Ethereum Struggles to Attract Investors Despite Upcoming Shanghai Upgrade, Healthy Network Fundamentals

It was another bumper week for crypto investments last week. That’s according to the latest Digital Asset Fund Flows Weekly report from CoinShares, who said that digital assets saw investment inflows of $76 million last week.

According to CoinShares, that marked a fourth consecutive week of inflows, which now stand at $230 million since the start of the year, “highlighting a decisive change in investor sentiment for the beginning of 2023”. The report added that total investment assets under management (AuM) has now risen 39% since the start of the year to $30.3 billion, the highest since mid-August 2022.

Healthy investment flows into the crypto space come as prices cling on to impressive gains for the year. Bitcoin and Ethereum are both up around 40% since the start of the year on a combination of factors including 1) macro bets that the Fed won’t have to do too much more tightening in 2023, 2) that post-FTX collapse pessimism was overdone given crypto fundamentals remain sound and 3) increased on-chain and technical signals flashing that the bear market of 2022 is likely over.

Ethereum Struggles to Attract Investors Despite Upcoming Shanghai Upgrade, Healthy Network Fundamentals

Bitcoin continues to dominate investor focus, accounting for 90% of last week’s inflows. Short Bitcoin investment products accounted for the rest of the inflows. “Despite the improving clarity around unstaking, Ethereum saw only US$0.7m of inflows,” CoinShares noted.

Ethereum’s struggles to attract investment flows might come as a surprise to some given 1) strong network fundamentals and 2) the upcoming Shanghai hard fork upgrade. Regarding the former, a recent Bernstein report observed that the Ethereum network has been enjoying an improvement in on-chain activity as of late, with improved activity in non-fungible tokens (NFTs) in wake of the launch of a mini-game by Yuga Labs.

According to Bernstein, the daily fees accrued by the Ethereum network have, as a result, more than doubled to around $4 to $6 million per day from closer to $2 million at the start of the year. Indeed, according to cryptofees.info, Ethereum’s average daily fees over the past seven days was last around $4.88 million, up from around $2.9 million this time last month.

Higher fees are a sign of higher Ethereum blockchain usage, which may also ensure that the Ethereum inflation rate remains negative in the near future, Bernstein said, pointing out that the ETH supply has been in deflation for over two weeks now. According to Glassnode data, Ethereum’s net annualized rate of supply change was last around -0.7%.

Prior to the “Merge” in September 2022, which saw the Ethereum network switch over to a proof-of-stake consensus mechanism from proof-of-work, the ETH inflation rate was over 4%. Many analysts think ETH’s deflationary nature could significantly support price appreciation in the coming years.

In the closer future, the Shanghai upgrade will be the next big catalyst for Ethereum, given that staked ETH will finally be freed up for withdrawals. Bernstein warned that there could be some caution heading into the event given worries that unstaked Ether could flood the market and add to sell pressure.