Crypto Current #89

This week, we examine recent structural changes to Ethereum. As institutional supply dynamics shift and ETF flows accelerate, we explore how "hated rallies" often provide the best risk-adjusted returns for institutional allocators, and why sometimes the simplest supply-demand math matters more than complex technological narratives.

Crypto markets delivered a mixed performance this week, with Ethereum standing out among major assets—rising 6% even as Bitcoin edged lower to $118,000. The ETH/BTC ratio climbed 7%, extending its recent outperformance amid ongoing institutional inflows and treasury accumulation programs. Meanwhile, total crypto market capitalization and Bitcoin dominance were largely unchanged, indicating continued capital rotation into alternative digital assets. Solana and BNB also recorded solid gains of 3% and 6%, respectively, underscoring broader institutional interest beyond just the two largest cryptocurrencies.

What's happening in crypto?

Chart of the week

Blackrock's ETHA the third fastest ETF to $10bn

Source: Bloomberg ETF research

Update on Solana's memecoin wars

As covered in previous editions, Solana's platform wars continue to intensify. Thursday 24th, pump.fun co-founder Alon announced that the promised $PUMP token airdrop won't happen "in the near future," sending the token down 12% below its pre-sale price. Meanwhile, the BONK/Raydium/Graphite Protocol alliance continues to gain momentum, validating our positioning in the infrastructure and community-aligned alternatives.

DACM funds hold positions in $BONK, $RAY, and $GP.

Source: The Block

Sometimes the best rallies start with hated assets

Institutional supply dynamics and a clearer value proposition make for a much clearer investment case for Ethereum.

When Vitalik Buterin took the stage to sing at Token 2049, it felt symbolic of a broader problem—the Ethereum Foundation seemed directionless, caught between appeasing Layer 2 scaling solutions and maintaining ETH's value proposition. Meanwhile, other chains were simply winning—Solana was capturing mindshare and volume, and newer protocols were advancing faster than Ethereum's glacial governance could respond. The debate over whether value would accrue to ETH or its Layer 2s grew increasingly murky, and institutional capital doesn't typically bet on complexity.

The institutional reframe: Supply matters more than sentiment

Institutional crypto allocation isn't always about picking the most exciting narrative or the fastest-moving technology. It's sometimes about recognizing when fundamental supply and demand dynamics shift in ways that create sustained price pressure. For major digital assets like Bitcoin and Ethereum, this usually means watching who the marginal buyers are and whether their demand patterns have staying power.

The case study here is obvious: Bitcoin's trajectory changed when spot ETFs launched in January 2024, opening access to a new demand that far exceeded new supply. The result was 155% gains and Bitcoin becoming the best-performing major asset globally. Sometimes markets really are that simple—more demand than supply drives prices higher.

For Ethereum, we'd been waiting for a similar structural shift. The Layer 2 migration was clearly happening, which initially looked negative for ETH economics. Protocol revenue fell, onchain fees dropped, and validators saw reduced yields. But beneath the surface, something more important was occurring.

What changed: The marginal buyer revolution

Source: Farside

The inflection point came in mid-May. After months of tepid flows, Ethereum ETFs suddenly caught fire, pulling in over $5 billion since May 15th. More importantly, a new category of institutional buyer emerged: treasury companies building systematic ETH accumulation strategies.

Companies like Bitmine Immersion Technologies ($1 billion), SharpLink Gaming ($1 billion), and Bit Digital ($375+ million) began deploying serious capital into ETH treasuries. Unlike retail speculation, these buying programs are systematic and sustained.

The math became compelling quickly. Since mid-May, ETPs and public companies combined have purchased 2.83 million ETH—more than $10 billion at current prices, representing 32x the increase in ETH's supply over the same period.

The layer 2 paradox: Short-term pain, long-term gain

The second quarter Ethereum data initially looked concerning. Real Economic Value dropped 53%, Real Onchain Yield fell 28%, and net dilution rose to 0.73% annualized as fee burns decreased 55%, according to The DeFi Report. Layer 2 migration was clearly impacting Ethereum's direct economics.

Source: The DeFi Report

But this perspective misses the bigger picture. Layer 2 transaction volume grew 13% in Q2, with networks like Base and Unichain driving adoption. The Pectra Upgrade enhanced user experience across the ecosystem, even as it reduced short-term fees. More critically, ETH showed strengthening as a store of value—ETF holdings rose 20%, treasury holdings surged to 1.3 million ETH, and ETH on exchanges declined 7% as capital rotated into institutional vehicles.

Layer 2s weren't stealing Ethereum's value—they were expanding its addressable market while institutional demand absorbed the underlying asset. This is exactly the type of dynamic that institutions should want to own, not avoid.

Why "hated rallies" often work

There's a counter-intuitive principle in institutional investing: assets that have been written off often provide better risk-adjusted returns than consensus favorites. When everyone expects an asset to fail, negative scenarios get priced in while positive surprises get magnified.

Ethereum perfectly fits this profile. Most conversations in crypto focused on Solana's speed, or AI tokens' speculation. ETH was the "old technology" that Layer 2s were transferring value accrual away from. Institutional flows were minimal, retail sentiment was mixed, and even crypto natives were questioning its relevance.

But while markets were focused elsewhere, institutional demand was building. Treasury companies discovered they could issue stock at premiums to their ETH holdings, creating self-reinforcing buying pressure. ETF flows accelerated as institutions realized they were underweight ETH relative to its share of the total crypto market cap. The supply-demand imbalance that drove Bitcoin's success was quietly developing for Ethereum.

Looking forward: Structural versus cyclical

The question for institutional allocators isn't whether ETH will outperform next week or next month—it's whether these demand dynamics have staying power. The evidence so far suggests they do.

ETH treasury companies trade at significant premiums to their holdings, incentivizing more corporate adoption. Ethereum ETFs still hold less than 12% of Bitcoin ETF assets despite ETH representing 20% of Bitcoin's market cap, suggesting room for convergence. Layer 2 scaling is expanding Ethereum's utility rather than diminishing it, creating more reasons for institutional adoption.

Most importantly, the marginal buyer has fundamentally shifted from crypto natives trading on sentiment to institutions with systematic allocation mandates. This typically creates more sustained price movements and lower volatility—exactly what institutional portfolios prefer. ETH’s transition toward institutional adoption appears to be underway.

DACM funds hold positions in $ETH.

This is a general communication to professional investors and is intended to be educational in nature. It is not investment advice. Digital asset investments are not suitable for all investors and are subject to a range of risks and very high price volatility. Seek professional advice before investing.

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Established in 2017, DACM is an institutional investor focused on the digital asset sector. Our team invest across the digital asset sector, from early-stage venture partnerships to listed and derivative markets. DACM has developed a fundamental investment philosophy designed for family office and institutional investors, tested across multiple market cycles.

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