Jason Guthrie, Head of Digital Assets, WisdomTree
The outlook for cryptocurrencies has become a hot topic for market participants, viewers and press alike. While the cryptocurrency market recently retreated amid a string of negative news, it is not all doom and gloom. Much has been said about Bitcoin (BTC), but Ether (ETH) is increasingly becoming an interesting opportunity for investors.
On May 12, 2021, Ether hit a new all-time high and with that event came questions from investors asking if the momentum was sustainable and if they should add the digital asset to their portfolio. While the recent sell-off may have hurt the positive momentum, there are still many positive aspects to be encouraged. Any price trend in the crypto space is complicated, but I will try to give context and outline the main drivers of the ether narrative.
Ether, the native cryptocurrency of the Ethereum network, is a cryptocurrency like Bitcoin, but has fundamental differences at the network level that cause very different use cases for everyone. Bitcoin is primarily a store of value powered by its hard supply cap and is seen as a layer 1 solution for the global payments infrastructure. This is where the analogy to digital gold comes from.
Ether is used to “power” the Ethereum network, which is essentially a decentralized software platform designed to run compiled computer code known as smart contracts. With these smart contracts, a whole range of functions can be automated, from the very simple exchange of values to insurance contracts to decentralized exchanges, all of which are operated by the decentralized Ethereum network. The complexity of the smart contract determines the transaction fees (so-called gas fees), which are priced in ether. In this way, the price of Ether is a factor in the expected volume and complexity of transactions on the network and the potential value generated by various applications based on Ethereum’s smart contracts – if transactions are of high economic value people willing to pay more for transactions. In addition, ether has achieved a certain status as a “safe haven” within the cryptosphere as it is the second largest cryptocurrency, its demand is very stubborn and the supply expansion, although not certain, is very predictable and relatively tame compared to the fiat -Currency standards after 2008.
So why has there been so much interest in ether in the past few months?
Excitement about ETH 2.0
There is great excitement in the room over the proposed future developments of the Ethereum network, which many are hailing as the next big thing to move the ecosystem forward. Far-reaching changes are planned, but the two most important developments are firstly the move from Proof of Work (POW) to Proof of Work (POW) as a consensus mechanism and secondly the development of “Layer 2” solutions to help with network scaling. There is speculation that these changes will help drive usage of the Ethereum network and bring more users and more projects to the platform.
In addition, the potential move to the POS is leading to a heated debate in the crypto space: energy consumption. POS is much less energy intensive than POW and so some speculate that this could be a tailwind for the platform’s adoption.
Developments in the field of decentralized finance (DeFi)
One of the most innovative implementations of the smart contracts has been the rapid growth of DeFi, which has mainly occurred on the Ethereum network. It essentially uses decentralized technology to automate the way value is transferred, a role that has historically been played by large institutions and has been very profitable. There are DeFi products that aim to replace exchanges, disrupt lending, renew bond issuance and the list goes on. For example, the LINK and Uniswap DeFi projects on Ethereum have attracted a lot of capital and show enormous potential. If Ethereum can maintain its dominance in this area, it should continue to fuel demand for Ether.
Bitcoin’s cyclical rotation as prices move sideways
Bitcoin is still the most ubiquitous cryptocurrency. Its bull runs generate the most media attention and it is by far the most common entry point for new money that comes on the market. But we all know that market movements occur in cycles. So when the steam comes out of Bitcoin, we see investors who want to take profits and invest in something else. Ether is often their next choice. This is not a new phenomenon and is being followed by crypto experts talking about the market following a trend from BTC to ETH to large cap altcoins and DeFi and finally to the micro-cap projects. This was a pattern that was observed in the 2017 market and we can now see something similar.
However, these trends never follow a straight line. The recent sell-off reminds us that any investment must be risk-adjusted. The future looks bright for cryptocurrencies, but it is almost impossible to decipher the exact route of introduction. Because of this, digital assets are currently a niche but growing part of a portfolio whose allocations are highly persuasive of crypto assets.