Where Bitcoin is the king of cryptocurrencies, Ethereum is the queen. Together, these two cryptocurrencies dominate the crypto market. Bitcoin and Ethereum have established themselves well. For any investor, new or old, both these cryptocurrencies have excellent prospects. For a good investment portfolio of cryptocurrencies, the inclusion of Bitcoin and Ethereum may even be considered a must.
For any investment, the most crucial part is the drivers of the price of the asset. The drivers of an asset's price give investors an idea of what to expect from the investment in the future, near or far, as analysis of the factors determining the price is a clear indication of price action movements. Hence, we ask:
What Really Drives The Price of Ethereum?
The three significant factors that affect Ethereum price:
- Correlation to Bitcoin
- Ethereum's platform
Should You Invest In Ethereum In 2022?
Why should you consider including Ethereum in your cryptocurrency portfolio in 2022?
Ethereum is considered a strong investment relative to other cryptos. Despite the fluctuations in Ethereum's history, crypto analysts and experts agree that the price of Ethereum will rise further in 2022 and beyond.
Ethereum 2.0, Ethereum's second version, is one of the main reasons why crypto analysts are overwhelmingly positive about the future of ethereum and its price performance.
Ethereum is one of the oldest and most established coins in the market. It is the second-largest cryptocurrency and has maintained its rank. The purpose of cryptocurrency is to provide a platform for smart contracts. Ethereum, through its development platform, also created decentralized apps and decentralized finance. Although new cryptocurrencies similar to Ethereum now support smart contracts, DeFi, and dApps, Ethereum remains the pioneer of these innovations. More than 250,000 cryptocurrencies are based on Ethereum's platform, with some of them being the top in terms of market capitalization.
Ethereum's Price Factors
The cryptocurrency market works in a unique way. In a traditional market, the demand and supply "the market forces or Adam Smith's invisible hand" determines prices. Still, since the cryptocurrency market is not traditional, it does not work like one either.
The supply of cryptocurrencies is hard-capped, which means that the supply reserve cannot be increased or decreased to meet the demand and establish an equilibrium. This is also one of the reasons why cryptocurrencies are such a hyped-up investment, there is no equilibrium price so that prices can shoot up beyond imagination.
Ethereum's currently available coin supply is equal to its total supply at 118 Million hence, it is the demand side factors that affect its price.
1. Correlation to Bitcoin
Bitcoin is the cryptocurrency market leader. Being the first cryptocurrency, it holds a lot of power over the market. Bitcoin also usually positively correlates with other cryptocurrencies; hence, any positive changes in Bitcoin are beneficial for the whole market.
The queen and king of cryptocurrencies, then, have a significant positive correlation usually above 0.8. However, they do not always have a positive correlation. Presently, the correlation between the two cryptocurrencies can be observed to be declining.
2. Ethereum's Platform
Ethereum revolutionaries the cryptocurrency market with its inception. Ethereum brought innovations like smart contracts, decentralized finance, and decentralized apps. DeFi and dApps are considered the future, and Ethereum is considered their pioneer, which puts the cryptocurrency at an advantage.
However, Ethereum is one of the oldest cryptocurrencies, which means that it has not incorporated the newest technology available, which most competing cryptocurrencies have made use of.
Ethereum has faced issues with scalability and efficiency, but the developers are continually working on the platform. A new update is set to be launched soon, Ethereum 2.0. the platform is moving from the older Proof of Work mechanism to the more recent Proof of Stake. Other measures have also been taken to improve speed and scalability. This updating of the platform will definitely increase the cryptocurrency's value.
The adoption rate of any cryptocurrency is a significant price driving factor. The adoption rate indicates the demand for cryptocurrency. Ethereum is known for its innovative smart contracts, dApps, and DeFi.
The future is digital, and Ethereum has been serving as a sought-after platform for decentralized apps and finance.
As the Ethereum adoption increases, more buyers shift the market power shifts to buyers rather than sellers, which drives the cryptocurrency's price up.
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Would you consider investing in Ethereum ETH?
Bitcoin vs. Ethereum
As Ethereum continued its upward trend in the bull run last year, even though Bitcoin was losing value, the king and queen were finally being perceived as competitors. And more outcries about how Ethereum is going to dethrone the king became common were heard.
Bitcoin's original purpose was to act as a medium of exchange, but the cryptocurrency does not seem fit to fulfil this role. Cryptocurrencies function as a safe haven for investors when the traditional market crashes like how it was observed during the stock market crash of 2020 due to the coronavirus outbreak. Since Bitcoin dominates the cryptocurrency market, it is the most sought-after choice.
This makes Bitcoin more of an asset than a medium of exchange. The price of Bitcoin alone makes it infeasible to act as a medium of exchange. Then, Bitcoin is also an old coin and suffers from scalability and inefficiency.
For instance, Bitcoin can process around four transactions in a second, whereas Ethereum is aspiring for 20 transactions a second. Research by the Economist found that a significant portion of Bitcoin, one-third, is being held for investment purposes while the value of Bitcoin used to facilitate transactions is relatively small.
With that said, Ethereum, as to how it tackles the issues that Bitcoin faces, after the Ethereum 2.0 upgrade, the queen stands as a viable option for the throne of Bitcoin.
Ethereum Performance In The Recent Bull Run
The new year's start saw a continuation of the bull run that began in November of 2021. The cryptocurrency market saw a huge boom, with cryptocurrencies establishing new all-time highs or near all-time high levels. Ethereum closely followed Bitcoin throughout the bull run, and when Bitcoin started to lose value, analysts expected the same from Ethereum.
However, it came as a pleasant surprise when Ethereum continued its upward trajectory despite Bitcoin. Ethereum broke its all-time high, reaching $4,891.70 and is currently at $3,200. The queen of cryptocurrencies is still maintaining its upward trend, and analysts are expecting good things from the cryptocurrency.
Ethereum has been closely associated with Bitcoin, which usually makes it a second choice to Bitcoin or just an accompanying option with Bitcoin. Ethereum must topple Bitcoin's hold on the crypto market to establish itself as an even stronger cryptocurrency.
As investors perceive Ethereum as an independent, viable option for investment, it will indefinitely gain value, and this is something that Ethereum has been trying to do in recent times.
Ethereum 2.0 Upgrade
The Eth2 is the most significant upgrade in the history of cryptocurrency. The developers have designed monumental changes that will improve the platform substantially. Ethereum has become one of the most trusted platforms for decentralized apps and decentralized finance. But as the network gained popularity, the increased usage led to the unveiling of many problems pertaining to scalability. Hence, the Eth2 upgrade is set to revolutionize the platform's technology.
Many significant changes are underway; with the upgrade transition from the current network to the new one, an interim network called the Beacon Chain has been developed. The Beacon Chain has been in operation since December 2021 and will facilitate the transition. The mining consensus mechanism, i.e., the Proof to Work (PoW), is planned to be shifted to a Proof of Stake (PoS) mechanism. Proof of Stake increases the efficiency of the network as the mechanism requires comparatively less energy.
The Shard chain nodes are expected to increase the throughput of the network by 64 times. The upgrade is planned in four phases and is likely to be completed by 2022. The announcement to roll out Ethereum 2.0 upgrade by December 2022 can also be regarded as one of the price surge reasons. Hence, the update is likely to increase the price of Ethereum significantly as it tackles the issues Ethereum faces currently.
Future Ethereum Price Predictions
A research paper by the Economist reveals that Ethereum has a far greater potential to grow in the future, given its price.
The 5-year predicted annual growth rate of Ethereum by the Economist is set at 136%, while for the sake of comparison, Bitcoin's predicted growth rate is a mere 10%. The paper also predicted a 5-year price for both cryptocurrencies.
Wallet Investor has predicted that Ethereum will end 2022 at $19,176.
According to Long Forecast, Ethereum is predicted to cross $3,405 by the end of 2022. Their projections show Ethereum going up in value for the foreseeable future. Long Forecast also predicts Ethereum to peak in 2023, rising to $9,331.
Pros Of Investing In Ethereum
Here are the best things about Ethereum:
✅ Launched in 2015; it is one of the oldest cryptocurrencies.
✅ Ethereum is known as the queen to Bitcoin's king due to its strong base.
✅ It was launched as a development platform for smart contracts, decentralized apps, and finance.
✅ Ethereum is currently on an upward trend as it established its all-time high.
✅ The cryptocurrency is said to hold colossal potential even more so than Bitcoin.
✅ Ethereum is affordable when compared to Bitcoin.
✅ Eth2 upgrade will bring significant changes and improvements to the platform and likely result in a price surge.
Cons Of Investing In Ethereum
Here are the weaker parts about Ethereum:
❌ Ethereum faces strong competition from Bitcoin as well as new cryptocurrencies that have integrated the most advanced available technology into their platforms.
❌ As is likely after a bull run, some forecasts estimate a sharp drop in the value of Ethereum.
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Bottom Line: Investing In Ethereum
Predictions for cryptocurrencies are mixed. While some platforms suggest phenomenal growth, others are not that optimistic.
Ethereum saw a growth of 400% in 2021, and at the moment, it continues to go upwards. However, the cryptocurrency market is brutal, and a sharp drop in the value of a cryptocurrency can be expected after high growth, as is being seen in the current bull run. Corrections can likely undertake Ethereum. After all, it is a high risk and high reward asset.
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