Ethereum upgrade drives huge crypto rebound

Ethereum upgrade drives huge crypto rebound

Ethereum upgrade drives huge crypto rebound

Crypto asset prices have been on a tear over the past few weeks, led by a near-doubling in ether prices following a key upgrade of the ethereum protocol.

Prices for ether, the native cryptocurrency of the ethereum blockchain, jumped more than 85% from their lows of around $1,700 on July 20 to a high of $3,200, as at 10 August. Over the same period, bitcoin surged 60%, from less than $29,000 to more than $46,000.

Ether prices

After the big rally, bitcoin and ether find themselves about halfway between their recent lows and their all-time highs set in April and May, respectively.

Bitcoin prices

EIP-1559

While it is too soon to say whether the crypto correction is over, the recovery in prices is a welcome development for bulls. Prior to this run, much of the talk in the market was about whether crypto asset prices would tumble even further than they had as part of a long, grinding bear market similar to the “crypto winter” of 2018.

That type of chatter is gone for now, replaced by bullish enthusiasm centred on EIP-1559, an upgrade of the ethereum protocol that went into effect last week. The upgrade’s main aim is to make ethereum transaction fees more predictable by replacing a first-price auction mechanism with a fixed fee (called a base fee) and optional tip.

While all transaction fees previously went to ethereum miners, under the new system, the base fee is “burned” (removed from circulation) and only the tip goes to miners. Analysts say that a user who pays the base fee and a negligible tip has a high likelihood of having their transaction added to the blockchain.

In essence, the protocol is now calculating the market clearing transaction fee, rather than having each individual user try and figure it out on their own.

User experience was the main impetus for EIP-1559, yet the upgrade’s impact goes beyond just fees. Base fees are burned to prevent miners from making off-chain agreements that could hinder the goal of more predictable transaction costs. But the design has the side effect of reducing the growth of ether supply, which many investors view as bullish for the token.

According to the site ultra sound money, since the upgrade last week, nearly 20,000 ETH has already been burned, equal to $62m at current ether prices.

NFT resurgence

Hand in hand with EIP-1559, a resurgence of interest for nonfungible tokens (NFTs) – most of which exist on the ethereum blockchain – also fuelled upside in ether.

As ETF.com reported earlier this week, the value of one of the original NFT projects, CryptoPunks, has been soaring lately, with even the cheapest punks changing hands for six figures.

OpenSea, a marketplace for NFTs, has seen volume on its platform reach all-time highs in recent days. Now under the new rules of ethereum, a lot of the transaction fees associated with that volume is being burned.

Moving in lockstep

Even as ethereum has dominated the crypto headlines recently, bitcoin is still the world’s most valuable cryptocurrency, with a market cap of $870bn versus $370bn for ether. The debate over the bitcoin network’s energy consumption, ignited by an Elon Musk tweet, has died down for now.

Instead, the focus is back on whether continued retail and institutional adoption of “digital gold” can push prices back to their peaks around $65,000 and beyond.

The crypto space tends to move in lockstep, so bitcoin’s short-term fate may hinge on developments in ethereum more than anything.

This story was originally published on ETF.com

Further reading

Ethereum Miners Make Multimillion-Dollar Bet on Upgrade Delay

Major bitcoin mining firms and miner manufacturers are increasing their investments in ethereum mining despite the second network’s impending switch to proof-of-stake.

Public bitcoin mining companies Hut 8 and Hive are increasing their capacities to mine the second-largest cryptocurrency by market cap. In the meantime, miner makers like Bitmain and Innosilicon are set to release new ethereum mining machines later this year.

This investment may seem strange, given that the Ethereum system is anticipated to migrate from proof-of-work (POW) to proof-of-stake (POS) in five months, and POS mining does not require such advanced machines. The rising demand might be attributed to expectations that the migration will be delayed, industry pros said.

Related: Nasdaq-Listed Powerbridge to Take Up Bitcoin, Ether Mining

“We were told mining was going to end four years ago and it is still going,” said Mark D’Aria, CEO of Bitpro, a New York-based consulting firm with a focus in brokerage and management of Ethereum mining hardware. “It has always been a wait-and-see approach – things tend to take longer than everyone expects.”

While last week’s London fork brings the network one step closer to Ethereum 2.0, significant upgrades throughout Ethereum’s six-year history have a track record of multiple delays.

For example, the Constantinople upgrade – which was a key step toward Ethereum 2.0 – was originally slated to launch as early as July 2018; however, a bug in its code delayed its deployment until February 2019, creating more delays for the migration.

Freezing mining with the Ice Age

Ethereum Improvement Proposal (EIP) 3554 introduced the difficulty bomb that adds artificial miners to increase mining difficulty, making mining operations less profitable. This period has been referred to as the “Ice Age.” Ethereum developers initially presented this EIP in 2015, but it has been postponed to December 2021.

Story continues

Related: How Does Ethereum Staking Work?

As ether’s price rises, it may become more difficult to transition the network to proof-of-stake, said Ethan Vera, chief operating officer of Seattle-based mining company Luxor.

“We have seen ether running up to $3,000, decentralized finance (DeFi) is built on top of the network and [non-fungible tokens] have taken off,” Vera said. “Even those that are bullish on Ethereum’s transition to POS still want to go slowly to make sure that things are being done correctly and there is not any potential doubt, pitfalls or blindspots that the developers are missing.”

Besides technical challenges and security issues for assets on Ethereum, potential resistance from the ethereum mining community could be another factor that slows the network’s migration to POS.

“One thing that has not been really appreciated is how much resistance there is going to be to that proof-of-stake migration,” D’Aria said. “To think that they are just going to flip a switch and turn off billions of dollars of miners, that’s crazy, that’s not going to happen.”

Institutional players

Ethereum mining has more individuals and fewer large-scale miners than bitcoin mining.

Relatively low energy consumption compared to bitcoin miners combined with the small amounts of heat and noise from ethereum mining rigs make it possible to mine ETH on graphic processing units (GPU) at home, Vera said.

More than 90% of ethereum mining machines are based on GPUs, which is also a common hardware used by gamers, D’Aria said.

However, crypto mining heavyweights are on the move to break into the industry and make profits that are bigger than they would be from bitcoin mining.

Public crypto mining company Hive Blockchain claimed it has become the largest public ethereum miner in the world with 3,383 gigahashes per second (GH/s), which was 1.3% of the total hashrate for the Ethereum network at the time, according to a financial report by Hive on Oct. 15, 2020.

The Vancouver-based company aims to raise its ethereum mining hashrate to 5,500 GH/s, which is a 62.5% increase compared to that level by the end of this year. Hive acquired a 50-megawatt (MW) data center in New Brunswick, Canada, from data center colocation services provider GPU One in February.

Another public crypto mining company, Hut 8, purchased $30 million worth of specialized Ethereum miners from GPU maker Nvidia in May. The company said all miners are expected to be delivered and installed into its Alberta facilities by the end of August. It plans to have 1,600 GH/s hashrate with a 4MW power usage.

“This transaction serves to strengthen Hut 8’s objective of increasing revenue diversification and to drive immediate short- and long-term revenue growth objectives forward in FY 2021,” the company said.

Unlike pure-play bitcoin mining companies such as Marathon and Riot, companies like Hut 8 have a mandate to utilize stranded or underutilized energy and turn that into compute power and reward, according to Vera.

“I think the companies that are going into ethereum mining right now this late in the game are looking at a bigger picture of how they can capitalize on their computing power,” Vera said. “Crypto is one vertical of many that they would pursue.”

Faster pay

More powerful ethereum miners, which shorten the payback period on such mining operations and increase profits, are coming to the market.

The specialized ethereum miners, also called application-specific integrated circuits (ASIC), are designed by miner makers such as Bitmain specifically for mining, whereas most GPU miners are made by repurposing graphic cards for gaming.

Nvidia unveiled its first ethereum miner in early 2021, while Bitmain and Innosilicon are set to deliver their latest model to mine ethereum by the end of this year.

Miner manufacturer iPollo has raked in over $200 million in revenue from pre-orders of its latest model of ethereum ASICs, which will be delivered by the fourth quarter in 2021, said Paul Yao, vice president of global business development at iPollo. It aims to increase its production when the company reaches a higher capacity and is able to make miners all year round in 2022, according to Yao.

The Singapore-based company will set up an office in the U.S. in the coming year and shift its focus from the Chinese market to North America’s, “We are seeing growing demand in North America and some of the Asian markets,” Yao said.

“With an ASIC/GPU ROI (return of investment) of five to six months, and ETH 2.0 being very likely more than six months away, I can understand how most would accept the risk especially with prices looking strong,” said Azam Roslan, senior sales associate at Wattum, which is a New York-based crypto miner brokerage and management company.

Vera estimated the payback period for Ethereum mining could be as short as four months if miners use the latest generation of ASICs. “For bitcoin mining, depending on the price they are paying for the operations, the public companies are looking at a year’s time frame for payback,” Vera said.

By comparison, some of the existing GPU cards for ethereum mining, such as the 3070 GPU card produced by Nvidia, still need about 18 months for the miners to cover all their costs, Arseni Grusha, Wattum’s CEO said.

“You want the payback period to stay under 12 months, meaning that either ETH goes up in value or the GPU prices have to go down,” Grusha said. “GPU prices are not expected to go down, and even if ETH goes to $4,000, it would have to stay there for ETH mining ROI to be attractive.”

Profit margins

A strong market price and relatively low operating costs are among the main reasons that Ethereum mining has been generating more profits than bitcoin mining since last year.

While the London fork has enabled the Ethereum network to burn a portion of the gas fee that would otherwise be paid to miners, Ethereum mining appears to be even more profitable since the fork thanks to Ethereum’s price.

Daily miner revenue in U.S. dollars has rather increased by 7.1% and hit a two-month high, according to data from Coin Metrics. The network has burned about 33% of the new coin supply growth since the update, which is 22,708 ETH and worth $76.1 million.

Besides priority fees (gas fee minus the base fee burnt), block subsidies (similar to Bitcoin block awards) and maximal extractable value (MEV) are the other two sources of revenue for miners. MEV is the amount of money an ethereum miner can make by helping traders to insert, leave out or reorder transactions in a block.

“After EIP 1559, we are still getting the MEV, 2 ETH from block subsidies and quite a bit of the gas given from some of the wallets,” D’Aria said. “So it is really not that big of a deal.”

Miners are already expecting gas fees to go down in the long run as more scaling solutions on Ethereum roll out, which will reduce congestion and transaction fees, D’Aria said.

DeFi saw explosive growth last summer due to a new reward mechanism for investors that use DeFi protocols, where they can earn new tokens beyond the returns on deposits. More trading activities across various protocols on Ethereum has drastically increased transaction fees, which is paid to miners for their work to validate transactions.

“You get two ETHs from the block subsidies and five to seven more from the fees,” D’Aria said of the high transaction fees during the DeFi boom. However, with lower transaction volumes on DeFi, gas fees have declined for Ethereum miners. “That was an anomaly and miners feel like enjoying it while it lasts.”

Ethereum mining tends to have low operating costs compared to bitcoin mining. While GPU miners are expensive and it is more labor-intensive to run the machines, low power consumption could make up those costs and reduce the overall cost even lower than bitcoin mining, Vera said.

The exact date of Ethereum’s historic migration to POS is anyone’s guess but a well-timed investment in Ethereum mining could make a big profit, Vera says.

“The miners who betted against proof-of-stake two years ago made an absolute killing,” Vera said. “If you can bet against that, the return could be quite lucrative.”

Related Stories

Ethereum’s ‘London Upgrade’ and Its Benefits to Investors Explained

Bitcoin has been the undisputed market leader since the cryptocurrency wave swept the world. While Ethereum has long been the lone challenger to the world’s largest cryptocurrency, its technology has suffered from several issues that have held it back. Gradually, the gap has widened between them. To overcome the challenges facing Ethereum, its developers have now released an upgrade. Colloquially called the “London upgrade”, it has rallied the cryptocurrency market. Investors seem upbeat about it as it brings more transparency in terms of transaction fee on the network. Some experts predict the latest changes to Ethereum technology in a long time could end Bitcoin’s dominance.

A lot of people get confused between Ether and Ethereum. So, let’s address that first.

Ethereum and Ether

Ethereum is a technology that makes use of blockchain technology to facilitate peer-to-peer contracts. Unlike traditional contracts, written in human languages, these smart contracts are written in codes that a computer can execute. The Ethereum network acts as a single decentralised computer that runs the code, meaning all computers in the network will agree with the outcome of each smart contract.

To run the network, developers need some kind of “gas”. Ether is the cryptocurrency coin that acts as its fuel. It is used to pay for transaction fees and computational services. When people send or receive smart contracts, computers are required to validate those transactions. Ether comes into existence by a successful validation, the process is called mining. Simply, Ether is the native currency and Ethereum is the technology that produces it. But the word Ethereum is casually also used to mean the currency. People can mine Ether or buy those that are already mined from an online exchange. Bitcoin price in India was around Rs. 35.3 lakhs and Ethereum price in India was around Rs. 2.47 lakhs as of 6pm IST on August 13.

What is the new Ethereum upgrade?

The Ethereum London Hard Fork upgrade is a set of five improvement proposals. One of them is called EIP-1559. It is aimed at giving speed to Ether mining and also incentivising it. Unlike Bitcoin, there is no limit to mining Ether coins, which makes it an inflationary cryptocurrency. Miners are paid new coins for validating each block of information. They are compensated with transaction fees that are paid by users. One of the biggest benefits of the London upgrade is that it has enabled the Ethereum network to handle many more transactions per second. It will help with scalability and tackle the high transaction fees — one of the biggest complaints of small investors or those who make frequent transactions.

Reduction in number of Ether coins in circulation

Another big feature of the EIP-1559 upgrade is that it is designed to reduce the number of Ether coins in circulating at any given time. This could potentially result in higher prices, assuming the demand remains constant. This upgrade will make Ether a deflationary cryptocurrency like Bitcoin, whose supply has already been limited at 21 million coins. This means over time their purchasing power will increase.

What does a hard fork mean?

When the majority of a cryptocurrency community, comprising developers, miners, and investors decide to change the fundamental rules governing the underlying technology, a hard fork happens.

What does the Ethereum upgrade mean for investors?

Ether is one of the fastest-growing cryptocurrencies and is only behind Bitcoin. But the gap between them runs into thousands of dollars. This update will create more transparency and, as a result, more trust in the future of this coin as a store of value, which should translate into attracting more investors. As the demand rises, so will the price. Many experts believe the latest upgrade has given Ethereum the firepower to challenge Bitcoin, which has shown immense volatility in the recent past.