Tetras Capital, a hedge fund focusing on the blockchain, cryptocurrency and digital assets, stated recently that they will be taking a short position on Ethereum [ETH]. They mentioned their reasons for doing so while supporting Bitcoin [BTC] as an investment.
Interestingly, the publication came before the sudden spike seen in the cryptocurrency market, when Bitcoin breached the $7000 mark earlier today. This marks a rally after a continued period of reduced volatility, the longest seen since its all-time high in December 2017.
Even with the price hike seen across the market yesterday, Ethereum’s performance seems lackluster. While most cryptocurrencies in the top 10 are posting gains of upwards of 9%, Ethereum sits tight at just 6% growth in price over the last 24 hours.
The publication by Tetras states that the price of Ether, Ethereum’s native currency, is still “significantly overvalued”. They go on to say that it is decoupled from Ethereum’s “current and near-term technological state”. The hedge-fund platform stated:
“Over the last year, crypto-asset markets have run wild on the thesis that value accrues to the ‘infrastructure layer of blockchains’…Ethereum and its native asset, Ether, sit at the center of this mania.”
Tetras suggest that the reason for the rise in the price of Ether over the year is due to speculation. This would suggest that the reduction in the interest and speculation is now subsiding, leading to a slow decline in price. The hike was a product of “irrational exuberance”, with “inevitable” suffering to follow once the market matures, says Tetras.
The publication states that the market and technology is too immature to justify the valuation it is at right now, with the driving reason behind it being “speculative narratives”.
While speculator-investors have been a huge part of the cryptocurrency market since the beginning, many point out that volatility comes in huge parts from this. Significant use-cases have long been touted as the primary weapon against speculation. The Ethereum network hosts 35 ERC20 tokens which are worth more than $100 million each, and over 1500 decentralized apps. Even as Ethereum is backed up by significant use in the terms of its 750,000 transactions every day, Tetras states that this demand is “far from sufficient” to justify the price of the asset.
Tetras further went on to say that in order for a cryptocurrency to achieve a trillion dollar market cap, it must have some resemblance to a Store of Value. They stated:
“We believe ETH lacks the crucial characteristics required for a dominant SoV [Store of Value], and we see a low probability of ETH taking the reign from the current crypto-asset leader, BTC — let alone from incumbent globally dominant assets like the USD and Gold.”
Furthermore, they elaborated that the possibility of Ethereum becoming a SoV rested mainly on it realizing its potential for one of its use cases. Mainly, the two use-cases that are described are as a dApp platform and as a platform for raising capital in the form of Initial Coin Offerings.
On the dApp front, Tetras argues that the platform has “severe issues” regarding technicalities and decentralization, that will persist across timeframes. These issues will then begin the eroding of Ethereum’s value proposition over “cheaper, more efficient and less risky” platforms.
Furthermore, genuine demand for Ether is being overshadowed by the rampant commoditization of capital raising projects. These ICOs will also be subject to incoming regulation which will then reduce the demand for them, says Tetras.
The hedge fund did state that their primary motivation for taking a short position on Ethereum was so that they could hedge a core long position in Bitcoin. They stated:
“As mentioned in all our updates since the start of the year, we believe the next, sustained crypto bull market will be led by BTC.”
They went on to speak about their reasons for building a short position on the cryptocurrency, which is mainly that it has minimal risk of news that moves price unexpectedly and a mature market to ensure borrow terms. They ended their statement by saying:
“We believe the coming months will be extremely telling for Ethereum’s future. Network strain (from DApp usage), competition (from alternative DApp platforms), and regulation (towards ICOs) will test the speculative hype and price of ETH.”
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