Fidelity Digital Assets released a “Q2 2023 Signals Report” on July 18, which claimed that Ether’s outlook for the next 12 months and the long term is positive. Year-to-date, Ether has gained 62%, but while the investment firm might be short-term bullish on Ether, that does not mean it believes that the month-long bullish channel will be sustained.

While institutional investors like Fidelity Digital Assets may have a bullish longer-term vision for ETH's price, let’s compare their analysis against network and market data to see if they’re on the money.

Ether/USD 1-day price index. Source: TradingView

Beyond the technical indicators, the rationale behind Fidelity’s bullish outlook for Ether is the network’s higher burn rate versus coin issuance, the “new address momentum” and a growth in the number of network validators.

Fidelity “Q2 2023 Signals Report,” July 18. Source: Fidelity Digital Assets

According to the Fidelity report, the net issuance since the Merge in September 2022 resulted in a net supply decrease of more than 700,000 Ether. Additionally, the analysts claim that Glassnode data showing an increasing number of Ethereum addresses that transacted for the first time ever proves healthy network adoption.

The report also points to a 15% increase in the number of active Ethereum validators in the second quarter.

The expectation around EIP-1153 is also building momentum for the Ethereum network, as the “transient storage opcode” improves smart contract efficiency, reduces costs and amplifies the Ethereum Virtual Machine design. The change is especially meaningful for decentralized exchanges (DEXs), where Ethereum’s dominance declined to 46% from 60% six months prior, according to DefiLlama data.

Dencun upgrade expected to reduce transaction costs

Another potentially bullish factor for the Ethereum network is the anticipated upgrade on the leading DEX, Uniswap. According to a July 17 presentation at the Ethereum Community Conference, the upcoming Uniswap v4 will allow users to build unlimited types of pools using programmable buttons (hooks), native ETH support and a singleton contract that performs internal transactions before settling final balances.

The announcement fueled the likelihood that EIP-1153 will be included in the next “Dencun” upgrade, which triggered Slingshot and DeFi Pulse co-founder Scott Lewis.

If approved, the implementation will be vital for the Ethereum network to recoup the market share lost due to high gas fees, as the seven-day average transaction cost has been above $4 since February. Consequently, Ethereum’s total value locked has dropped to its lowest level since April 2020, at 13.55 million ETH, according to DefiLlama.

Moreover, decentralized application activity has dwindled, as shown by DappRadar’s unique active wallets’ 30-day data: Uniswap, minus 28%; 1inch Network, minus 14%; MetaMask Swap, minus 8%; and OpenSea, minus 5%. As a comparison, in the same period, BNB Smart Chain’s PancakeSwap gained 10%, and Polygon’s Uniswap users increased 8%.

Derivatives metrics remain flat

Ether quarterly futures have been signaling unease among professional traders. Those fixed-month contracts typically trade at a 5% to 10% premium compared to spot markets to compensate for the delayed settlement, a situation known as contango.

Ether 3-month futures premium. Source: Laevitas

According to data from Laevitas, the Ether three-month futures premium currently stands at 4%, which is below the neutral threshold and lower than the 5.5% level seen on July 14. This indicator is clear evidence that traders are less inclined to use leverage for bullish ETH positions.

More concerningly, Ether’s 59% gains year-to-date might have caused investors to become overly optimistic. A recent survey from CryptoVantage of 1,000 North Americans that invested in cryptocurrencies over the past five years found that 46% named Ether as the top contender to surpass Bitcoin

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Coins with the best chances of surpassing Bitcoin. Source: 2023 CryptoVantage survey

This is a somewhat startling point of view, but it could be misleading since the survey did not ask whether any coin would eventually flip Bitcoin, so respondents don’t necessarily place strong odds on this outcome.

Fidelity’s analysis has given valid reasons for why the firm is bullish on Ether’s 12-month price performance, but in the shorter term, the recurrent high gas fees and lack of interest from leverage buyers signal increased odds of the Ether price breaking below the channel support.

By MARCEL PECHMAN