Ethereum’s ether (ETH), the world’s second-largest crypto asset, has long been overshadowed by its predecessor bitcoin. But it seems to finally be coming out on its own.
Ether is up more than 20 per cent since the launch of Ethereum Futures Contracts by the Chicago-based CME Group on Monday. A total of 388 ETH contracts were traded on the first day with a total volume of $33.6 million.
The price of ether recorded its highest level on Wednesday, jumping from $1,500 to above $1,800 within the first three days of the week. As at the time of writing, the cryptocurrency is trading above $1,810, eyeing another record high.
Ethereum created the smart contract.
It’s well known that the pseudonymous inventor of bitcoin invented the blockchain. But, outside the crypto industry, few investors understand why Ethereum hosts a technology that is just as important for blockchain applications.
The creator of Ethereum, Vitalik Buterin, wanted to find a way to do more with the blockchain than just create tokens and exchange them.
Buterin invented a way to make the blockchain power tasks, like exchange money, property, shares, rent an apartment, arrange a performance, etc. The smart contract checks for performance and authenticity and pays or exchanges or arranges delivery.
Smart contracts work with If-Then logical statements, and as blockchain analyst Jeff Garzik notes:
“You can execute contracts that say, ‘If I receive cash on delivery at this location in a developing, emerging market, then this other product, many, many links up the supply chain, will trigger a supplier creating a new item since the existing item was just delivered in that developing market.”
This is why Ethereum, which provides the framework for smart contracts, has attracted traditional and institutional investors alike, and ether, its currency, has become linked to invaluable intellectual property.
This helps to account for the fact that the number of ‘whale addresses’ (those holding at least 10,000 ether tokens ) has jumped to a 13-month high of 1,103, according to on-chain data from blockchain analytics firm Glassnode. More than 35 whale addresses have been created in January.
The increased accumulation by investors with deep pockets is unquestionably driving up ether’s price. Grayscale, the largest fund manager investing in cryptocurrencies, has received $23 million per week for ether investment in the past year. Grayscale has 3.04 million ETH with a total value of $5.19 billion. The asset manager purchased 2,954 Ethereum in the last week.
Improvements to the Ethereum blockchain
Another factor that could make Ethereum a good long-term investment is that there are plans for more improvements in the future.
Both Bitcoin and Ethereum are currently using the proof of work system to verify transactions. This is complex, time-consuming and expensive for miners, but Bitcoin is almost certain never to change it, as it is fundamental to the coin’s value. But only those who can invest thousands in mining equipment and who have access to cheap electricity can succeed in mining bitcoin.
Ethereum, which has more flexibility, is likely to change over to the proof of stake system for verifying transactions in the coming months.
The proof of stake (PoS) seeks to address the issues of dog token creation by attributing mining power to the proportion of coins held by a miner. This way, instead of utilising energy to perform the mathematics in proof of work verification, a PoS miner is limited to mining a percentage of transactions determined by their ownership stake. For instance, a miner who owns 3 per cent of the ether available can theoretically mine only 3 per cent of the blocks.
Proof of stake is also viewed by programmers as less vulnerable to certain kinds of hacking attacks.
Some analysts believe that if Ethereum does implement proof of stake, then it could make Ethereum more effectively decentralised than Bitcoin. This means that the Ethereum network could become more secure than Bitcoin.
Thanks to a number of smaller-scale improvements and the transition to proof of stake, it will be possible to process thousands of transactions per second consuming very little energy.
All of these changes are certain to add some value to ether itself.
Ether is a gateway to DeFi
Value for Ethereum’s ether is not linked to a shrinking supply, as is that of bitcoin, which ‘halves’ at specific intervals, and which will eventually run out.
“ETH, on the other hand, does not have a fixed cap. The price of ETH may be more directly related to its utility to process transactions which are used in many applications,” including a number of decentralised finance (DeFi) dApps,” comments Doug Schwenk, Chairman of DAR (Digital Asset Research).
“As more mature applications are built on Ethereum that provide greater value to the end-user, the value of the asset should naturally increase.”
A number of analysts, like Schwenk, also see an investment in ether as a gateway to investment in DeFi, decentralised finance, the most innovative and rapidly growing part of the cryptocurrency industry.
“Just like taking part in MicroStrategy’s $650 million convertible senior note offering last year was basically getting an almost-free call option on bitcoin, going long on ethereum is a way to get indirect exposure to DeFi protocols,” Denis Vinokourov, head of research at digital asset prime broker Bequant, said. “Not everyone is comfortable with the risks that are still associated with DeFi, but the hyper growth of these projects boosts activity on the Ethereum network and, thus, supports capital appreciation.”