The losses due to the current crypto winter have been eased a bit by double-digit gains in the past few weeks, yet it still cuts deep for many investors and projects reliant on Ether or other digital assets to fund their growth. Looking more granularly, however, market conditions are far better than most people understand, said Jeff Dorman, chief investment officer at Arca, a digital assets investment firm.  

“The third quarter and into October is one of the healthier trading environments we’ve ever been in for digital assets,” Dorman told me. “Investments are working, or not, based on the merits of the investment, not just based on what’s happening in [the] macro” economic environment, like rising interest rates or inflation, he said.

For much of the recent price downturn, the broad crypto market reacted to decisions by the U.S. Federal Reserve or appeared to take its cues from the stock market. That’s no longer the case, Dorman said.

“It’s completely decoupled from macro, there’s real events and catalysts happening,” he said. “There’re real projects succeeding and real projects failing. It’s sort of a token-picker’s market for the first time in a long time.”

Recent market commentary has noted the decoupling of digital assets from technology stocks, where Bitcoin and Ether have risen while tech stock have fallen, Dorman said. But that’s not the correct decoupling to focus on.

“The decoupling happened five months ago,” Dorman said. “It’s just that it happened the wrong way. Digital assets went down in May and June because of Three Arrows and Celsius and Tera/Luna and no one wanted to admit that was a form of decoupling. It was. We haven’t been tracking stocks for six months, it’s just that this is the first time we’ve outperformed to the upside.”

Jeff Dorman

He pointed to how other asset classes performed in the third quarter compared with crypto. The S&P 500 stock index was down 6 percent, long duration government bonds fell 11 percent, oil dropped 15 percent and gold was down 9 percent, he said. At the same time, the Bloomberg Galaxy Crypto Index was up 16 percent, Dorman said, which was led mostly by Ether. Those gains were driven by positive events that many people might not be paying attention to, Dorman said, including the Terra/Luna reorganization of its blockchain, Uniswap governance changes and new leadership at Sushiswap.

“Too many people are just watching Bitcoin,” Dorman said. “Bitcoin was down and so was the Nasdaq, therefore everyone says, ‘oh, we’re just tracking stocks again.’ It just so happens it’s a more fun story for people to write when we decouple to the upside than the downside.”

Ether one-month performance source: CoinMarketCap

A somewhat confounding recent market event has been the drop in Ether after the Ethereum developer community successfully completed the move from proof of work to proof of stake. Known as the merge, it took place in September after years of complicated coordination among seven different client teams. The change cut the energy usage attributed to Ethereum by 99.9 percent while also adding to an already enormous amount of Ether being destroyed on a transaction-by-transaction basis.

Still, Ether dropped as much as 20 percent in the weeks after the merge. Why? Dorman said there were three phases to the Ether trade related to the merge.

The first was when the final merge date was announced in mid-July, which made Ether roughly double in price. The third part was the larger context that Ethereum is still the most-successful blockchain in terms of being used for stablecoins, defi projects and non-fungible tokens.

Ether one-year performance source: CoinMarketCap

“If you just want to be generically long blockchain Ethereum is the way to do that,” Dorman said to this point.

The second phase of the recent Ether trade is what happened directly right around the merge itself. Ether could’ve gone higher or dropped on a “buy the rumor, sell the news approach,” Dorman said. “Obviously what we saw is the latter. We saw a lot of people selling the news in a short-term trader capacity and [being] less focused on the long-term math which suggests Ether is going to go a lot higher.”

In the past 10 days, Ether has regained its losses post-merge, rising to $1,567 on Oct. 31 from $1,305 on Oct. 22. Yet it’s still down significantly from $4,800 just about a year ago, according to data from CoinMarketCap.

Dorman sees a rising price trend in place going forward.

“Simplistically, the math says if supply is way down and demand is constant, the price should go higher,” he said. “The supply reduction has been massive, it’s, what, $600 million less of supply than it would’ve been if we were still in proof of work?”

He added, “There’s a lot going on in this space, but all eyes continue to focus on Bitcoin and Ether, which is fine, those are two very large, interesting assets, but there’s a lot more going on behind the scenes.”