by the crypto exchange's clients since December, which reflects “a growing awareness in the unique utility underpinning” ether, he said.