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The price of Ethereum’s coin, ether, fell below $1,800 on 23 May for the first time since 31 March, as the market collapsed by 60% from the all-time high of $4,382 reached on 12 May.The cryptocurrency has since recovered some of its losses, trading at $2,429 on 17 June.
With the network in the middle of a major upgrade that will change the way transactions are verified and fees are charged, some observers expect the ETH price to rebound and advance to fresh highs.But how realistic are those expectations? Is now a good time to invest in the ETH market to position your portfolio for substantial gains?
This Ethereum price analysis looks at the recent volatility in the cryptocurrency, the reasons behind those fluctuations and predictions for the direction of the coin price for 2021 and the coming years.Ethereum takes the lead in DeFi and NFTs
ETH is the second-largest cryptocurrency after bitcoin (BTC) .Its market capitalisation was around $282.8bn on 17 June, less than half of bitcoin’s $734.4bn, reflecting the dominance of the first digital coin.
There are around 116.3 million ETH coins in circulation, compared with 18.7 million bitcoins.
Computer programmer Vitalik Buterin proposed the Ethereum network in 2013 to develop blockchain technology that could attach real-world assets.Along with several other co-founders, Buterin crowdfunded its development in 2014 and launched the network in 2015.
At the start of December 2020, the Ethereum 2.0 upgrade got under way.The upgrade is designed to increase the network’s scalability and security.Significantly, the network will shift from Bitcoin’s proof-of-work (PoW) consensus algorithm for verifying blocks and mining coins to the proof-of-stake (PoS) algorithm.
As described in an Ethereum Foundation blog post, the upgrade involves the so-called “Eth1” PoW chain, applications and tools and “Eth2” software and protocol layers.“Eth1 is primarily the operation and upgrading of Ethereum’s user-layer – state, transactions, accounts – all the things the end-user considers when interacting with Ethereum.
Eth2 on the other hand is a series of upgrades meant to overhaul Ethereum’s core consensus – to move from the energy-hungry, inefficient proof-of-work to a more sustainable, scalable proof-of-stake.”
As part of the upgrade and shift to PoS, the Berlin hard fork (blockchain split) was activated on block 12.244.000 on 15 April 2021.The upgrade includes optimising contracts to address transactional efficiencies that have seen transaction fees rise sharply, updates to how the Ethereum Virtual Machine (EVM) reads code, and changes to prevent distributed-denial-of-service (DDOS) attacks.
Simon Peters, crypto asset analyst at eToro, commented: “Post the network upgrade, Ethereum in particular is proving its use-case, and with developers piling on to the platform, it is little wonder it is gaining so much traction with investors.
“Underlying this is demand from institutional investors.While they may now have some exposure to bitcoin, institutions are diversifying their exposure and Ethereum is the natural next pick.
This leaves the second-biggest crypto asset by market cap well placed to benefit further.”
The Ethereum ecosystem has emerged as the first choice for developers launching decentralised finance (DeFI) applications and non-fungible token (NFT) sales, although there are some new applications that are turning to alternative blockchains.
Ethereum is key to the advent of DeFi, which runs smart contracts on the EVM and enables holders of various cryptocurrencies to use their coins as collateral for financial services including loans, insurance, trading and savings.And the ability to attach real-world assets to contracts enables developers to launch NFTs on Ethereum.
DeFi applications emerged in 2020, offering new capabilities to the burgeoning fintech space.
NFTs came to the fore in early 2021, with high-profile multi-million-dollar sales capturing the attention of investors.Ethereum upgrade addresses high gas fees
As part of the upgrade to Ethereum 2.0, the Ethereum Improvement Proposal (EIP) 1559 is scheduled to launch on 14 July.EIP-1559 will change the way Ethereum charges transaction fees, known as gas prices.It will switch from its current auction mechanism, which has resulted in prohibitively high gas prices.
Instead, according to the proposal, it will “start with a base fee amount which is adjusted up and down by the protocol based on how congested the network is.
“When the network exceeds the target per-block gas usage, the base fee increases slightly and when capacity is below the target, it decreases slightly.Because these base fee changes are constrained, the maximum difference in base fee from block to block is predictable.This then allows wallets to auto-set the gas fees for users in a highly reliable fashion.”
In addition to the base fee, there will be a priority fee set by the sender that rewards miners.The base fee will be burned, which will make Ethereum a deflationary asset that observers say will drive up its value.
“This burn counterbalances Ethereum inflation while still giving the block reward and priority fee to miners,” the proposal says.”Ensuring the miner of a block does not receive the base fee is important because it removes [the] miner incentive to manipulate the fee in order to extract more fees from users.”
Ethereum gas prices climbed to around 298.78 gwei (a gwei is a billionth of an ether) on 19 May, and slid to 143.67 gwei on 24 May and lower to 27.69 gwei on 9 June.
A year ago, on 9 June 2020, the figure stood at 37.27 gwei.The spike that followed on 10-11 June took prices to 709 gwei.This has prompted developers to launch alternatives to Ethereum, with lower fees that can run DeFi applications and NFTs, making the EIP-1559 upgrade especially significant.Why Capital.com? .
