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Why Investors Are Talking About Ethereum Again. What You Need to Know.



This article is written by Giles Coghlan, Chief Currency Analyst at HYCM


It’s been a while since the Ethereum network and its native cryptocurrency, ether, were in the mainstream financial media; over two years, to be precise. As is often the case, the coverage back then centred around ether hitting a significant new all-time high at over $1400 per coin. This was in January 2018, after it had risen by over 10,000% in a year. When the entire crypto market underwent a two-year-long correction, Ethereum predictably fell from the headlines and gave back more than 90% of the gains it had made. Recently, a new wave of interest has been growing around the world’s second-largest cryptocurrency, with Google searches having spiked to their highest level since July of 2019. So, why now? What’s going on? And why the renewed interest?

A Brief History

Ethereum is the brainchild of Russian-Canadian programmer and co-founder of Bitcoin Magazine, Vitalik Buterin. He proposed the project in a 2013 white paper and announced its development to the world at the North American Bitcoin Conference in 2014. The thinking went that: due to certain choices in its construction, Bitcoin’s blockchain is limited to its monetary application. In other words, all it can function as is digital money. But a blockchain with its own scripting language (like the one your smartphone uses to run different apps) would be able to offer the same kind of decentralisation that bitcoin enjoys as a currency, to a host of other use cases.

These decentralised applications (or Dapps) could include anything from decentralised storage, crowdfunding, exchange, social media, finance and much more. Essentially, Vitalik was proposing the creation of a kind of world computer. Just as Bitcoin was envisioned as a global financial asset that no one party could control, Ethereum would be a global consensus machine, allowing people from all over the world to enter into all sorts of agreements (smart contracts) directly with one another, with nothing other than the blockchain itself to enforce them.

The first such alternative application was the Initial Coin Offering, or ICO. ICOs were the first big success story of the Ethereum network. Ethereum’s native scripting language (Solidity) allowed for the creation of tokens that are separate from – but just as secure – as Ethereum’s currency, ether. These (ERC-20) tokens were native crypto assets secured by the Ethereum blockchain. They could be created and sold to investors in accordance with certain pre-defined rules. They allowed start-ups to raise money in a decentralised and unregulated way.

Ownership of said tokens would entitle the holder to certain rights and benefits associated with the project they had invested in. As you can imagine, it became a free-for-all. A dot-com style bubble ensued, with all manner of companies using blockchain jargon to raise money for businesses not actually requiring a blockchain. Riding the hype the entire crypto market was experiencing at the time, these ICOs raised billions of dollars. Part of the reason for ether’s skyrocketing price was that ICOs raised money in ether, which had to be purchased from the open market by investors in these ICO projects.

Ethereum 2.0 August final testnet launch approaches

DeFi

As 2017 came to a close and the crypto bubble approached breaking point, an Ethereum-based project called MakerDAO (MKR) launched DAI, a stablecoin token that was backed by collateralised ether and pegged to the value of the US dollar. For the first time, a synthetic, decentralised asset had been created that could algorithmically track the value of a real-world asset, and thus function as a stand-in for it.

The breakthrough was overshadowed by the price action, and as the crypto crash continued, the potential of projects like MakerDAO went unnoticed. However, even though Ethereum had fallen from the headlines, the development continued. By 2019, a host of DeFi (Decentralised Finance) projects had sprung up. These finance-based Dapps allowed Ethereum users to access rudimentary crypto money markets, where they could lend their assets out, post them as collateral, borrow against them, and take advantage of changing exchange rates.

Prior to the coronavirus pandemic and subsequent market crashes, Ethereum was riding a wave of DeFi interest that helped the price of ether reach a high just shy of $300, up from its December 2019 lows of around $115. Crypto markets are currently enjoying a resurgence of interest due to the strain that the COVID crisis is placing on the global financial system. While some investors are fleeing to gold, others see a unique opportunity in cryptocurrencies and some of that interest is directed at decentralised finance. Since April of this year, the amount locked-up in DeFi projects has gone from around $600 million to almost $7 billion.

Ethereum 2.0

Another reason you may start hearing more about Ethereum shortly is that the project is approaching the end of its development roadmap, where a complete overhaul of the manner in which it achieves consensus is planned. This involves transitioning from energy-thirsty Proof-of-Work (also employed by Bitcoin), which uses brute computing power to achieve consensus, to a faster and more efficient (though technically trickier) method called Proof-of-Stake. Proof-of-Stake uses the holdings of stakeholders to guarantee the security and fairness of the network, and thus requires no costly hardware to run. This, along with some other peripheral improvements, should enable Ethereum to scale and speed up into a truly global network that can support mainstream adoption.

Been Here Before?

Followers of the crypto market will have already experienced several cycles of optimism surrounding Ethereum since the highs of 2018 that have failed to bear fruit. Last summer’s high of around $360 is one such example. The truth is that Ethereum’s price, like that of the entire crypto market still follows Bitcoin’s price. This means that until a project like Ethereum can start onboarding people to use its various services on a mass scale, the dynamics that influence its price will mostly be influenced by broader crypto market speculation.

Its recent surge in price to $450 is not only the highest price ether has hit since August 2018, but also the hardest it has rallied against Bitcoin since the beginning of 2019. The ETHBTC chart is definitely one to keep an eye on in the coming months because, unlike the ETHUSD chart, this tells the story of how Ethereum is gaining ground against Bitcoin in terms of usage, market share and mindshare.

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Why Investors Are Talking About Ethereum Again. What You Need to Know.

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