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 Classic’s ‘Irrational’ Price Tripling Bears Hallmark of Dogecoin Frenzy
Ethereum classic (ETC), the not-really-like-ether (ETH) sibling of the Ethereum blockchain’s native cryptocurrency, is on track for the best weekly performance in its four-year history, with prices nearly tripling since Sunday.
ETC/USD trading pair on Kraken. Source: Kraken, TradingView
Analysts in the digital-asset market say the price move likely reflects a speculative fever among retail traders rather than deeply informed bets on the Ethereum Classic blockchain’s future technological potential.
The dynamic might show that the just-for-fun yucks of trading the joke token dogecoin (DOGE) (which bears the hallmark of this year’s frenzy in GameStop shares on Wall Street) might be spilling over to almost-left-for-dead cryptocurrency projects from the last big bull market in 2017.
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Few professional cryptocurrency-market analysts see Ethereum Classic as possessing the disruptive potential of Ethereum or other up-and-coming blockchains like Binance Smart Chain or even Cardano.
But to retail traders looking to bet on price-go-up, the ETC tokens might be looking pretty good, and cheap.
“I think a lot of the interest has to do with the fact that dogecoin has moved so much and U.S. retail is looking for the next big asset,” Joshua Frank, co-founder and CEO of crypto data firm The TIE, which tracks social media interest in digital-asset markets.
At press time, ethereum classic is changing hands at $133.72, up 7.96% in the past 24 hours.
Ethereum Classic was born out of a contentious split from Ethereum in 2017, known in blockchain lingo as a “hard fork.” However, it quickly lost the support of the larger Ethereum software-developer community and has never attained a similar level of respect among industry executives and investors. The project’s market capitalization is less than one-twentieth of Ethereum’s $409 billion and it has been the victim of several 51% attacks.
Yet, that hasn’t stopped ETC’s price from shooting up for eight straight days in the current bull market. For instance, the ETC price rose 47% on May 5, according to data from Coinbase and TradingView.
The ETC growth is also supported by trading activity: Trading volume for ethereum classic on Thursday surged above $10 billion on Upbit, a Korean cryptocurrency exchange, according to data from CoinMarketCap.
“It’s a crazy, irrational market now,” Ki Young Ju, the chief executive of South Korea-based blockchain data firm CryptoQuant, said. “People will learn.”
Bitcoin’s rally since the beginning of last year could be mainly attributed to institutional investors in North America. Some of them have argued that bitcoin (BTC), the largest cryptocurrency (with a market capitalization of about $1.1 trillion) might work well as a hedge against inflation in the wake of trillions of dollars of coronavirus-prompted monetary stimulus from central banks around the world.
Ethereum classic’s gains, by contrast, appear to be largely driven by retail investors in both the West and East, according to analysts. That’s similar to the driving force behind the meme-centered dogecoin.
The TIE’s Frank says he noticed ethereum classic was trading at more than a 50% premium on U.S.-based, retail-focused crypto trading platforms including Robinhood and Coinbase, compared with prices at roughly the same time on other native cryptocurrency exchanges such as Binance.
The observation suggests rising demand for the ETC token from retail investors in the U.S.
“If institutions were behind the move, I don’t think you would have seen such a large spread in price between major exchanges with the retail-focused platforms having such a significant price premium,” Frank said.
The number of tweets about ethereum classic and bitcoin cash (BCH), a token created from a hard fork of the Bitcoin blockchain, has soared in the past week, another indication “a mass market” could be behind the outperformance, said Frank.
Market capitalization and tweet volume of ethereum classic and bitcoin cash since the beginning of the year. Source: The TIE
Robinhood currently supports seven cryptocurrencies on its platform: bitcoin, bitcoin cash, bitcoin sv (BSV), dogecoin, ether, ethereum classic and litecoin (LTC), according to its website. Among those, only ETC and dogecoin have outperformed both bitcoin and ether on a year-to-date basis.
In South Korea, where ETC’s trading volume is surging on the Upbit exchange, investors behind the rally are only looking at profits in the short term, Ju said.
“There are no institutional investors in Korea,” Ju said. “Koreans are seeking cheap coins that look likely to be pumped.”
Analysts expressed concern investors would get hurt eventually by the recent speculative fervor in these lesser cryptocurrencies. After the pump comes the dump, the thinking goes.
“Investors will get burned at some point, but this could go on for a while,” Frank said.
Thursday on Twitter, @SecretOfCrypto, who has more than 176,000 followers, tweeted that cryptocurrency markets are in a phase where ether has outperformed bitcoin and new money has started flowing into other large-cap tokens seen as having more room to spike in price.
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.
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