Focus on Ethereum (ETH), the second largest cryptocurrency by market cap after Bitcoin
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What are the characteristics of this cryptocurrency? What is the price of Ethereum today? How to invest in Ethereum and when? With what strategy and through which platforms?
The growing importance of cryptocurrencies
Experts are almost unanimous on one fact: cryptocurrencies today represent a financial breakthrough and a technological feat that is gradually penetrating the habits of individuals on an international scale.
The economic impact is becoming real: at the beginning of 2023, cryptocurrencies have a capitalization that represents almost 1.2% of the world's GDP. The currency, its issuance and its control, which for a long time were the exclusive preserve of States, now take into account a system of decentralization. Today, many people are beginning to wonder whether they should invest in and buy cryptocurrencies like Ethereum. It is now undeniable that we are at the dawn of a new era, a new way of conceiving and carrying out commercial transactions between individuals.
However, in addition to the usefulness of this new technology as a means of payment, cryptocurrencies have also seduced people with their profitability. So they turned it into an investment in its own right. These are, in effect, financial assets that, for many of them, present dizzying growth curves. Growth such that most specialists agree that cryptocurrency is one of the most profitable investments of the last ten years if we accept high volatility and risk-taking.
After several years of stagnation, Ethereum prices reached an all-time high in 2021, peaking at $4,380 in May 2021. Which brought Ethereum to a privileged position in the market.
Except for rare exceptions, Ethereum has always remained the second cryptocurrency only behind Bitcoin.
Ethereum: one of the most attractive cryptocurrencies
Ethereum has more attractive average annual returns than other major cryptocurrencies. Be careful though, volatility and risk are common with such returns.
At the beginning of 2020, Ethereum was worth $150. Since then, its price has multiplied by more than 12. This success is such that it has almost eclipsed that of other cryptocurrencies such as Bitcoin, Ripple, Litecoin, BNB and others.
In addition, although bitcoin is the precursor to the blockchain and cryptocurrencies, it suffers from certain shortcomings and imperfections on which cryptocurrency projects such as Ethereum have relied to offer, technically speaking, more successful and innovative projects.
How does Ethereum work?
Ethereum: a virtual currency based on the blockchain
Launched on July 30, 2015, Ethereum is a decentralized exchange protocol that, through a Turing-complete language, allows users to establish smart contracts. These are in fact pre-made contracts, applications that self-execute exactly as intended without any possibility of downtime, censorship, or fraud, and without the intervention of a third party to ensure authenticity.
This allows developers to create markets, store records of debts or promises, transfer funds according to previous instructions (such as a will or a forward contract), or acquire, for example, many other things that have not yet been invented, regardless of all the risks involved in the intervention of a third party.
Ether, virtual currency of the Ethereum network
Ether is the native cryptocurrency that uses the Ethereum network as a means of settling its smart contracts. Right behind Bitcoin, Ethereum is the second largest cryptocurrency on the market with a market capitalization of over $201 billion as of mid-2023.
The Ethereum network is at the heart of many projects and enables the development of applications. The Ethereum network is used by more and more people every year, making it more complex to operate. The main players in this network (network nodes) are the United States (51% of the network), Germany (16% of the network), Japan (3% of the network), etc.
In 2023, the number of daily transactions on ETH is around 1 million transactions, compared to 40,000 transactions in 2017. The record number of transactions on Ethereum was set on December 9, 2022 with 1.9 million transactions. This extremely active network is at the heart of a very significant part of the cryptoasset market.
Ethereum: What developments are there?
The Ethereum RoadMap is the set of predictions made by the cryptocurrency development team. Like Bitcoin, the Ethereum network is set up so that the mining difficulty is constantly adjusted to the computing power of the mining community.
The growing popularity of Ethereum among the public quickly attracted a large number of new miners. Thus, the first impact of this craze was a general increase in the computing power of the entire community, followed by an increase in the mining difficulty.
In fact, the mining difficulty has increased considerably since the beginning of 2020, rising from 2 to almost 7.5 TH in mid-2021. This is the largest increase in the difficulty level to date. This mining difficulty had already increased considerably in September 2017, from 2.3 to 3TH. This frequency of increase in the difficulty level demonstrated the growing interest that Ethereum was already arousing at that time.
But the price development does not necessarily follow that of the mining difficulty level, which may have discouraged miners. To prevent an increase in mining difficulty, updates have been planned, for example in 2018 with a new version of the software called Serenity.
The new Ethereum 2.0
Ethereum 2.0 (also called Serenity) is an improvement of the Ethereum system that existed until then. In fact, until then, the Ethereum system was relatively slow and mining difficulties were increasing. Between June 2020 and June 2021, for example, the mining difficulty of Ethereum has increased by almost 3.3 times, which is considerable. This means that more and more hashes were needed to validate the blocks, which meant more time and more computing power to mobilize and therefore also a higher cost.
This is why the transformation of the Ethereum Blockchain took place to move from a proof-of-work system (Bitcoin-type proof of work), to a Blockchain system called proof of stake (proof of participation). With this proof-of-stake Blockchain system, the user makes at least 32 Ethereum available to the Blockchain network. In return, the user who locked his ETH receives a reward. The goal is to increase the liquidity of the network and ensure faster processing of transactions. The minimum number of units that can be locked in Ethereum 2.0 was set at 32, or over €63,000 in June 2021.
The first Ethereum 2.0 Block was created on December 1, 2020, and is expected to be gradually rolled out over the next few years. This new system makes Ethereum a digital currency with a more limited supply and a more efficient processing system. Some see great potential in Ethereum 2.0, which could lead to it overtaking Bitcoin.
Ethereum 3.0: The Merge and Shanghai, the two big updates
In September 2022, the blockchain technology on which the Ethereum protocol is based received a major upgrade. Called “the merge,” this protocol evolution has seen the Ethereum network evolve from a proof-of-work (PoW) transaction validation system, akin to “mining” (as is the case with bitcoin) to a system that uses proof-of-stake (PoS).
Today, the Ethereum network therefore no longer uses complex mathematical puzzles to validate blocks, but instead asks the most involved users on the network to vote for the validation of transactions. This is a major change that significantly reduces the energy consumption used to operate a blockchain, one of the points frequently pointed out.
In April 2023, the Ethereum network underwent another major upgrade, called Shanghai, whose 3 takeaways are:
- The completion of the full implementation of the proof-of-stake system for validating transactions (blocks);
- Technical improvements to optimize transaction processing;
- An upgrade to increase the liquidity of active cryptocurrencies.
Although some investors may make pessimistic predictions about Ethereum prices after this latest update, the technological advancement should be beneficial for users and developers, which should have positive repercussions in the long run.
What is the Ethereum price outlook in 2024?
Ethereum has generally underperformed in this corrective period compared to Bitcoin. However, ETH has an interesting feature that makes ETH outperform Bitcoin in times of recovery. Since late 2020, for example, Ethereum has benefited from a powerful Bitcoin recovery phenomenon.
Ethereum is a bit like silver to physical gold (it is more volatile than the reference asset and benefits from greater upward or downward effects). In the short term, Ethereum is therefore still outperforming Bitcoin at the beginning of 2021. The continuation of this outperformance could be accelerated if it intensifies slightly in the coming months in view of the indicators.
In addition, in the longer term, the average annual return of ETH also remains more attractive than that of Bitcoin. Ethereum is a pillar of several hundred companies that have developed projects based on Blockchain or, more generally, on cryptocurrencies. As long as the number of global users grows, this recovery effect of Ethereum on Bitcoin could intensify.
The sharp reduction in the ETH-BTC spread can largely be explained by investor confidence in Ethereum. Ethereum is closer to the spread of Blockchain technology than Bitcoin. So, in the long term, as long as the number of cryptocurrency users continues to increase, the fundamental trend should remain good. Moreover, institutional positioning should prevent a noticeable price crash.
When should you invest in Ethereum?
In general, cryptocurrencies follow the same trend. There is therefore a correlation with certain fundamentals. Indeed, cryptocurrencies are not without fundamental correlations. A significant correlation with the economic cycle appears.
It is therefore interesting to position oneself after each peak of financial stress (VIX). As long as cryptocurrencies remain speculative, this link, also valid for ETH, should continue. The importance of monetary cycles is therefore also palpable.
We can also refer to the liquidity available on the markets (balance sheet of central banks, etc.), to anticipate volatility peaks and fundamental trends. Indeed, with the strong intervention of central banks, we see that the performance of stock market indices and volatility are almost entirely determined by available liquidity. Therefore, an indicator of liquidity can currently be the balance sheet of central banks.
In addition, cryptocurrencies react differently to physical gold. Basically, it is not fair to make a comparison between Ethereum and gold. Gold is an asset already inserted into the financial landscape and has no exchange function. Ethereum, on the other hand, is integrating into the financial landscape and has an exchange function. Therefore, in the long term, as long as the number of cryptocurrency users increases, the fundamental trend should remain good. Obviously, the progression of cryptocurrencies causes an attraction of institutional investors, which amplifies the phenomenon.
The exchange function of cryptocurrencies is not a negligible factor. A large number of people trade cryptocurrencies. Unlike your conventional bank account, the cryptocurrencies received are often not exchanged. This phenomenon of capitalization through exchange inevitably causes prices and volumes to increase over time. This is at the heart of the success of cryptocurrencies.
ETH What investment strategy should be adopted?
As we have seen, cryptocurrencies remain (very) volatile assets. Ethereum, in particular, is more sensitive than Bitcoin to fundamental variations. Therefore, your portfolio's share of Ethereum should ideally remain low, especially in periods of financial stress (lack of liquidity, banking tensions, etc.).
Furthermore, Ethereum can be considered as the "stock market index" of the crypto industry. Many corporate tokens are based on ETH. The more the decentralized finance sector and investment platforms grow, the more ETH will be favored. ETH allows for implicit diversification, which also arguably justifies a higher exposure to ETH than to other cryptocurrencies with lower capitalization.
How to invest in Ethereum?
There are several possibilities to buy Ethereum directly or indirectly. First, many brokers offer the option to switch to derivatives. This is the case of brokers such as eToro, IG, XTB, etc. Note that derivatives allow you to trade virtual currencies in the short term and require a deep knowledge of the financial markets.
ETPs (index products that trade close to ETFs) on Bitcoin and Ethereum are now also available on the Stock Exchange. Then there are specialized cryptocurrency brokers such as Binance and Coinbase. This is generally the preferred way to invest in cryptocurrencies in the medium and long term.
These platforms allow you to buy or sell a wide range of cryptocurrencies, including Ethereum. Transaction fees are quite variable. It should also be noted that some platforms apply capital exit fees.
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