Ether's strong first-quarter performance was upstaged by bitcoin. Here's what comes next

Published Mon, Apr 3 20237:56 PM EDT

Ether delivered a strong performance in March – despite the bigger and more-established bitcoin stealing the show all month – and investors have good reason to be excited about the cryptocurrency heading into the second quarter. Bitcoin opened investors' eyes to the diversity of its narrative as its price fought a banking crisis, a regulatory crackdown and persistent inflation. However, ether, the second largest cryptocurrency by market cap, finished March up 12%, according to Coin Metrics. That was its third positive month in a row for its longest monthly streak since a seven-month rally ended with April 2021. Ether also posted a 52% gain for the quarter, according to Coin Metrics. ETH.CM= YTD mountain Ether (ETH) in 2023 Many crypto investors believe they're now in a bull market to kick off the second quarter. Bitcoin's recent price action has certainly helped, but crypto is still bigger than bitcoin alone. Further, some see technological advances on the Ethereum network as laying the groundwork for the new cycle. "The reason we're in a new bull market cycle right now is we have this enormous breakthrough in blockchain technology, which is that the issue of scalability and cost is going away," said Matt Hougan, chief investment officer at Bitwise Asset Management. "It's being overshadowed right now for good reason – because people are so excited about bitcoin in the face of yet another banking crisis." "It doesn't mean we won't have big pullbacks – we could – and it doesn't mean it won't be volatile," he added. Bitcoin and ether price moves have historically tracked relatively in line on a percentage basis, but the top two crypto assets "decoupled" in March, thanks to a "flight to quality" in bitcoin following the bank closures, Wells Fargo analyst Jeff Cantwell said in a recent note. While the two cryptocurrencies remain tightly correlated for the time being, further technological advancements on Ethereum that allow for "real world" use cases on the network will drive them further apart in time, according to Oppenheimer's Owen Lau. Solving the 'blockchain trilemma' In crypto's history, designers haven't solved the problem of being able to build blockchain networks that are secure, decentralized and scalable, Hougan said. "You couldn't build a software that did all three things at once," he said. "It could do two things, but it couldn't do the third thing. It could be scalable and decentralized but not secure. Or it could be secure and decentralized but not scale." Last year, however, Ethereum underwent " the Merge " and became a proof-of-stake blockchain. That breakthrough accelerated its development pathway, allowing major Ethereum blockchain upgrades on the regular, Hougan added. "What it will mean is the cost to do a transaction on the Ethereum blockchain will fall from a couple dollars to 10 cents to 0.002 cent, effectively falling to zero," he said. "That's a huge sea change and it's the result of these technological breakthroughs. It's akin to the moment where internet access went from dial-up to broadband." Ultimately, a cheaper and more scalable Ethereum will allow for more applications to be built on top of the network. While bitcoin is often seen as a "boring" asset investors buy to watch the price change, ether is the token that fuels a network developers can build on top of – payments, gaming, nonfungible tokens and more. It's what drove much of the 2021 bull run . "Those crypto native forces are becoming much more important as the real-world applications are becoming much more real," Hougan said. Even so, he cautioned, "it's still the case that these big macro shocks influence all these assets." Looking ahead: the Shanghai upgrade Ethereum's next big tech upgrade is scheduled for April 12 and it's bound to be a key catalyst for the price of ether in the coming months, according to Lau, analyst at Oppenheimer. "There are positives and negatives that could come from the Shanghai upgrade," he said. On one hand, "you're going to see more token tokens being unlocked, so there may be some selling pressure. But longer term, this is another step that tells people we can get a better and faster ecosystem in Ethereum." "It's not the end game, we're just marching towards the end game," he added. "So there may be some volatility going into the news." The most notable outcome of the Shanghai upgrade is that it will allow investors to withdraw their staked ether, for the first time ever. That could spark a period of volatility considering about 18 million ether coins, or 15% of the total ether in circulation, is staked, according to KeyBanc. "The upgrades represent a significant step for the Ethereum network, and while tough to say what ETH flows may look like post-upgrade, more liquidity will exist all else equal," said Alex Markgraff, analyst at KeyBanc. "Greater liquidity could be a catalyst for a change in institutional participation while simultaneously presenting commercial opportunity for staking providers." The Shanghai upgrade follows the Ethereum Merge , the September transition of the network from proof-of-work to proof-of-stake. After it's completed, it will allow investor withdrawals of staked ether. Last year, ether rallied in the weeks leading up to the upgrade, posting a 70% gain in July alone. It fell about 20% shortly after the upgrade was complete . —CNBC's Michael Bloom and Nick Wells contributed reporting