Over the last year, from April 2020 to April 2021, ETH/USD has outperformed BTC/USD by a significant margin. BTC returned 785.38% against the US dollar, while ETH/USD has returned 1,425.21%.
And in the last few days, Ether has seen its price reach a new all-time high of $2,197 following Visa's decision to allow cryptocurrency for transactions on its platform.
Ethereum uses a native currency called Ether (ETH) which can be transferred or traded just like bitcoin (BTC). But the true genius of Ethereum is that it is not simply another Bitcoin clone. The growing conviction around Ethereum as an asset class relies on its utility.
Ethereum’s broad practical application as a foundational computing framework means that investors are now looking to Ethereum as a potentially more valuable asset to track.
The launch of cash-settled ETH futures by CME Group on 8 February 2021 also points to a maturing market with ETH traded by institutions as any other common asset class, alongside gold, BTC or commodity metals. Commenting on the launch, CME Group’s global head of equity index and alternative investment products Tim McCourt said:
In terms of the technology, we can think of Ethereum’s blockchain as a base layer upon which a whole host of computing functions and programmes can be built. The key analogy here is that of the TCP/IP tech stack that underpinned the creation of the internet, along with all the various protocols that were built on top of it.
The initial infrastructure of TCP/IP, created in 1983, allowed for computers to be networked and linked together. Later protocols like IMAP (created in 1986) and HTTP (created in 1991) were built to sit on top of this base layer, allowing for world-changing applications like email and interlinked website pages.
In the same way, Ethereum’s blockchain is the foundation layer upon which innovative financial applications are created. And it is responsible for all of today’s fastest-growth niche cryptoasset markets: namely decentralised finance (DeFi) and non-fungible tokens (NFT). These applications are powered by Ethereum’s smart contracts, which are self-executing pieces of code which complete when a certain set of conditions are met.
And while Bitcoin’s code is relatively inflexible, Ethereum is subject to regular ongoing development, meaning its use cases can expand and react to innovation. Metrics like improved transactions per second (Tx/s) are one way to track this. According to on-chain analytics site Blockchair, while Bitcoin has remained mostly static at an average of 3.2Tx/s since 2018, over the same time period Ethereum has improved its Tx/s from 4Tx/s to 14Tx/s.
As the number and breadth of Ethereum’s use cases grow, and its adoption continues, this too drives demand for the network’s ETH currency.
2017 was arguably the year that cryptoassets crossed over into the mainstream, and while most market attention was focused on BTC, which increased 14x across the year, ETH’s price performance was significantly greater, rising 100x.
In the 12 months from April 2020 to April 2021, BTC returned 785.38% against the US dollar, while ETH/USD has returned 1,425.21%. Here we use the price reference data from Luxembourg cryptoexchange Bitstamp, one of five exchanges upon whose data the Bitcoin Reference Rate (BRR) is compiled. The BRR is a registered benchmark under the 2016 European Benchmarks Regulation and powers CME Group’s Bitcoin futures contracts.
The utility of the Ethereum network, its developer-friendly programming language Solidity, its smart contracts (see below) and use case as a basis for almost all decentralised financial applications are largely responsible for the growth of the wider cryptoasset market.
Instead of creating a novel form of digital money, like Bitcoin, Ethereum’s raison d’etre is to be used for programming new applications, backed by smart contracts. Smart contracts refers to a set of promises written out in code, which are irreversible once conditions are met, and allow two parties to come to an agreement automatically, without the need for third party verification
As the Ethereum Foundation describes:
The technology actually pre-dates the invention of cryptocurrency by around 15 years: computer scientist Nick Szabo coined the term in 1994. But it is the addition of recording smart contracts on an immutable and tamper-resistant distributed ledger like blockchain that has seen the technology really come to prominence. Ethereum was the first to allow anyone to write and distribute sophisticated smart contracts on a blockchain.
Since its creation in 2015 Ethereum has birthed several niche subsectors that have changed the retail utility of blockchain and cryptoassets. The most popular of these is DeFi, which could accurately be called the first truly mass-market application for Ethereum. It allows users to lend or borrow funds and crucially, earn interest on their cryptoassets. Before DeFi, crypto could accurately be called a non-yielding asset like gold. Through DeFi, however, users can stake their cryptoassets on various platforms and earn an annual percentage back in return.
Virtually all — 79 out of the 80 largest — DeFi marketplaces are built on Ethereum, ranging from options and futures markets to asset staking and decentralised exchanges, and they are climbing in value.
The main metric used to determine market size is the ‘Total Value Locked’ in DeFi smart contracts, as recorded by industry data site DeFiPulse.com.
Since crossing the $1bn-mark in late June 2020, the market has grown 50 times larger, surpassing $52.3bn by 12 April 2021. DeFi tokens like Aave (AAVE), Uniswap (UNI) and Cosmos (ATOM) have quickly risen into the top 30 list of the world’s most valuable crypto projects.
Another fast-growth retail market that uses Ethereum’s system of smart contracts triggering predefined agreements are ‘non-fungible tokens’ or NFTs. Fungibility is one of the key properties of money, in that one unit of currency is interchangeable for any other identical unit. Non-fungible tokens, by contrast, represent an individual and unique claim on a physical asset like an artwork, the ownership record for the piece of real estate or a digital collectible property, for example. In February 2021 Christie’s became the first recognised auction house to sell digital art with ownership represented by NFT tokens recorded on the Ethereum blockchain.
Encoded in the terms of the smart contract was the stipulation that the artist’s heirs would receive 10% of any future value transfer.
Speaking to Art Market Monitor, Noah Davis, a specialist in post-war and contemporary art said:
Market data site nonfungible.com recorded that by March 2021 NFT trading volume had surpassed 21,000ETH (~$38.3m) per week. This wide-scale usage, and the exponential growth of both DeFi and NFT helps to boost the viability and longevity of Ethereum’s network.
Smart contracts with values recorded on the Ethereum blockchain underpin both markets, but the use cases for smart contracts have expanded far beyond finance to nearly every other industry from agriculture to healthcare. The determination of internationally recognised ISO standards for blockchain has helped the industry to mature, with a report published by the ISO through Technical Committee 307 (Blockchain and Distributed Ledger Technologies) describing the functions of smart contracts and how they interact with one another. This will be the basis for a future Technical Specification.
Smart contracts themselves are also becoming part of the legal fabric of world economies, with clear regulatory boundaries helping to aid adoption.
Chinese courts have already started to implement smart contracts for automated case and outcome filing, for example. One other particularly significant ruling came in November 2019 when the UK’s Jurisdictional Taskforce confirmed the region’s key focus on financial services and technology, reporting that smart contracts were capable of satisfying valid contracts under English law. For the decision, this panel of senior barristers and solicitors sought advice from the Bank of England, Her Majesty’s Treasury, the Financial Conduct Authority, as well as clearinghouse Euroclear and the London Stock Exchange, noting in their opinion that smart contracts could be enforced in court and that cryptoassets formed property under law.
Announcing the decision, the Chancellor of the High Court, Sir Geoffrey Vos, said:
One of the largest recent signals of the value of Ethereum to modern applications is Amazon Web Services’ announcement that its Managed Blockchain now supports the technology. Ethereum is only the second blockchain after the IBM and Intel-backed Hyperledger Fabric to gain support from AWS.
AWS specifically cited DeFi as a major factor behind the decision.
It is this kind of mainstream technological support that will expand the Ethereum developer base and open up new applications for use cases in the Ethereum ecosystem.
Ethereum’s core development team are constantly proposing and enacting EIPs , or Ethereum Improvement Protocols, to make changes to how the blockchain runs, for example altering the UI to make it easier to use, upgrading its security, or removing bottlenecks to enhance its performance. In their functionality they are similar to patches or bugfixes in mainstream software applications.
The most consequential of these is EIP 1559. It does two very important things. Firstly, it greatly simplifies transaction fees, and secondly turns Ethereum from an inflationary asset into a deflationary one.
The cost of completing a transaction on Ethereum is called a ‘gas’ fee. These are paid in fractions of the ETH currency called ‘gwei’, a similar notation to how fractions of bitcoin are called ‘satoshis’.
Transaction fees have long been a source of contention for Ethereum users. Under periods of network congestion — more likely the more popular the blockchain’s use becomes — fees can rise as high as $30 per transaction. Fees this high make systems borderline unworkable for the average user. EIP 1559 switches the system away from a scenario where users pay a variable fee to miners to get their transactions recorded on the blockchain, which leaves gas fees subject to rising quickly under extreme demand.
Under EIP 1559, gas fees will instead be sent to the network in a new fee structure called a ‘basefee’, which is algorithmically controlled. This puts forward an easier-to-understand fee structure for users, and allows them to check if they are paying a fair fee or not.
Secondly, and more importantly, EIP 1559 ‘burns’ a small amount of ETH every time that the currency is used to pay transaction fees. In effect this creates a major shift in the way that users transact using Ethereum.
It is baked into the design of Bitcoin that new units of the cryptocurrency are created at a gradually decreasing rate. 86% of all the Bitcoin that will ever be created is already in existence, with a hard cap of 21 million BTC. Between now and 2140 approximately 2 million more BTC will be mined into existence, but at such a negligible rate that the money supply is effectively fixed from 2025 onwards.
The effect of EIP 1559, which is to be bundled into a set of upgrades due to come into force in July 2021, is to change Ethereum from an inflationary asset into a deflationary one, mimicking the value proposition of Bitcoin as a global hedge.
Alongside EIPs, Ethereum is currently in the first stages of a planned multi-year shift away from a ‘Proof of Work’ consensus algorithm, like that employed by Bitcoin, to a model called ‘Proof of Stake’.
The nature of the Proof of Work consensus mechanism — the method by which the Bitcoin network is secured — means that cryptoasset miners compete to validate blocks of transactions by using computing power to solve increasingly-difficult cryptographic tests.
But the unintended consequence of Bitcoin’s Proof of Work algorithm is its extreme energy requirement: as the popularity of the cryptoasset has grown, and the rewards for confirming transactions repeatedly reduced, miners are forced to run an ever-greater number of more powerful machines that can calculate vast reams of mathematical puzzles more quickly.
According to the Cambridge Centre for Alternative Finance, across 2019 the Bitcoin network consumed around 63.95 TWh of energy, and these figures have continued to grow sharply. By 12 April 2021, the Bitcoin network’s electricity consumption had more than doubled to 143.54TWh per year , making it more power-hungry than either Sweden (131.80TWh annual consumption) or Ukraine (128.806Twh). These figures are based on the latest available data from the US Energy Information Administration.
Georg Kamiya, writing for the International Energy Agency’s Bitcoin Energy Use: Mined the Gap report, explains:
Because it removes miners from the equation and instead relies on validators who already own a stake in the cryptoasset they are seeking to secure, Proof of Stake effectively curtails this struggle for ever-greater computing power.
Ethereum’s switch away from intensive Proof of Work also matches up with ESG factors now playing an ever greater role in institutional investment decision making.
Ethereum’s transition to Proof of Stake began on 1 December 2020.
Ethereum’s development team decided that a minimum threshold of 524,288ETH should be staked in ETH 2.0 contracts before the process could start. As TheBlockCrypto reported on 10 February 2021, over 3 million ETH worth $5.3bn has now been locked into ETH 2.0 contracts, which will provide an approximate 23% return for stakers, with deposits able to be withdrawn during phase 1.5 scheduled for 2022.
As such, this represents a large vote of confidence in the medium-term future of Ethereum.
Among the inter-governmental organisations to spotlight Ethereum is the influential OECD. In a report prepared for and presented to the meeting of G20 finance minister and central bank governors on 14 October 2020, the authors write that the shift to Proof of Stake will help Ethereum to reduce its energy intensity, adding that focusing on securing the blockchain with staking instead of mining
At time of writing, ETH stands with a market cap of over $249bn with a per coin price of $2,150, just 2.1% shy of its all time high of $2,197 recorded in early trading on 12 April 2021.
Overall optimistic market sentiment continues to drive cryptoasset markets higher.
And while investment banks like JP Morgan and Citi have yet to make bullish multi-year price predictions for ETH in the same way as their widely-reported BTC targets of $146,000 and $318,000 , there are signals of growing support for ETH to breach fresh all-time highs.
According to the Bloomberg Intelligence (BI) Crypto Outlook report from February 2021 Ethereum’s outperformance of Bitcoin in 2020 was
In the report Bloomberg senior commodity strategist Mike McGlone notes:
In the longer term, peer-reviewed research is starting to collate striking differences between the way traders and investors treat bitcoin and ether. As a Singaporean research team assert in ‘Behavioural structure of users in cryptocurrency market’ published in the PLOS ONE journal on 12 January 2021:
Again, it is perhaps Ethereum’s wide-scale utility that supports this kind of long-term optimism.
Ethereum is newer than Bitcoin and its blockchain continues to undergo highly consequential system-wide transformation. Therefore, traditional methods to place value on Ethereum and its ETH currency remain in a constant state of flux. This brings with it risks, of course, but opportunities too.
Recent changes proposed in EIP 1559, and anticipation of the multi-year shift to ETH 2.0 have seen the Ether currency rebound to fresh all-time highs with market analysts now proposing near-term targets well above $2,000. The addition of major cross-sector support for Ethereum development by Amazon Web Services is perhaps one of the strongest signals yet that the asset has truly crossed over into the mainstream.
As such, today’s Ethereum is much improved from just a few years ago, in its usability, scalability and internal economics. And if investors can consider Ethereum not as a static asset, but as a constantly evolving base layer upon which scores of applications both financial and non-financial can be built, its true value case starts to become clear.
From its inception, Bitcoin took 8 years to amass a $200bn market capitalization. Ethereum has achieved that feat in less than 6. With its mass-market applications experiencing rapid growth, recent alterations creating a deflationary formula, and wider structural improvements on the horizon, it is not outside the realms of possibility that Ethereum’s market value could overtake that of Bitcoin in the long run.
Disclosure | Copyright © 2021 ETC Group. All rights reserved
Terms of Website Use
If you continue to use our website, you are deemed to have read and accepted our Terms and Conditions as set out below:
This website is for information only. It does not provide investment, tax or legal advice or recommendations. According to the applicable laws and regulations in your jurisdiction, some contents on this website or the access to certain contents on this website might be restricted.
Disclaimer: The material and information contained on this website is for informational purposes only and ETC Management Ltd, its affiliates, and subsidiaries are not soliciting any action based upon such material. The material and products do not represent or shall not be inferred as an offer or a recommendation to buy or sell a security, nor shall it be considered or treated as investment advice. Additionally, the material accessible through this website does not constitute a representation that the investments described herein are suitable or appropriate for any person. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on any information.
Distribution of Information:
The distribution of the information and material on this website may be restricted by law in certain countries. None of the information is directed at, or is intended for distribution to, or use by, any person or entity in any jurisdiction (by virtue of nationality, place of residence, domicile or registered office) where publication, distribution or use of such information would be contrary to local law or regulation.
You must inform yourself about, and observe any such restrictions in your jurisdiction and by accessing this website you represent that you have done so. The information on this website is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof).
By accepting these Terms and Conditions, you hereby confirm that according to the applicable laws and regulations of the relevant jurisdiction (be it the jurisdiction of your nationality, residence, incorporation of the company you are representing or current physical location) you are allowed access this website.
Use of this website does not result in a contractual relationship between the user and ETC Issuance GmbH. To that extent, no contractual or quasi-contractual claims arise against ETC Issuance GmbH as a consequence of visiting this website.
No content of this website should be considered as an offer to purchase any product or securities as described on this website. The prices and valuations published on this website are indicative and are for information purposes only, as is other information displayed on this website. Any person making offer of securities described on this website shall observe and strictly comply with restrictions on the usage of information pursuant to these Terms and Conditions, as well as any restriction imposed by a prospectus published with respect of any securities described or applicable laws and regulation, including without limitation restrictions imposed by the EU Prospectus Regulation (REGULATION (EU) 2017/1129 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 14 June 2017).
Any securities described on this website are not permitted to be offered for sale in all countries and are in each case reserved for investors who are authorised to purchase the securities. Selling restrictions applicable to specific products are set out in the relevant prospectus and should be read carefully by investors. Any restrictions imposed by the relevant prospectus are in addition and without prejudice to any restriction or prohibition established by laws or regulations of any jurisdiction.
United States Persons and legal entities resident in the United States
Securities issued by ETC Issuance GmbH or its affiliates have not been registered under the U.S. Securities Act of 1933, as amended, (the "Securities Act"). The Bonds are being offered outside the United States of America (the "United States" or "U.S.") in accordance with Regulation S under the Securities Act ("Regulation S"), and may not be offered, sold or delivered within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act.
The information provided on this website is not directed to any United States person or legal entity or any state thereof, or any of its territories or possessions.
U.S. PERSONS (AS DEFINED IN REGULATION S) AND LEGAL ENTITIES RESIDENT IN THE UNITED STATES MAY NOT ENTER THIS WEBSITE.
Information from this website may not be distributed or redistributed into the United States or into any jurisdiction where it is not permitted.
Exclusion of liability for content
Some documents displayed on the website and its content are restricted to ”Professional Investors” only and are not intended for retail or private investors. By making use, opening, or downloading such documents, you agree that you are an “Institutional Investor” as defined here: https://www.handbook.fca.org.uk/handbook/COBS/3/5.html, and have read, understood and accepted the conditions.
Certain documents made available on this website may have been prepared and issued by persons other than ETC Issuance GmbH. This includes any prospectus and additional documents thereto. ETC Issuance GmbH is not responsible in any way for the content of any such document. Except in those cases, the information on the website has been given in good faith and every effort has been made to ensure its accuracy. Nevertheless, ETC Issuance GmbH shall not be responsible for any loss which is a direct or indirect result of reliance placed on any part of the website and it makes no warranty as to the accuracy of any information or content on the website. The terms and conditions of securities applicable to investors will be set out in the relevant prospectus, available on the website and should be read prior to making any investment.
You should always bear in mind that:
Investors should refer to the section entitled “Risk Factors” in the relevant prospectus for further details of these and other risks associated with an investment in the securities offered by the Issuers before investing.
Changes of terms and conditions of website use
ETC Issuance GmbH reserves the right to modify or amend these Terms and Conditions at any time without prior warning.
Content and design of this website are protected by copyright and other applicable laws. Any copying of the website or of its content requires the prior written consent of ETC Issuance GmbH.
Some of the hyperlinks contained on this website may lead the user to external websites that are not under the control of ETC Issuance GmbH and for the content of which ETC Issuance GmbH is not responsible. When the user clicks on such a link, the user will leave the ETC Issuance GmbH website. ETC Issuance GmbH is not responsible for the content of any websites reached by means of such a link.
Governing Law and Jurisdiction
ETC Issuance GmbH is a subsidiary of ETC Management Ltd, company number 12165332, with registered office at Gridiron, One Pancras Square, London, England, N1C 4AG. These Terms and Conditions and your access to and use of this website and the content are subject to the laws of England and Wales.