Key Points:

• Coinbase said ether has the potential to surprise to the upside in the coming months.
• The cryptocurrency is unlikely to be displaced as the center of decentralized finance, the report said.
• The market may be underestimating the timing and odds of a potential approval of a U.S. spot ether exchange-traded fund.

Ether (ETH) has underperformed the broader crypto market this year, but its long-term positioning remains strong and it has the potential to surprise to the upside, Coinbase (COIN) said in a research report on Wednesday.

The second-largest cryptocurrency by market value has risen 29% year-to-date, less than two-thirds the surge of its larger rival bitcoin (BTC), which has gained 50%. The CoinDesk 20 Index (CD20), a measure of the broader crypto market, has advanced 28%.

Register and receive your 6,045 USDT now!

"Ether may have the potential to surprise to the upside in the coming months," the report said, noting that the cryptocurrency does not have "major sources of supply side overhangs" such as token unlocks or pressure created by miners' sales.

The Ethereum Virtual Machine (EVM) is the Ethereum blockchain's native processing system that allows developers to create smart contracts and lets nodes interact with them. Layer 2s are separate blockchains built on top of layer 1s, or the base layer, that reduce bottlenecks with scaling and data.

Moreover, the importance of potential spot U.S. ether exchange-traded funds (ETFs) cannot be understated. "We think the market may be underestimating the timing and odds of a potential approval, which leaves room for surprises to the upside," Coinbase said.

"Even if the first deadline of May 23, 2024, encounters a rejection, we think there is a high likelihood that litigation could reverse that decision," the note said. "In the interim, we believe the structural demand drivers for ETH, as well as the technological innovations within its ecosystem, will enable it to continue straddling across multiple narratives."

In conclusion, while Ether has lagged behind Bitcoin in year-to-date gains, Coinbase's research highlights several factors that could drive its price higher in the coming months. With no significant supply-side pressures and the potential approval of a U.S. spot ether ETF, Ether remains a strong contender in the crypto market.