Despite supporting thousands of cryptocurrencies on its open-source platform, institutional investors are seemingly bearish on the broader use case of Ethereum, the world’s second-largest digital currency by market cap.
A crypto hedge fund that came to prominence last year, Tetras Capital is a New York-based fund that currently has around USD 30 million in assets under its management, and it has recently published a 41-page report on why it has decided to short ETH.
Making its initial move in May of this year, Tetras started shorting ether when the price of the cryptocurrency ranged between $572 and $659. At the time of writing ETH is sitting at $463.
Tetras Capital argued that despite uncertainty around regulation and value capture, Ethereum and its currency Ether have received “absurdly” high valuations. These valuations even rose to greater heights than traditional equity investments. Tetras Capital believes that Ether’s overly high valuation is a direct result of pure speculation. The hedge fund noted in the Medium blog that Ethereum’s technology is still too immature to justify its high price valuations.
The fund said,
“We believe that ETH’s current price is still significantly overvalued; still significantly decoupled from the Ethereum network’s current and near-term technological state. Our research has led us to believe that the market and technology is still far too immature to justify current valuations.”
“This nascent asset class has taken off due to speculative narratives, and we believe that the current marketplace is not sophisticated enough to properly evaluate risks or general economic concerns,”
The hedge fund noted that on the surface, Ethereum’s key performance indicators (KPIs) are quite strong. In July 2018, their market capitalization was $45 billion. There are over 1,500 decentralized applications using their network, and they support many ERC20 tokens, 35 of which have a valuation of over $100 million. The network also undergoes 750,000 transactions every day.
While there is demand, Tetras Capital noted that the demand is significantly less than its current valuation.
Ethereum developers are working on several solutions to improve network capacity. The Tetras team thinks significant improvements are too far off. Tetras’ report reads,
“The most optimistic estimates suggest that Ethereum’s Layer-2 and other broad scaling solutions will not be fully functional, tested, or capable of supporting the most popular DApps for roughly another two years”
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