There are two very real reasons Ethereum is taking off

There are two very real reasons Ethereum is taking off

Ethereum is up more than 50% in the past week. In 2021, the world’s second largest cryptocurrency has risen more than 360%. And since the stock market bottomed late last March, Ethereum is up an astonishing 2,200%.

During the 2017 crypto boom, Ethereum shot up to more than $1,400. After falling more than 90% during the eventual bust, it just surpassed that level in January of this year. Now it’s worth more than $3,200 as of this writing.

Bitcoin is performing well this year but it’s up “only” 100%. So why is ETH up so much more than Satoshi’s invention of late?

You can never drill these types of price moves down to a singular reason, so let’s look at what Ethereum is and does to get a better sense of the euphoria in this digital asset.

Back in the 2017 crypto bubble there were no use cases beyond using it as a store of value on the security of the blockchain. Now, there’s nothing wrong with a store of value as the main selling point for something like Bitcoin. Bitcoin has the potential to become the digital version of gold, which has itself been a store of value for thousands of years. And gold has an estimated market value of around $10 trillion.

Ethereum is more than a store of value. The bull market in 2017 was all about the possibilities of this technology, but there were no applications or real world uses for cryptocurrencies.

The crypto run this time has two features the 2017 version didn’t—institutional adoption and actual applications. According to the Financial Times, [hotlink]Coinbase[/hotlink] now has more than $122 billion in institutional capital on its platform, up from just $45 billion at the end of 2020. For most of its existence, crypto has been driven by individual and retail adoption. That is changing.

But it’s the use cases that are likely driving Ethereum higher. Ethereum is a blockchain just like Bitcoin but it differs in that it is programmable. This means developers can write code, create rules, and make applications on the platform. These “smart contracts” can be used to validate agreements securely.

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You can think of the applications that can be built on Ethereum much like the apps that can be developed on Apple’s App Store or Google’s Android system. The biggest difference is there are no giant tech behemoths behind the scenes controlling Ethereum’s network. This is what attracted so many people to crypto in the first place: It’s decentralized in terms of who controls it. The general idea is you can create rules for proof of ownership and avoid scams or hacks because of the security of the blockchain.

And you need Ethereum to buy things on Ethereum’s network. According to the Wall Street Journal, more than 7 million new accounts that hold Ethereum balances were created in the first four months of 2021, bringing the total up to more than 55 million. And transactions totaled $1.5 trillion in the first quarter, more than the previous seven quarters combined.

There is a lot of stuff going on behind the scenes in decentralized finance (DeFi) that could prove to be transformational in the years ahead, but the use case most non-crypto people would be familiar with are non-fungible tokens (NFTs).

Smart contracts are simply code that is stored on the blockchain. Now blockchains themselves are essentially worthless, but NFTs provide a unique ID for a piece of digital art that can have its own rules for transferring ownership. So you could write into a smart contract for a digital piece of art being sold as an NFT that the original artist earns a certain percentage of any future sales of his or her creation. This is a huge leap forward for creators.

The most famous example of a digital artist taking advantage of this technology is Beeple, who sold an NFT of his work for $69 million. In concert with the National Basketball Association, Dapper Labs created NBA Top Shot, which essentially allows fans and collectors to buy and sell short highlights of NBA players that are stored on the blockchain. Some of the most sought-after moments have traded hands for six figures on the platform. The Kings of Leon even released their new album as an NFT, selling tokens that will give fans perks including specialty albums or front-row concert seats.

The hope is these smart contracts could displace or work alongside many of the tasks and services we use that are bogged down with paperwork and outdated practices. You could see a world where the sale of art, concert tickets, music rights, or title insurance, and money transfers or other financial transactions are performed using smart contracts.

The hope in the crypto community is Ethereum can become the platform that powers many of these future use cases now that there are real-world examples that actually work.

From a purely financial asset perspective, none of this helps us determine what the fair price is for Ethereum itself. The soaring price is likely taking into account the future potential of this technology. There is also an element of momentum, speculation, and the fear of missing out at play here.

It’s impossible to know what the “fair” value of Ethereum is or could be. Crypto is like a commodity in that there are no cash flows, profits, dividends, or income streams to use for valuation purposes. It’s all supply and demand.

Right now, the demand for Ethereum remains strong. Assuming the use cases continue to grow, that demand could remain for a while.

Ben Carlson is the director of institutional asset management at Ritholtz Wealth Management. He may own securities or assets discussed in this piece.

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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.

Market Wrap: ‘Ethereum Killers’ Pop as ING Report Highlights Ethereum Over Bitcoin

The tokens of the Ethereum blockchain’s competitors are making huge gains Thursday, while ether set a new price record above $3,600.

Bitcoin has less than 10% of gold’s market capitalization but could continue to differentiate itself from the yellow metal and grow its piece of the total market-cap pie.

Ether (ETH) trading around $3,483 as of 21:00 UTC (4 p.m. ET). Gaining 0.28% over the previous 24 hours.

Ether’s 24-hour range: $3,397-$3,607 (CoinDesk 20)

Ethereum Classic (ETC) trading around $148 as of 21:00 UTC (4 p.m. ET). Gaining 50% over the previous 24 hours.

Eos (EOS) trading around $12.29 as of 21:00 UTC (4 p.m. ET). Gaining 48% over the previous 24 hours.

Cardano (ADA) trading around $1.59 as of 21:00 UTC (4 p.m. ET). Gaining 9% over the previous 24 hours.

Bitcoin (BTC) trading around $56,161 as of 21:00 UTC (4 p.m. ET). Losing 1.6% over the previous 24 hours.

Bitcoin’s 24-hour range: $56,586-$58,266 (CoinDesk 20)

Big-time gainers Thursday included tokens associated with blockchain projects that aim to replicate some of the key attributes of Ethereum, mainly programmability.

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In the past month, ethereum classic (ETC) has gained over 1,250%, while cardano (ADA) has jumped 238% and eos (EOS) is up 42%, according to Kraken spot data provided by charting software TradingView.

The gains come as the giant Dutch bank ING used a recent report to throw some support behind the notion of programmable money used for decentralized finance, or DeFi.

“The recent bull run of ETH has shed some light on competing projects to the Ethereum value proposition, which can be bundled into a category that we can call a ‘sector,” said Elie Le Rest, partner at trading firm ExoAlpha. “The crypto market tends to work on comparable principles, meaning that if a coin of a ‘sector’ has been doing great, such as ETH in the ‘layer 1 sector,’ then other coins of this same sector may follow a similar trend.”

Performance of ETC (green), EOS (Black) and ADA (Blue) the past month. Source: TradingView

Layer 1 refers to blockchains that can serve as the foundation for various programming languages to create applications, known as smart contracts, that perform financial functions. Ethereum is a layer 1 smart-contract blockchain; ETC, ADA, and EOS are similar.

A Wall Street Journal article published Thursday highlights that retail investors are searching for value coins. Ethereum classic may no longer fit that bill, currently priced around $130, according to CoinDesk 20 data, but cardano priced at around $1.63 and eos at a little over $12 certainly do.

“Interest has flowed out of bitcoin and into [altcoins] for the time being. People are looking further out the risk spectrum for returns,” noted Ciaran Neilan, an executive at crypto market maker GSR.

Bitcoin market dominance the past four years. Source: TradingView

Bitcoin’s dominance, its share of the greater cryptocurrency market cap, is one sign of a loss of interest for the world’s oldest cryptocurrency. As of press time, BTC dominance, according to chart provider TradingView, was at around 45%, a low not seen since July 2018.

During the last bull market, at the start of 2018, bitcoin’s dominance dumped to an all-time low of 35% as investors redeployed their bitcoin gains into alternative cryptocurrencies.

Early this year, bitcoin dominance went as high as 72%. GSR’s Neilan said that dominance percentage will likely return. “It will end how it usually does,” Neilan said. “BTC consolidates, then takes back the headlines.”

Institutional interest, price of ether higher than ever

Ether’s hourly price chart on Bitstamp since May 3. Source: TradingView

Ether (ETH), the second-largest cryptocurrency by market capitalization, hit a fresh high Thursday of $3,607 at around 17:30 UTC (12:30 p.m. ET), according to CoinDesk 20 data. The price has settled on some heavy selling, but still gained 0.28%.

The European Investment Bank (EIB) issuance of a $121 million bond on Ethereum as another sign of institutional support for the ether ecosystem.

“I think ether has benefited from the recent Berlin upgrade,” Jean-Marc Bonnefous, managing partner at investment firm Tellurian Capital. “For once we have a new all-time high and lots of DeFi activity without a simultaneous explosion of gas [transaction] fees.” The EIB bond issuance could be another sign of institutional support for the ether ecosystem, he said.

Ether futures open interest the past month. Source: Skew

In the ether derivatives market, ETH futures are now at $10 billion – an all-time high. More sophisticated investors are entering the market and requiring more complex instruments. In the past month, open interest in ether futures has climbed by 47% across major venues.

“I think we’re just getting started,” Stefan Coolican, chief financial officer for investment firm Ether Capital, told CoinDesk. “The addressable market for ETH is almost infinitely larger than bitcoin.”

Bitcoin-gold correlation dumping

Bitcoin’s hourly price chart on Bitstamp since May 3. Source: TradingView

The price of bitcoin was down Thursday, going as low as $56,586 around 08:15 UTC (3:15 a.m. ET).

The trading range was even tighter than the day before. Thursday’s $56,586-$58,266 spot price variance was narrower than Wednesday’s $53,633-$57,356 range. BTC is below the 10-hour moving average and the 50-hour on the hourly chart, a bearish signal for market technicians.

“We’re seeing BTC almost completely flat while ETH has pumped,” noted Andrew Tu, an executive at quant trading firm Efficient Frontier.

“I don’t think this is the last we’ve heard from bitcoin, perhaps just a breather on its march to gold’s market cap,” Coolican said. Bitcoin’s current market capitalization is over $1 trillion, according to CoinGecko, versus gold’s more than $11 trillion.

The correlation between the two assets, according to data aggregator Coin Metrics, is near zero, which means their prices are no longer moving in sync as they were for most of last year. In October, the metric passed 0.6. A 1 would signify perfect synchronicity.

Bitcoin-gold correlation the past two years. Source: Coin Metrics

Mostafa Al-Mashita, vice president for trading at quant firm Efficient Frontier, says he’s ready for the return of BTC action.

“Another leg up for bitcoin is not expected anymore, which is why it’ll likely happen,” Al-Mashita told CoinDesk.

Read More: Bitcoin Options Traders Leaning Bearish Despite Price Recovery

Other markets

Digital assets on the CoinDesk 20 are mostly higher Thursday. Notable winners as of 21:00 UTC (4:00 p.m. ET):

Notable losers:

Equities:

Commodities:

Oil was down 0.61%. Price per barrel of West Texas Intermediate crude: $64.84.

Gold was in the green 1.6% and at $1,815 as of press time.

Silver is gaining, up 3.2% and changing hands at $27.32.

Treasurys:

The 10-year U.S. Treasury bond yield fell Thursday to 1.570 and in the red 0.11%.