Ethereum is hitting a critical inflection point, Bernstein says, as crypto shifts from speculation to real financial innovation

While this crypto market cycle has been dominated by the narrative of institutionalization of Bitcoin, stablecoins, and tokenization, analysts at Bernstein believe that these developments are driving the early stages of traditional financial innovation on public blockchains such as Ethereum.

"Bitcoin is great, we love it and still believe $200,000 is our high-conviction but conservative price forecast this cycle," the analysts led by Gautam Chhugani wrote in a Monday note to clients. "However, we believe, the mainstream interest is broadening beyond the 'store of value' Bitcoin use case toward the early stages of the financial innovation unleashed by the blockchain. Some investors still draw the line between blockchain (useful tech) and crypto ('useless') … [but] Ethereum 'deserves love,'" they said. 

The U.S. spot Bitcoin exchange-traded funds, launched in January 2024, are among the most successful investment products of all time, having crossed $120 billion in assets under management in less than two years, analysts noted. Meanwhile, the launch of spot Ethereum ETFs in the U.S. last July has largely flown under the radar, generating a comparatively small $9 billion in AUM. However, with ether trading at a $300 billion market cap — one-seventh of bitcoin's $2.1 trillion — that's no surprise, they said.

Instead, Ethereum's uniqueness is derived from its position as a decentralized computer, Chhugani explained, with interesting blockchain use cases such as stablecoins and tokenization being native to Ethereum and the Ethereum blockchain, which enjoys a maximum market share in these sectors.

"Not surprising, as Ethereum hits institutional awareness, we are seeing ETH ETF inflows waking up. In the last 20 days, ETH ETFs' inflows stood at $815 million, with year-to-date net inflows turning positive at $658 million," the analysts said.

"This is the stage where crypto takes a leap from speculative token markets to blockchain-driven financial innovation," the analysts continued — with financial activity evolving from retail trading memes to blockchains providing open financial rails for capital markets, payments, and new-age fintechs, integrating with stablecoins and tokenization.

A critical inflection point

Major payment incumbents like Visa, Mastercard, and Stripe are already developing their stablecoin strategies, Bernstein noted, arguing that if real companies and institutional investors are innovating on the blockchain, it makes blockchain networks, and by implication, blockchain network assets like ETH, valuable.

"Investors have always told us — crypto is useless, but blockchain is valuable," Chhugani said. "But these are not different things. If you believe in stablecoin-based payments innovation, why is the Ethereum network that mints the stablecoins and processes stablecoin transactions not valuable? Any company that uses stablecoin tech pays transaction fees to the Ethereum network. There is now both utility and value accrual. We believe that the narrative around value accrual of public blockchain networks is at a critical inflection point, starting to reflect in investor interest in Ethereum ETF inflows."

The analysts also highlighted the rising adoption of these sectors from major crypto firms, noting Coinbase's merchant stablecoin payments pilot and applications within its Base Layer 2 network. They also cited Robinhood's recent push in advocating for tokenized real-world assets and Kraken's planned rollout of tokenized U.S. stocks for international users.

"We are hoping to help institutional investors connect the dots here," the analysts said. "Coinbase and Robinhood are not just trading crypto but building financial applications on the blockchain/crypto rails. Not all crypto tokens are valuable, but foundational blockchain native assets such as Ethereum are now crossing the chasm from useless retail speculation to useful financial innovation. As the market recognizes this trend, this has a positive feedback loop as more investors trade/invest in tokens other than Bitcoin."

Gautam Chhugani maintains long positions in various cryptocurrencies. Certain affiliates of Bernstein act as market makers or liquidity providers in the equity securities of Coinbase and Robinhood.

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