Despite supporting thousands of cryptocurrencies on its open-source platform, institutional investors are seemingly bearish on the broader use case of Ethereum, the world ’s second-largest digital currency by market cap.
The Big Ether Short
According to Forbes, cryptocurrency hedge funds and family offices believe Ethereum (ETH) will plummet further in 2018, despite the platform token already falling approximately 40% from its all-time high in December 2017.
Amongst the many is one Hidden Hand Capital, a San Francisco-based family office started by tech entrepreneur Timothy Young. The office reportedly handles $100 million worth of cryptocurrencies and has a “short” position in the ether.
New York-based Tetras Capital is relatively popular in cryptocurrency circles for its coin analyses, and price outlooks recently published a 41-page report explaining its ether short. While the six-person team handles a $30 million fund, founding partner Alex Sunnarborg is aggressively betting against ether and investing substantially in bitcoin.
Sunnarborg acknowledges Ethereum’s concept and overall application but believes the two factors are not enough to make it a good investment. Young partly agrees with the view, and called out the protocol’s “disconnect with price and technology,” However, Young holds an optimistic view of the protocol in the future, and believes developers will fix the infamous scaling issue.
The entrepreneurs further voiced concerns of Ethereum’s inflated $48 billion market, which, according to them, does little justice to the network’s capacity of handling 15 transactions per second. In comparison, payments processor VISA is valued at $314 billion and processes 24,000 transactions per second.
Scaling Issues Adding to Investor’s Pessimism
Scalability issues have unanimously plagued Ethereum and network congestion after the launch of applications on its platform, notably the December 2017 case of CryptoKitties, a tradable digital cat game which caused skyrocketing fees and hour-long delays for processing transactions on the network.
Tetras noted in its report that applications costs in the Ethereum network were “1 million” times more expensive than Amazon Web Services, a significant disadvantage for companies considering decentralized server systems.
The Ethereum network has several decentralized applications running on its protocol, attracting more than 5,000 active users daily. The network runs at full capacity, and over-congestion immediately causes transaction fees to surge.
Kyle Samani, a managing partner at Multicoin Capital, echoes the bearish sentiment and is “seriously considering” shorting the digital currency. However, Multicoin has opened short positions on Litecoin and Ripple and is cautious about adding to its exposure.
Meanwhile, CoinShares chief strategy officer Meltem Demirors shared her “neutral” outlook for the cryptocurrency:
“We are nowhere near a bear market yet, [and] demand for Ethereum-based tokens and applications is largely speculative. In the absence of more Enterprise Ethereum Alliance announcements in 2018, I won’t look to add more exposure.”
Ethereum developers are aware of the issues affecting their platform and are steadily working towards improved mechanisms. In this regard, Casper and Plasma are two awaited technical updates that aim to speed up the network and prevent over congestion.
However, Tetras think such essential improvements remain a far-fetched feature. The team cites “optimistic estimates” to determine the protocol’s Layer-2 arrangements capable of supporting, or testing, scaling solutions are “roughly two years” off.
Young adds to Tetras’ outlook, and points out the community’s limited interest in the two technical updates, citing the low number of views on their YouTube channels.
The cryptocurrency fund added the ICO boom of 2017 majorly contributed to Ether’s price rise, as investors searched for token options regardless of their utility, value, or long-term development.
Meanwhile, Tetras is seemingly bullish on the controversial EOS platform. Its report believes the platform’s $4 billion ICO can be spent for recruiting experienced talent, apart from “big bag” investors protecting their investments by maintaining price action.
Cover Photo by Mikito Tateisi on Unsplash