Author: Robert Liu, Graphics: Carol Lu
The BRB Bottomline
Recently, Ethereum (ETH), the second-largest cryptocurrency in terms of market capitalization, recorded an all-time high price of $4,840, surpassing the $4,800 mark for the first time ever. Other popular cryptocurrencies, such as Bitcoin and Litecoin, surged as well, extending their gains during what has been a bullish few months for the cryptocurrency market. In the following article, senior investing columnist Robert Liu takes a closer look at Ethereum and investigates the factors that have caused it to skyrocket.
What is Ethereum?
Founded by Russian-Canadian programmer Vitalik Buterin in 2013, Ethereum is a decentralized, open-source blockchain network with its own associated cryptocurrency, Ether (ETH). Ethereum’s platform allows users to create, publish, and utilize permanent decentralized applications known as “dApps.” A majority of these applications provide varying types of financial services including: the transfer of funds, lending and borrowing money, earning interest, and privatized transactions. Other dApps facilitate the creation and exchange of digital artwork known as NFTs (non-fungible tokens). Ether, commonly also referred to as Ethereum, is used as payment within the Ethereum network.
On Tuesday, November 9th, Ethereum, the second-largest cryptocurrency by market capitalization, trailing only Bitcoin (BTC), surged to an all-time high price of $4,840, surpassing the $4,800 threshold for the first time in the cryptocurrency’s history. Overall, Ethereum has increased more than 60% since the end of September and more than 600% since the start of 2021.
What has Caused Ethereum’s Recent Surge?
You might be wondering why Ethereum has surged over the past several months. Here are three possible explanations for Ethereum’s recent success:
1. Growing Interest in Blockchain Technology
According to Deloitte’s 2021 Global Blockchain Survey, a majority of large corporations, regardless of industry or location, are readily adopting blockchain technology. In fact, 78% of the surveyed financial executives believe that “there is a compelling business case for the use of blockchain, digital assets, and/or cryptocurrencies within [their] organization or product.” Additionally, 73% of those surveyed feel that “[their] organization will lose an opportunity for competitive advantage if [they] don’t adopt blockchain and digital assets.” Going forward, companies are not only accepting blockchain technology, they are actively embracing and investing in this growing industry. One particular segment of blockchain that has interested a large number of companies is decentralized finance (DeFi), a blockchain-based ecosystem in which financial transactions occur on a blockchain network rather than through traditional intermediaries, such as banks or brokerage firms. Ethereum is the most established blockchain network for decentralized finance–ahead of Bitcoin and other cryptocurrencies–due to its efficiency, scalability, and popularity. As such, Ethereum will greatly benefit from a growing interest in blockchain technology and decentralized finance, both as a currency and as a platform.
2. Ethereum 2.0
Ethereum 2.0, also known as Eth2 or “Serenity,” is a set of upgrades that are currently in progress. Originally launched in December of 2020, Ethereum 2.0 is projected to be fully released by 2022. Ethereum 2.0 aims to “improve the scalability, security, and sustainability” of Ethereum 1.0 while continuing to champion Ethereum’s “core ethos of decentralization.” While Ethereum 1.0 utilizes a mechanism known as proof-of-work (PoW), a system where miners rely on a computer’s computational power to solve complex mathematical algorithms in order to validate new transactions, Ethereum 2.0 will optimize a new mechanism known as proof-of-stake (PoS), a system where users can actively validate transactions on the blockchain network by staking their Ethereum. The shift from a proof-of-work mechanism to a proof-of-stake mechanism is significant for a number of reasons.
To begin, it will drastically improve the scalability of the Ethereum network. Currently, the Ethereum network can only process approximately 15 to 45 transactions per second. As a result, the network commonly experiences congestion. However, Ethereum 2.0 will be able to support up to 100,000 transactions per second, ridding the network of delays and giving it the capacity to cater to an even greater number of users. Additionally, increased scalability and decreased congestion will cause a reduction in gas fees, which are fees paid by users who are conducting a transaction on the Ethereum network. Gas fees vary per transaction, depending on the number of transactions taking place and the number of miners available. Because the Ethereum 2.0 network can process transactions at a greater rate, gas fees will be exponentially lower than before. Once the barrier of high and unpredictable gas prices is removed, the road to the mainstream adoption of decentralized finance and other Ethereum services will be much smoother.
Ethereum 2.0 will also make the existing Ethereum platform more secure. Typically, proof-of-stake models have a small population of validators and are thus viewed as centralized and unsecure. However, Ethereum 2.0 has designated a requirement of 16,384 validators, making it more decentralized and secure than traditional proof-of-stake systems. While there isn’t a general consensus about whether a proof-of-stake system or a proof-of-work system offers better security measures, there is no doubt that Ethereum 2.0 will mitigate many of the network’s current vulnerabilities.
Finally, Ethereum 2.0 will allow the Ethereum network to become more environmentally friendly. A primary issue with a proof-of-work model is its energy consumption. In order to validate transactions, miners must utilize incredibly high-powered computers to decipher mathematical puzzles. Not only are these computational machines expensive to operate, they also consume tremendous amounts of energy. In fact, the environmental impact of cryptocurrency mining has long been viewed as an issue by environmentalists and skeptics of cryptocurrency. However, Ethereum 2.0 has developed a solution to this problem. By transitioning to a proof-of-stake model, miners will be completely jettisoned from the Ethereum network. It has been estimated that by switching to a proof-of-stake mechanism, the Ethereum network will decrease its energy consumption by a whopping 99.9 percent. In the long-term, this will help benefit Ethereum immensely, increasing the usability and efficiency of the network as well as helping the cryptocurrency realize its ambitions of mainstream adoption.
Currently, Ethereum is still undergoing the first of three phases in Ethereum 2.0, the “Beacon Chain.” However, recent upgrades to the Beacon Chain, such as Altair, a test to confirm that the Beacon Chain functions properly, indicate that a transition from a proof-of-work model to a proof-of-stake model is entirely feasible. As Ethereum continues to transition to Ethereum 2.0, many new investors are purchasing the cryptocurrency, hopeful that they will reap the benefits of an upgraded platform.
3. The Rise of Cryptocurrency
Aside from just Ethereum, cryptocurrency, as a whole, has experienced a bullish run in the past year. In fact, as of Tuesday, November 9th, the S&P Cryptocurrency Broad Digital Market Index has increased more than threefold since the start of the year. Once viewed as an obscure commodity, cryptocurrency has legitimized itself as both an asset class and as a real investment. Even more, the hype and attention surrounding cryptocurrency is at an all-time high. Not only have numerous multinational corporations such as Tesla, Square, and Paypal, readily embraced cryptocurrency, a steady influx of new investors continue to enter the cryptocurrency market.
Outside of its long-term potential, cryptocurrency is an enticing investment option for a plethora of different reasons. Firstly, cryptocurrency serves as a hedge against future inflation. As inflation increases at a frightening rate, many investors have obtained cryptocurrency as a hedge against rising prices. Traditionally, gold has been viewed as a strong hedge against inflation. However, amid a down-year for gold prices, many investors have opted to acquire cryptocurrency instead. Additionally, investing in cryptocurrency allows investors to diversify their investment portfolios. In an increasingly volatile stock market, managing risk through diversification has become more and more vital for investors of all types. As such, many investors have elected to swap some of their more traditional equities for less conventional investments, such as cryptocurrency.
Regardless of investors’ rationales, increased investment in the cryptocurrency sphere only serves to benefit Ethereum. Ethereum represents a large percentage of the cryptocurrency market capitalization. Thus, recent success in the cryptocurrency industry has directly boosted Ethereum’s price point.
My Take
Still, the age-old question remains: should I invest in Ethereum? My answer to this question is conditional. If you are saving for retirement or attempting to pay off high-interest debt, it would not be in your best interest to invest in Ethereum. Ethereum is undoubtedly a high-risk asset. Just as easily as it can surge, it can also come crashing down. When constructing a retirement investment portfolio, it is a good idea to omit high-risk investments such as cryptocurrency and instead focus on surefire assets, such as bonds and mutual funds. Similarly, if you’re attempting to pay off high-interest debt, it would be financially imprudent to allocate a significant portion of your portfolio to cryptocurrency. If you are a beginning investor, it might also be a good idea to refrain from investing in Ethereum. As with most cryptocurrencies, it’s difficult to conduct financial analysis on Ethereum. While traditional equities can be evaluated via fundamental analysis methods, cryptocurrency represents a more speculative investment. For this reason, it’s difficult to learn about the stock market and develop trading strategies if you’re solely invested in cryptocurrency. However, if you have already constructed a diversified portfolio of stocks or stock index funds and are looking to expand your portfolio, I would advise you to invest in Ethereum, as long as it doesn’t exceed 10% of your entire portfolio. While the value of Ethereum may fluctuate from day to day, investing in Ethereum will help to diversify your portfolio as well as hedge against future inflation. Additionally, the long-term potential of Ethereum is extremely attractive. If the Ethereum platform achieves its ultimate goal of mainstream adoption, Ethereum shareholders are likely to be thrilled with their initial investments.
Take-Home Points
- On Tuesday, November 9th, Ethereum, the second-largest cryptocurrency by market capitalization, surged to an all-time high price of $4,840, surpassing the $4,800 threshold for the first time in the cryptocurrency’s history.
- Ethereum will greatly benefit from a growing interest in blockchain technology and decentralized finance.
- As Ethereum continues to transition to Ethereum 2.0, many new investors are purchasing the cryptocurrency, hopeful that they will reap the benefits of an upgraded platform.
- Recent success in the cryptocurrency industry has directly boosted Ethereum’s price point.
- For investors that have already constructed a diversified portfolio of stocks or stock index funds, it may be a smart idea to acquire cryptocurrency assets such as Ethereum.