Crypto Funds Short Ethereum on Overvaluation Concerns
Some major digital asset investors are shorting Ethereum due to their lack of strong conviction in its potential to scale and increase its network capacity.
Ethereum is moving sideways this week at around $476, showing slight growth over the last two days as the crypto market enjoys a Bitcoin-driven boost. However, many institutional investors lack the conviction that the second largest cryptocurrency can keep up with the bullish trend. Ethereum has lost 36% year-to-date, which can be imputed to the correction of the entire crypto space, but some investors expect it to decline even more and are betting on a continued slide, Fortune writes.
Tetras Capital, a crypto-oriented hedge fund headquartered in New York, is one of those shorting Ether. The company opened its first short positions in May this year, when the price fluctuated around $600, so the bet has already produced substantial gains. As founding partner Alex Sunnarborg explained, the fund is relying on two major bets – selling Ether and investing in Bitcoin. According to Forbes estimations, the six-member outfit manages $30 million in assets.
Last week, Tetras published a report explaining its decision to short Ether. 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,” Tetras added.
Hidden Hand Capital is also bearish on Ethereum and has already opened short positions on Ether. The company, which manages about $100 million in crypto assets, is the family office of Timothy Young – the entrepreneur who sold tech venture Socialcast for over $100 million seven years ago.
Hedge fund Neural Capital has also shorted Ethereum, Fortune said, citing unidentified sources.
Doubting investors say that Ethereum’s current market cap of about $48 billion market cap is hardly a fair valuation, especially since the network can manage only 15 transactions per second. Visa, for example, can do 24,000 transactions per second.
As Sunnarborg put it:
“In the long term, I think they’ll solve a lot of scaling challenges. But in the short term, there’s a disconnect between the price and underlying technology. Just because something is a good idea doesn’t mean it’s a good investment.”
Ethereum developers are working hard to update the network capacity, but Tetras does not expect immediate improvements.
There are major investors who are neutral or undecided on Ethereum, while a third group is positive about it. For example, Jake Brukhman, founder of crypto asset manager CoinFund, believes that Ethereum will come up with many improvements and will still lead the space.