Ethereum May Be Undervalued Amid Explosive Layer-2 Adoption, Fidelity Report Suggests
Despite lackluster price action in recent months, a new report from Fidelity Digital Assets indicates that Ethereum (ETH) may be significantly undervalued, as both fundamental network growth and on-chain signals point to a potential bottom formation. According to Fidelity’s latest Signals Report, ETH’s recent correction could offer a strategic entry point for long-term investors, especially as Layer-2 (L2) adoption surges to record highs.
Key Highlights from the Report:
• Ethereum’s MVRV Z-Score enters “depressed” territory for the first time since the previous market cycle bottom.
• Layer-2 active addresses reach an all-time high of 13.6 million, highlighting growing network demand.
• ETH’s market cap relative to Bitcoin (BTC) has dropped to mid-2020 levels, suggesting relative undervaluation.
⸻
Ethereum Faces Price Weakness in Q1, But On-Chain Metrics Show Signs of Capitulation
Ethereum started 2025 with a bearish tone, falling 45% from its yearly high of $3,579 in January to a recent low near $1,950. In March, ETH experienced a so-called “death cross”, as its 50-day Simple Moving Average (SMA) dropped 21% below its 200-day SMA—a traditionally bearish signal in technical analysis.
However, Fidelity’s report cautions against relying solely on short-term technicals. On-chain data shows deeper insight into Ethereum’s current market phase. One critical indicator, the MVRV Z-Score—which compares ETH’s market value to its realized value—dropped to -0.18 on March 9. Historically, such readings have aligned with cycle bottoms and marked periods of undervaluation.
In addition, the Net Unrealized Profit/Loss (NUPL) ratio for Ethereum briefly touched zero, indicating that unrealized profits have been wiped out across the market. This type of capitulation event typically sets the stage for a neutral or bullish reset, as sellers exhaust themselves and new buyers begin to accumulate.
That said, Fidelity also warns that historical precedents (such as during the 2022 bear market) suggest ETH could still decline further below its realized price before staging a sustainable recovery.
⸻
ETH/BTC Weakens, But Layer-2 Ecosystem Signals Explosive Growth
One of the more concerning trends in the report is Ethereum’s declining relative strength to Bitcoin. The ETH/BTC market cap ratio has dropped to 0.13, the lowest level since mid-2020. While this indicates Ethereum has underperformed BTC significantly over the past 30 months, contrarian investors may view this as a buy signal, especially when paired with growing network usage.
While the price remains under pressure, Ethereum’s network fundamentals are accelerating—particularly in its Layer-2 ecosystem. According to data from growthepie.xyz, the total number of active addresses on Ethereum Layer-2 networks reached a record 13.6 million, surpassing all previous highs. Weekly growth in L2 addresses has surged 74%, showcasing rising adoption.
Layer-2 Network Breakdown:
• Unichain leads with 5.82 million weekly active addresses, overtaking Base and Arbitrum.
• Ethereum’s Layer-2 dominance in active addresses rose 58.74% over the past week alone.
• This reflects increasing demand for scalable, low-cost transactions in the Ethereum ecosystem—especially in gaming, DeFi, and social dApps.
The rapid expansion of L2 solutions suggests Ethereum is evolving beyond its role as a settlement layer. It is increasingly becoming the foundational infrastructure for Web3, capable of supporting high-volume applications without sacrificing decentralization or security.
⸻
Early Technical Signs Point to a Recovery
In addition to the encouraging on-chain data, some technical indicators are flashing early signs of a potential rebound. Pseudonymous trader CRG pointed out that Ethereum has reclaimed a position above the 12-hour Ichimoku Cloud—a move often considered a bullish trend reversal signal.
This is the first time ETH has broken above the Ichimoku Cloud since December 2024, suggesting that short-term momentum is turning in favor of the bulls. While confirmation requires sustained price action above key moving averages and resistance levels, the signal is a positive development for traders looking for early recovery plays.
⸻
Upcoming Catalysts Could Drive Bullish Momentum
Fidelity’s report concludes that Ethereum’s current market conditions—characterized by depressed valuation metrics, strong L2 network growth, and early technical turnarounds—set the stage for a potential long-term accumulation opportunity.
Key bullish catalysts that could accelerate this thesis include:
• Spot Ethereum ETF approvals in the United States, which would open the doors to institutional capital inflows.
• Mainstream adoption of Layer-2 scaling solutions, enabling faster and cheaper transactions while maintaining Ethereum’s security.
• A potential “flippening” in on-chain activity, where L2 usage eclipses L1 for the first time in history.
⸻
Conclusion: Ethereum’s Price May Be Misleading—The Fundamentals Tell a Different Story
While Ethereum’s price performance has lagged behind Bitcoin and other altcoins, the underlying fundamentals have never looked stronger. Record-breaking Layer-2 activity, a rising number of active users, and improving technical indicators suggest that ETH may be in the early stages of a major recovery phase.
As always, short-term volatility remains a risk. But for long-term believers in Ethereum’s role in the future of decentralized finance and Web3, the current price levels may offer one of the most compelling buying opportunities since 2022.