Analysis: Cryptocurrency ethereum is flourishing but risks linger
By Gertrude Chavez-Dreyfuss
NEW YORK (Reuters) – Ethereum has outperformed major digital currency rivals this year, bolstered by the surge in decentralized finance (DeFi) and the anticipation of a technical adjustment this summer, but it faces hurdles that could stall its rise.
With a jump of more than 350% in its price this year, ethereum has the second-largest market capitalization after bitcoin, but not as much cache and perhaps more operational challenges that could prevent it from eclipsing its major rival.
In the crypto world, the terms “ethereum” and “ether” have become synonymous. Technically, ethereum is the blockchain network in which decentralized applications are embedded, while ether is the token or currency that enables or drives the use of these applications.
Ethereum’s market cap on Friday was $410 billion, second to bitcoin’s at more than $1 trillion, according to data tracker CoinGecko.com. It hit a record high of $3,610.04 on Thursday and was last up 1% at $3,524.
Bitcoin, meanwhile, has risen a more modest 97% this year. Since hitting an all-time high of just under $65,000 in mid-April, bitcoin has actually fallen roughly 18%.
Graphic-Major cryptos in 2021 – https://fingfx.thomsonreuters.com/gfx/mkt/rlgpdywrwvo/Pasted%20image%201620292105900.png
A rise in institutional interest has increased ethereum demand, but supply has been limited. The token’s supply in exchanges in April hit its lowest in nearly 2-1/2 years, according to Kraken Intelligence, a research blog from cryptocurrency exchange Kraken.
“It’s more than just a coin. It’s a whole ecosystem that allows other applications to be built,” said Bradley Kam, chief executive officer of blockchain domain provider, Unstoppable Domains.
At the heart of ethereum’s ascendancy is DeFi, which refers to peer-to-peer cryptocurrency platforms that facilitate lending outside traditional banking institutions. Many sites run on the ethereum network, using an open-source code with algorithms that set rates in real time based on supply and demand.
The value locked – the total number of loans on DeFi platforms – was $79 billion as of Friday, DeFi Pulse data showed, up nearly 600% from $11 billion in October.
DeFi, however, has its problems. Dune Analytics research showed 2%-5% of transactions on ethereum-based decentralized exchanges failed due to complications such as slippage or insufficient “gas” prices, which are the fees required to successfully conduct a transaction on the ethereum blockchain.
Between April 15 and April 21, for instance, roughly 1.1 million transactions were made on Uniswap, a DeFi protocol used for exchanging cryptocurrencies. Of those, 241,262 failed, representing the largest number of transaction failures across the entire ethereum network, data from analytics platform Etherscan and Dune Analytics showed.
“DeFi is destined for meteoric growth, but that growth inherently comes with risk,” said Alex Wearn, chief executive officer at crypto exchange IDEX.
“Issues such as failed transactions and front-running are not subtle, costing users millions of dollars every day,” he said, referring to the practice of getting a transaction first in line in the execution queue right before a known future contract. “These major … problems limit the appeal of these products for a wider audience and ultimately hinder the ecosystem’s growth.”
Wearn estimates that more than $285 million were lost in DeFi hacks so far this year.
Proponents say DeFi sites represent the future of financial services, providing a cheaper, more efficient and accessible way for people and companies to access and offer credit.
TECHNOLOGY BUMPS
Ethereum has also been plagued by the network’s inability to scale to meet demand without incurring high transaction fees as well as slow execution of transactions, market participants said.
The first phase of an upgrade called Ethereum 2.0 launched last year is aimed at addressing the network’s tech issues on speed, efficiency, and scalability.
However, John Wu, president of AVA Labs, an open-source platform for financial applications, pointed out that the planned migration to Ethereum 2.0 has been in the works for years.
“The timelines have consistently been delayed, so it’s hard to feel comfortable with that unknown,” he said.
Ethereum also faces stiff competition from networks such as AVA Labs’ Avalanche and Binance Smart Chain, which are also compatible with ethereum’s assets and applications.
Data from AVA Labs showed users have transferred more than $170 million to Avalanche from ethereum since February.
ANOTHER TECHNICAL ENHANCEMENT
Still, hopes of a technical adjustment called EIP (ethereum improvement proposal) 1559, which is expected to go live in July and is seen reducing the supply of ethereum, has provided a lift for the digital currency.
EIP-1559 aims to reduce the volatility of ethereum’s fees by introducing a mechanism to burn some of those transaction fees, which should slow the token’s issuance, analysts said.
The impact on ethereum’s price could be similar to a bitcoin halving event, in which an adjustment cut bitcoin’s supply and propelled its price to record highs, analysts said.
“There’s a lot of numbers going around the market about the potential impact that has like a halving-type magnitude with bitcoin,” said Richard Galvin, co-founder and chief executive officer of crypto fund Digital Asset Capital Management.
“They’re all pretty positive drivers that have, I guess, seen a pretty strong revaluing.”
(Reporting by Gertrude Chavez-Dreyfuss in New York; Additional reporting by Tom Wilson in London; Editing by Alden Bentley and Matthew Lewis)
Ethereum price 2021: Ethereum ‘will keep rising’ as all-time high expected in months
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Ethereum and Bitcoin have many similarities; each is a digital currency traded via online exchanges and stored in various kinds of crypto wallets. Both Bitcoin and Ethereum are decentralised, meaning they’re not issued or regulated by a central bank or other authority, and both make use of the distributed ledger technology known as blockchain. While it began as an alien concept, over the years the concept of a virtual and decentralised cryptocurrency has gained acceptance and traction among regulators and government bodies.
Altcoins like DOGE are ‘first to drop 95%’ when markets crash - expert
Launched in July 2015, Ethereum is the largest and most well-established open ended decentralised software platform.
Ethereum comes complete with its own programming language which also runs on blockchain.
This enables developers to build and run distributed applications, essentially improving the currency any time.
According to eToro, Ethereum is of great value to investors as it can easily be traded or exchanged for other cryptocurrencies.
In addition, the broker writes that the crypto coin can be used at a growing number of online and ‘bricks and mortar’ retailers.
READ MORE: Dogecoin price: Dogecoin value jumps 47% in just one week - how to buy
Ethereum breaks new record highs as Bitcoin slips…which one to buy?
Ethereum (CRYPTO: ETH), or Ether if you prefer, is once again outperforming Bitcoin (CRYPTO: BTC) today.
Ether is up just under 1% over the past 24 hours, currently trading for US$3,504 (AU$4,492). That’s down slightly from the all-time high of US$3,607 that Ethereum breached earlier in the day.
Bitcoin headed the other way, slipping just under 1% in 24 hours to US$56,579. Bitcoin hit its own all-time high of US$64,829 in mid-April.
Bitcoin remains a high-returning investment in 2021, with the price up 94% year to date. That gives the world’s biggest crypto a market capitalisation of US$1.05 trillion, according to data from CoinDesk.
While that’s a stellar return by any standards, investors in Ether have done far better.
So far in 2021, Ethereum has gained 374%. That’s seen the cryptocurrency’s market cap grow to US$402 billion, steadily closing the gap with Bitcoin.
What’s the difference between the 2 digital tokens?
With some 7,000 or more cryptocurrencies in virtual circulation, it’s hard to keep track of even of a small fraction of them, let alone stay atop of what their primary functions are. Though, our task is made a tad easier in that many cryptos have little to no real function at all.
But Bitcoin and Ether, the world’s top 2 cryptos, do have very different purposes.
Ether is a digital token used to verify and record transactions of all sorts on Ethereum, the world’s most popular blockchain.
Bitcoin, on the other hand, is increasingly used in purchases and money transfers, as well as long-term holdings.
Explaining the difference between the 2 cryptos, Pat LaVecchia, Oasis Pro Markets CEO said (quoted by Bloomberg), “Ether is a blockchain platform that functions like the Apple store or Android app store. Bitcoin is a commodity like gold, or a store of value.”
Why buy Bitcoin or Ether?
Phil Bonello is the director of research at Grayscale Investments. The company’s trusts are involved in both Bitcoin and Ether.
According to Bonello, “Investors often look at Ethereum as a growth-type investment, making a bet on the continued development of the decentralized ecosystem built on Ethereum.” He added that investors, “sometimes consider Ether as a way to get index exposure to all the development occurring on Ethereum.”
Bitcoin, on the other hand, is arguably likely to outperform Ether in any future downturns.
As Bloomberg reports, “With a slide of about 20% in the Bloomberg Galaxy Crypto Index, there’s notably more downside risk to Ether than its larger compatriot, [Cornerstone Macro] strategist Benson Durham said.”
Durham added that, “With a rally of the same magnitude (so up 20%) you don’t really get the concomitant upside to Ether compared to Bitcoin. Ergo the convexity, if you will, favours Bitcoin.”
The case for both
If you’re looking to invest in cryptos, you may wish to look beyond Ether, Bitcoin, or any single token. Just as with your ASX shareholdings, there’s a good case for some diversification within a crypto portfolio.
As Cornerstone’s analysts wrote:
Given that there are diversification opportunities among digital coins themselves, we should consider a small basket of them, rather than just Bitcoin alone, when we assess whether some allocation to crypto assets can reduce portfolio volatility alongside traditional assets.
Whether you already are investing in Ether, Bitcoin or other cryptos – or maybe just considering it – it’s important not to lose sight of the massive historic volatility displayed by almost every single crypto.
Just as prices can rise by hundreds of percentage points in weeks or even days, they can also significantly crash just as quickly.