Cryptocurrency ethereum is flourishing but risks linger
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.
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%.
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.
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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.
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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.”
What is Ethereum and why is it surging right now?
Ethereum: The lowdown on what it is and why it’s surging
Ethereum Price Jumps To New All-Time High As Institutions Pile In
The Ethereum price has set a new record over the weekend, gaining 10% to $3,960. JPMorgan outline why this may be the start.
The recent rally in Ethereum shows no signs of stopping just yet, and the coin continues to eat away at Bitcoin’s market share.
The 450% rally (so far) in The Ethereum price in 2021 now has the coin’s value at almost half a Trillion US Dollars. The number #2 ranked digital assets total valuation is now $448,000,000,000 and, according to JP Morgan, may be set to climb much higher.
Whilst Bitcoin has struggled to break new ground in the last 6 weeks, Ethereum has soared. ETH has outperformed BTC/USD by 4 times since the start of April.
Ethereum and others, including Dogecoin, have grabbed more than the headlines. They have also grabbed market share from Bitcoin.
Bitcoins’ failure to make news highs has seen its market share drop from 60% to just under 45%.
This reminds me of the market in late 2017/early 2018. Although for different reasons. Bitcoin’s decline in market share has less to do with a declining BTC price and all to do with a rising Ethereum price.
Institutional Investment Soars
A report by JP Morgan has outlined why Ethereum has and could continue to outperform Bitcoin. The report details how investors are embracing ETH at a growing pace.
In April, four new Ethereum ETFs’ were launched. This has made it easier for institutional investors to profit from the rising Ethereum price.
Open interest in the CME Ethereum futures surged in April. This indicates that Institutions bought more than $250 Million of Ethereum over the period.
Ethereum Outlook
I believe the current extension could see the Ethereum price test $5,000 level over the coming sessions.
The price has now cleared an ascending triangle formation, that had been building since the 3rd of May. This breakout level at $3,600 should now act as price support.
Often when the price breaks a trend line, it revisits that price before continuing the move. A pullback in price to the top of the formation would offer a better entry point for longs.
Longs may want to place stops beneath the lower end of the triangle at $3,480. A failure to hold this line may see the price slip to $3,300 and then $3,165.
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