The Curious Case of Ethereum's Underperformance

It has been no secret that the crowd has been slowly but surely turning against Ethereum (crypto's #2 market cap) in favor of more exciting and outperforming assets like XRP (#3) and Solana (#4). But is it solely due to ETH's slumping marketcap growth compared to the drastically different results from its fellow top cap counterparts?

Well, it sure hasn't helped. Here is a look at the 3 assets over the past month:

From December 21, 2024 to January 21, 2025 (the date of this writing), the three have moved like so:

Ethereum $ETH Marketcap: -4.7%

XRP Ledger $XRP Marketcap: +36.9%

Solana $SOL Marketcap: +32.2%

One of these are clearly not like the others. But what is the narrative being formed? Sometimes poor performance leads to negative sentiment, and other times negative sentiment can lead to poor performance (though the latter usually is brief, because prices move the opposite direction of the crowd's expectations.

We have seen many debates that veer on the side of emotions across social media, such as this exchange:

And many have gone after Vitalik Buterin himself for periodically selling off large amounts of ETH, sparking reactions from the cryptocurrency community. For example, in May 2021, he sold around 90,000 ETH (worth over $100 million), and in March 2023, he sold $12 million worth of ETH. He explained that some of these sales were to fund personal expenses or support projects related to Ethereum. However, these actions often lead to concerns among traders and multi-week long selloffs as a result. When Vitalik sells ETH, some people see it as a signal that he might not have full confidence in Ethereum’s future, which can cause the price of ETH to drop as others follow suit. While Vitalik has defended his decisions, critics feel these sales send mixed messages to the market.

These sales also connect to concerns about Ethereum’s decentralization. Some argue that Vitalik and the Ethereum Foundation have too much control over the network’s future because of their significant influence and large ETH holdings. Additionally, most of the ETH used to secure the network is held by a few big players, like Coinbase, Binance, and Lido Finance, which makes some people worry about power being too concentrated. On top of that, Ethereum has faced criticism for following government rules in certain cases, like blocking some transactions linked to Tornado Cash. While many believe Ethereum is still more decentralized than traditional systems, these issues make some people question whether it truly operates without central control.

But as for discussions that get more into the technological explanations, one narrative that may provide context to the coin's underperformance is its choice to go "modular".

Take, for example, Alexander Pack's great analysis of ETH's "strategic misstep".

Without writing out his whole thread (which you can read here), in text, here in our article, we can summarize his explanation, which he elaborates on in this detailed article:

---

Ethereum has been falling behind Bitcoin and Solana in growth during this market cycle, and many believe it’s because Ethereum decided to split its responsibilities across different parts of its system. This approach, called modularization, means Ethereum relies on separate projects to handle tasks like processing transactions and ensuring security. While this has helped Ethereum grow its ecosystem, it has hurt the value of its main token, ETH, in the short term. Fees on the network have gone down, so less ETH gets burned (removed from circulation), which lowers its price. Additionally, new modular projects with their own tokens are taking away some of the attention and investment that used to go to ETH.

The decision to modularize, however, is part of a bigger plan to prepare Ethereum for the future. By working with these smaller, specialized projects (called Layer 2 solutions), Ethereum can grow and keep up with new technology that improves how blockchains work. Even though Ethereum now shares the spotlight with other blockchains, it has still managed to keep about 75% of its market share over the last nine years—a much smaller drop than similar tech companies like Amazon Web Services, which fell to about 35%. This modular strategy ensures that Ethereum can stay relevant and adapt to changes, even if it means making sacrifices today.

In the long run, Ethereum’s choice to modularize could help it stay ahead. By supporting innovation and creating a larger, more advanced ecosystem, Ethereum can continue to attract developers and users. While this strategy makes Ethereum harder for beginners to use and spreads economic benefits unevenly (with some profits going to new projects instead of ETH holders), it could protect Ethereum from being replaced by newer technologies. This forward-thinking approach gives Ethereum the tools to remain one of the leading platforms in the blockchain world, even as the industry evolves.

---

Now, with all of this said, still keep in mind that this is an opinion piece that many don't have to agree with. But it does reveal a positive long-term future for crypto's #2 market cap, despite its recent struggles. Those who have held strong believe that the asset may be struggling in the short-term just so that it can thrive in the long-term, while many other coins have shown histories of doing the exact opposite (such as $LUNA, $BCC, $HAWK, etc.)

Long-term investors will be pleased with the fact that Ethereum's utility is looking better than average, with rising daily active addresses, particularly as January, 2025 has progressed.

And unlike most of Ethereum's top cap peers, the asset actually is showing that short-term traders (wallets active on the network in the past 30 days) are trading at an average loss. This means that buying or adding on to your position would be doing so at a less risky spot than average, during the duration of ETH's existence.

And as for the social side of Ethereum, it's important to note that the ratio of positive vs. negative comments across social media have veered toward extreme negativity with traders becoming increasingly frustrated.

This bodes well for ETH's short-term future, as markets typically move the opposite direction of the crowd's expectations. We could see a few days or weeks where the asset can really make up ground if the retail traders continue to stay bearish and sell off their coins to key stakeholders out of frustration.

Ethereum's recent underperformance compared to its peers has sparked significant debate, with critics pointing to everything from Vitalik Buterin’s ETH sales to concerns about decentralization and the impact of modularization. While these issues may weigh on Ethereum’s short-term market performance, they also highlight the network’s ongoing evolution and its attempts to future-proof its ecosystem. For long-term holders, Ethereum’s growing utility, solid market share, and commitment to innovation suggest that the network is well-positioned to remain a dominant player in the blockchain space, even as it navigates challenges.

Moreover, the growing negativity in social media sentiment surrounding Ethereum could actually serve as a bullish signal for contrarian investors. Markets often rebound when public sentiment reaches extreme pessimism, creating opportunities for those willing to bet against the crowd. Combined with improving on-chain activity and signs of accumulation by key stakeholders, Ethereum’s current struggles may ultimately set the stage for a period of recovery and renewed growth. For investors, the question remains: will they see this as a chance to buy into the future of blockchain or avoid the uncertainty of its present?

-----

Disclaimer: The opinions expressed in the post are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.