Core Strategy

While there is no need to “panic chase,” ETH likely begins trading better from here. We should start considering ETH beta names to add if Bessent’s meeting with China this weekend results in a positive outcome. The immediate-term risk/reward is certainly less attractive after BTC’s rally to $103,000 and strong follow-through from altcoins this week, but there are legitimate signs pointing to the U.S. reaching a deal in short order. Given the wide range of possible outcomes and the unpredictable nature of this administration, we believe the right approach is to “read and react” to the results of the meeting rather than fade what has already been a very strong week for crypto.

ETHBTC Finally Makes a Move

Over the past couple of years, we have been skeptical of ETH due to its lack of identity and structural weaknesses, including value leakage to L2s and poor positioning relative to BTC and SOL.

However, we have recently been discussing how the stabilization in the ETHBTC ratio has caught our attention. Just one week ago, we noted that while ETH was not making progress against BTC, it wasn’t losing any ground either. ETHBTC was consistently finding buyers around the 0.018 to 0.019 level (see Comments titled “Is ETH Finally Turning the Corner?”).

We also noted that the narrative around ETH, particularly as it relates to ETH leadership, had started to shift. To provide some additional context on the matter:

• The Ethereum Foundation announced leadership changes on March 1^st, introducing two new co-directors, Hsiao-Wei Wang and Tomasz Stanczak.
• In an X post, Stanczak shared his vision for the Foundation and emphasized a greater focus on near-term goals, including improving the user experience and scaling the L1. This marks a much-needed change of pace from prior leadership, which, in our view, has been more academic and long-term oriented in its approach to network upgrades.
• The Ethereum Foundation holds a large treasury comprised of ETH. Because its liabilities are denominated in USD, it has historically needed to sell some ETH to cover expenses. This has been a marginal headwind for price. However, starting in February, the Foundation began deploying ETH into DeFi applications to generate yield. This shift in strategy may reduce the need to sell into every ETH rally and allow the Foundation to harvest yield instead.

Anecdotally, morale among those within ETH circles seems to have improved slightly because of these changes.

ETHBTC Follows Small Cap Outperformance

From a macro perspective, we have long observed a strong relationship between small cap relative performance and ETHBTC. This is broadly due to the elevated risk profile of ETH compared to BTC. We do not think that it is a coincidence that IWM/SPX finding a low a couple of weeks prior to ETH/BTC finding a low is a coincidence.

Covered Shorts on the CME

We also argued back in November that the marginal buyer of ETH this cycle might not be crypto natives but could come from institutional capital. This is due to ETH’s size and the availability of TradFi products like CME futures and spot ETFs. We think it is right to look at these areas (CME, ETFs) for signs of institutional participation.

Examining these indicators, they do not immediately suggest that institutions are buying ETH.

• Coin-denominated CME open interest was trending lower until the big rally on May 8^th.
• Aside from a minor spike in late April, ETF inflows have remained essentially nonexistent.

However, CME basis has been trending higher since bottoming on March 31^st. Combining this with the fact that total open interest is decreasing suggests that institutional traders might not be buying, but they are closing their short positions.

This dynamic is probably similar to what we have seen in small-cap equities. While small caps may be outperforming due to the prospect of economic growth in a weaker dollar environment, some of their outperformance might simply be due to funds reducing short interest in heavily shorted names.

Takeaways

We finally saw ETH make a decisive move on Thursday, and it was an explosive one. ETH was up 23%, and ETHBTC climbed 15%, overshadowing what was also a strong day for Bitcoin.

Our takeaways from Thursday’s move:

• There is no need to “panic chase” here. ETHBTC remains more than 70% below its all-time high, and ETH is still over 40% below its all-time high. A mere regression of ETHBTC back to its 200-day MA would be a 30% relative move, and likely much higher on an ETH/USD basis.
• This move likely sets the stage for ETH to “trade better” going forward. We saw a similar move in May 2024, but that was driven by the ETH ETF approval. This time, there was no obvious catalyst, which means there is no “speculation of future flows” to wash out. The move was organic, driven by an actual change in flows.
• Over the past couple of years, ETH has become a popular short leg for pair trades in crypto. If ETH starts to trade better, traders are less likely to select ETH for the short leg of their trades. This would remove an overhang of short demand, which should reinforce ETH’s ability to recover some of its losses.

Looking for ETH Beta

We are not making any adjustments to our Core Strategy portfolio today, but we think it is appropriate to compile a list of ETH beta names that could outperform if ETHBTC continues to move higher.

Below, we put together a correlation matrix featuring several ETH ecosystem tokens, along with some non-ETH ecosystem tokens.

If we focus on tokens with a correlation over the past 12 months greater than 0.75, the list includes: PEPE, UNI, ENA, ARB, OP, LDO, and PENDLE.

Source: DefiLlama, Fundstrat

Other Considerations

Ultimately, ETH’s success, along with the broader altcoin complex, will depend on the outcome of Scott Bessent’s meeting with China this weekend. There are a range of possible outcomes, but the market is clearly priced for something positive. What that “something” is remains to be seen, but anything short of a significant tariff reduction and an agreement to continue negotiations is likely to trigger some “sell the news” price action.

Anna Wong, an economist at Bloomberg, published an insightful piece on Friday titled “Ships, Shelves, and the Case for a China Tariff Cut.”

In it, she argues that the administration is likely to reduce Chinese tariffs significantly over the weekend due to prior complaints from large U.S. importers such as Walmart, Target, and Home Depot. She lays out the timeline in the bullet points below:

We also saw a significant move on Polymarket today, with odds favoring a trade deal with China before June. The probability of a deal is now up to 60%.

Of course, just “any deal” is unlikely to move risk markets substantially higher, since asset prices have already recovered from the post-Liberation Day losses. The market reaction will likely depend on two factors:

1. The level of initial tariff reduction announced.
2. A clear and identifiable path toward achieving a favorable deal that results in much lower tariffs than the initial deal entails.

In Summary

1. Do not “panic chase,” but ETH likely starts trading better going forward.
2. We should think about ETH beta names (PEPE, UNI, ENA, ARB, OP, LDO, and PENDLE) to add if Bessent’s meeting with China this weekend produces a positive outcome.
3. The risk/reward is undoubtedly less skewed here after a rally to $103,000 for BTC, as well as strong follow-through from altcoins this week.
4. That said, there are signs pointing to the U.S. reaching a deal in short order.
5. Given the number of potential outcomes and the unpredictable nature of this administration, we believe it is appropriate to “read and react” to the meeting between Bessent and China, rather than fade what has been a very strong week for crypto.