The billionaire creator of Ethereum already expected the collapse of cryptocurrencies

The billionaire creator of Ethereum already expected the collapse of cryptocurrencies

May 21, 2021 3 min read

This article was translated from our Spanish edition using AI technologies. Errors may exist due to this process.

This week, the world of cryptocurrencies experienced a severe collapse, losing about 35% of its total capitalization in one day . Although this took investors and markets by surprise, Vitalik Buterin , the billionaire creator of Ethereum , revealed that he already expected the bubble to burst.

In an interview with CNN Business , the 27-year-old mogul said that cryptocurrencies are “in a bubble,” but it is difficult to predict when it will burst. “It could be over by now … It could be over in months ,” Buterin said.

According to the specialized cryptocurrency portal CoinMarketCap, on Wednesday morning the price of Ethereum fell to $ 2,092 . This is 41% less than the $ 3,559 it cost a day earlier. Although it managed to recover to exceed $ 2,900 on Thursday, today it is trading at $ 2,283 per unit with a downward trend.

Source: CoinMarketCap.

These figures are still a long way from the all-time record price of $ 4,337 that it reached on May 12, according to data from Coindesk .

Of course, the fall of Ethereum impacted the public portfolio of Vitalik Buterin , who just three weeks ago was crowned the youngest billionaire in the world . His account went from $ 1.1 billion to $ 870 million in a single day.

However, the crash of digital currencies did not surprise the Russian-Canadian programmer.

“We’ve had at least three of these big crypto bubbles so far (…) And quite often, the reason the bubbles end up stopping is because some event happens that just makes it clear that the technology isn’t there yet,” said the founder of Ethereum.

Currently, Ethereum is the second currency by market capitalization, only behind Bitcoin . One of the reasons for its growing popularity is that it is used in NFT transactions or non-fungible tokens , the new ‘crypto’ sensation .

The abrupt collapse of cryptocurrencies can be explained by two crucial events that occurred this week. First, on Sunday May 16, Elon Musk stated on Twitter that Tesla would no longer accept Bitcoin as payment . Second, the announcement that China would prohibit transactions with cryptocurrencies to the country’s financial institutions.

Ethereum Price: Can It Reach a New All-Time High?

Ethereum took a hit like most cryptos did this week, but where can it go from here? Updates to the network are on the horizon and may help to boost its price.

Ethereum, along with all other cryptos, experienced a huge sell-off in the last week. Just this month Ethereum reached over $4,300. Since then it dropped as low as $1,950 a now rests at around $2,500.

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The drop from its all-time high represents a 42% decrease. But why such a harsh drop? What happened to make the cryptocurrency plummet from the top, and can it climb back to a new all-time high?

Correlation With Bitcoin

Ethereum, as with most cryptocurrencies, is highly correlated to Bitcoin’s movements. While Bitcoin and Ethereum are vastly different in their design and use cases, the majority of people still lump all cryptocurrencies together as the same thing. With Bitcoin being the most popular, a drop in Bitcoin can lead to drops in the rest.

This will likely change as people slowly gain more exposure to cryptocurrencies and how they work, but right now they are all correlated in their price movements.

Due to this view that cryptocurrencies are all largely the same, when Bitcoin drops so does everything else, and Bitcoin dropped hard this week.

So, if Ethereum follows Bitcoin’s fluctuation, then why did Bitcoin drop?

Tax Day

Tax day was on the 17th. Historically, tax day is correlated with down markets as people sell off their investments to pay due taxes.

Tax day affects crypto and traditional markets too. On the 17th, the S&P 500 also had a rough day.

Elon Musk and Tesla

Though many crypto enthusiasts would not admit that one company and its billionaire figurehead has the power to affect Bitcoin’s price, Bitcoin tumbled sharply right after Tesla announced that it would stop accepting the crypto for its cars.

After the announcement, Musk engaged in various arguments on Twitter regarding Bitcoin’s energy efficiency, leading many to fear that Tesla could take it one step further and sell its Bitcoin holdings worth well over $1.6 billion.

While concerns over Bitcoin’s energy use grew, Musk reassured Twitter that Tesla had “diamond hands” and would not be selling.

Even though there was a strong sell-off, those leaving the market seemed to be newer investors panic selling as addresses that are accumulating Bitcoin have continued to grow through the drop.

Fears of Regulation

Perhaps one of the largest drivers of fear in the market was fresh concerns over regulations. Both the U.S. and China made announcements about coming regulations for taxes and other things.

In the U.S., the Treasury Department announced that it would begin to require any transfer of $10,000 or more to be reported to the IRS, though it is unclear how such a law would actually be enforced in the real world.

A report released by the Treasury Department said that cryptocurrencies were a growing concern.

“Still another significant concern is virtual currencies, which have grown to $2 trillion in market capital-ization. Cryptocurrency already poses a significant detection problem by facilitating illegal activity broadly including tax evasion.”

China also called for tighter regulations around mining and trading behavior. A statement from China said that it is time to “crack down on Bitcoin mining and trading behavior, and resolutely prevent transmission of individual risks to the social field.”

The country’s statement continued, saying “It is necessary to maintain the smooth operation of the stock, debt, and foreign exchange markets, severely crack down on illegal securities activities, and severely punish illegal financial activities."

Where Does Ethereum Go From Here?

While the whole cryptocurrency market has followed Bitcoin in its steep decline, Ethereum has a lot of upcoming updates that could help to lift the crypto out of the hole.

In the next year or so Ethereum will experience massive changes to its system known as Ethereum 2.0. These changes will increase transaction speeds and greatly reduce the cost to move money on the network. In this update, Ethereum will move to a proof-of-stake consensus system instead of proof-of-work.

Right now, transactions on the Ethereum network can cost $100 or more, making transactions of anything under that amount impossible and not worth it. After Ethereum’s update, this issue will go away, greatly reducing the barrier to entry and allowing anyone to move money for far smaller fees.

Why does this matter for Ethereum’s price? It matters because with lower fees the network is suddenly opened up to more people that could not previously afford to use it. This increased use can help to bolster the decentralized financial ecosystem on Ethereum and in turn its price.

Other than moving to proof-of-stake, Ethereum has another update that will change the way transaction fees work and help to lower inflation, thus making it more scarce. The update, called EIP-1559 (Ethereum Improvement Proposal), will lower the volatility of transaction fees by burning a portion of the fees, rather than giving it all to miners.

Though this will cause miners to make less money, it will allow more people to use the network for smaller transactions. This update will replace the auction-style system that exists today for a standard rate known as the base fee. Instead of miners setting the fees the network does, and instead of the fees all going to miners most of them are burned, helping to lower Ethereum’s inflation rate.

The combination of lower fees and a lower barrier to entry for more individuals, along with a new system to lower the inflation of Ethereum, are both good signs for the crypto’s price. Should these new updates prove effective, Ethereum’s ecosystem and its price stand a good chance to grow.

How Ethereum plans to get around a major drag on crypto prices

Climate change is becoming a major financial liability for bitcoin. Tesla CEO Elon Musk said on May 12 that the company will no longer accept the cryptocurrency as payment, over concerns “about rapidly increasing use of fossil fuels for bitcoin mining and transactions.” Other organizations may follow suit: Greenpeace became the latest on May 20, telling the Financial Times that it will stop accepting bitcoin for donations, which it has done since 2014.

Bitcoin mining globally uses about as much electricity as the nation of Argentina, producing a similar volume of greenhouse gas emissions to the London metro area. The reason for the big footprint is rooted in how bitcoins are “mined”: Fleets of computers compete to unlock coins by solving increasingly difficult math problems, a computational methodology known as proof-of-work. In this method, the only way to get an advantage over other miners is to run more computers, more efficiently, an approach that is energy-intensive by design and can only become more so over time. Some bitcoin proponents like Twitter co-founder Jack Dorsey have argued that the cryptocurrency can promote clean energy consumption by becoming a cornerstone customer for big solar and wind farms. But for the moment, most of the power for bitcoin mining is delivered by coal-fired power plants in China and hydropower dams—and no matter where it comes from, it’s an awful lot of energy to use on a service that benefits only a tiny niche group of speculators.

A better solution would be to scrap proof-of-work altogether—which is exactly what ether (a currency that runs on a network called Ethereum), bitcoin’s chief rival in the cryptocurrency scene, is planning to do.

Mining an environment-friendly cryptocurrency

In a blog post May 18, Carl Beekhuizen, a researcher at the Ethereum Foundation, a nonprofit that helps organize the currency’s community of miners, programmers, and investors, asserted that the currency’s long-planned shift to a new computational method will shave 99.5% off its energy consumption (which is already much lower than bitcoin, because of the smaller size of its market). In a colorful analogy, Beekhuizen writes that if the energy demand of bitcoin were represented as the height of the Burj Khalifa, the world’s tallest building, then Ethereum’s new energy demand could be compared to a single screw.

The new method, already in use by some other cryptocurrencies, is called proof-of-stake. Under this method, access to new coins is restricted based on how many coins a miner already owns; if a miner owns 3% of all coins, they can access only 3% of new coins. This system eliminates the need for energy-intensive number-crunching, because a miner’s rate of coin access is a product of their “stake,” not of their “work.” As a result, proof-of-stake mining software can essentially work on one normal computer, rather than a warehouse of servers, and there is no longer any strategic need to consume an increasing amount of energy.

The proof-of-stake transition is risky

Whether Ethereum can pull off this transition, known among insiders as The Merge, remains uncertain. Beekhuizen is vague about when the Merge will occur (“the upcoming months”), because no one individual or group can simply push a button and make it happen. To work, all ether miners (Beekhuizen estimates there are about 16,400) will need to update their systems at the same time, said Alex de Vries, a digital currency researcher. If they don’t—because of miscommunication, active resistance to the concept, or any reason—the Ethereum market could splinter. This has happened before: In August 2017, a disagreement among bitcoin miners and developers over the maximum transaction rate precipitated a split, with a minority going off to form a new currency called bitcoin cash.

While the technical details of such a split are complex, the upshot is simple: If it doesn’t work, ether’s value could suffer, and people who own Ethereum-based non-fungible-tokens could risk losing them, de Vries said.

“There’s reason for people to be afraid about doing it,” he said. “It’s going to create some interesting work for the lawyers.”

If the Merge works, it could increase pressure on bitcoin to follow suit. With a much larger and more diverse global community, the odds that bitcoin miners could come to consensus on a proof-of-stake transition are slim—but climate concern could tip the scales.

“If you are a bitcoiner today, you’ve made tons of money over the past year. The past few days have been bad but year-to-date, you’re still in a lot of profit. Why would you change a winning thing?” de Vries said. “But if bitcoin keeps going down in value because it’s attracting negative headlines or because Elon Musk is cracking down on it, then people might change their mind about that. Especially if they see that Ethereum succeeds.”