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Why Ethereum has been on a tear

Is the best yet to come?
Ethereum's business case looks more compelling by the day. Image: Shutterstock

Ethereum, the second-biggest crypto asset after bitcoin, hit its previous all-time high of $1 400 this month and is trading at 130 times its price of four years ago.

Astonishing as this is, technical analysts say the run is far from over. Some crypto investors have started rotating out of bitcoin into smaller coins such as Ethereum’s ether and Chainlink’s link digital token, as momentum shifts to altcoins expected to pick up pace as we enter 2021. Altcoins refer to all crypto coins that are not bitcoin.

Bitcoin’s phenomenal rise over the last two months has stalled and investors seemed unimpressed by US President Joe Biden’s $2 trillion stimulus package to refloat the US economy.

However, bitcoin’s more than 300% surge over the last year was eclipsed by that of ether, which is trading at 10 times its price of January 2020, and is up 66% since the start of 2021.

Ether price in USD

Source: CoinDesk

Ether’s current price is where bitcoin was less than four years ago, though whether it performs the same way as its larger cousin is difficult to predict.

Ethereum’s investment case differs from that of bitcoin in that there is no cap on the number of coins that can be issued. Having hit its previous all-time high, Ethereum’s next target is $2 000, with some technical analysts eyeing much higher levels of $35 000 in the next two to five years.

Despite its recent run, Ethereum’s technical signals remain extremely bullish, though momentum indicators point to the possibility of some consolidation before the next move.

While bitcoin is regarded ‘digital gold’ and a store of value, Ethereum’s business case is built around the exploding market for decentralised finance, or DeFi, which allows financial products such as loans and insurance to be transacted without intermediaries. AltcoinTrader’s founder Richard da Sousa recently explained to Moneyweb how he used DeFi to purchase a house on the West Rand and ended up paying less than a third of the asking price in rands.

Ethereum vs ether

A distinction must be drawn between the Ethereum blockchain and ether, the crypto coin (ETH) that trades on this blockchain. The Ethereum blockchain is able to accommodate smart contracts, which are really lines of computer code, allowing transactions to occur without any intermediary. For example, an insurance policy that pays out when certain events are triggered. This can be managed entirely on the Ethereum blockchain.

This is where the real power of the blockchain will manifest in the coming years.

While a bank will store its entire transaction history on a centralised database, blockchains are distributed across thousands of computers, called ‘nodes’. The idea behind this is to prevent any centralised authority having control of the transaction history, and therefore the blockchain. Every one of these nodes contains exactly the same information as every other one, so hacking one or even 100 computers will not work. You’d have to hack all nodes simultaneously, a theoretical impossibility.

Promising future

Ethereum developers have spent years preparing for the DeFi revolution that is about to come.

Just a few years ago DeFi was unknown. It now accounts for $24 billion of crypto assets, a figure that will explode in the next few years.

There are other reasons to be optimistic about Ethereum. The Chicago Mercantile Exchange announced plans to trade Ethereum futures, commencing in February, and the upgrade to Ethereum 2.0 to make it more secure and scalable.

Another factor driving the Ethereum price is the slipstream effect created by bitcoin’s ability to capture institutional money flows.

Bank of America’s January 2021 survey of asset managers shows that fund managers are piling into bitcoin at a faster rate than tech stocks. This is the first time that ‘long bitcoin’ surpassed ‘long tech’ as fund managers’ most popular trade.

The only way for many institutions to buy bitcoin is through Grayscale Bitcoin Trust, which has seen massive inflows in recent months. This institutional flow has been the key driver of the bitcoin price surge late into 2020 and early 2021.

JP Morgan argues that Grayscale Bitcoin Trust will have to maintain its $100 million-a-day inflows in the coming weeks for bitcoin to break above $40 000.

Bitcoin price in USD

Source: CoinDesk

In a recent interview with Cambridge House, former prime minister of Canada Stephen Harper said he sees a role of bitcoin as a reserve currency, and is concerned about central bankers implementing risky monetary policies around the world.

Michele Schneider, MD of MarketGauge Group, told CoinDesk that bitcoin will have to hold its gains around $40 000 to $42 000, or it could retrace to $24 000, at which point it is likely to find solid support. Ethereum seems to have forged a different trajectory based on strong speculative interest, and a business case that looks more compelling by the day.

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ETH is surely the BTC’s cryptonite?

Can I purchase bread, a house or a car with any crypto? Just explain to me please!
Msybe I’ll just buy the S&P500…

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