By the end of April, the Ethereum market cap has risen to new heights and hit the $250 billion mark for the first time. Just to put it in the picture, Ethereum’s market capitalization in summer 2020 was half this amount. By May, the price of the coin has reached $4,132, breaking all the previous records.
The recent crypto rally might have slowed down, but it certainly set a new trend. This time, Bitcoin wasn’t the only one in the spotlight, as ETH has finally big break. That wasn’t a matter of luck. The second-biggest asset on the market saw it coming: the thrift of the DeFi market, the hype around NFTs, and the upcoming upgrade of the network have increased Ethereum popularity.
Until now, retail investors have been playing a key role in Ethereum’s blossom. In three years, the amount of ETH addressed holding small amounts of funds (from 0.01 to 1 ETH) has increased tremendously – from 3.8 million to over 13.6 million. But this time, a new player has stepped up.
One of the most straightforward ways for institutional investors to get into the crypto space is to buy Ethereum futures at the Chicago Mercantile Exchange (CME). Although CME has started trading Ethereum futures at the beginning of the year, the volume has only picked up by April, reaching over $500 million daily. At the end of April, according to the data provided by Coinshares, institutions bought over $30 million worth of ETH, adding up to $13.9 billion of total holdings.
The sentiment is rather apparent, but what’s driving it?
Ethereum is the most dynamic blockchain out there and the number one smart-contract network for decentralized apps. It gave birth to the entire DeFi industry that has been successfully recreating traditional financial systems. Also, it became a breeding ground for trendy non-fungible tokens that made a splash earlier this year.
Currently, DeFi’s total-locked value – the amount of underlying supply – is over $54 billion. Various use-cases like stablecoins’ ability to save value, multiple lending opportunities, and yield farming give Ether a whole new purpose. Today, ETH is not just an ordinary coin people buy in hopes to gain profit. It is being put to work by DeFi apps, promising further growth.
New Type of Asset
Although Ethereum provides an excellent environment for building all kinds of apps, there are a few technological challenges to overcome. However, the solution is currently in the making. The new, improved, and more scalable version of the network, Ethereum 2.0, has been released in 2020. The final phase should be finalized by 2022, and it will mark a new stage in Ethereum’s development.
Since the network is transitioning from the Proof of Work to the Proof of Stake consensus algorithm, interested parties will be able to stake Ether. Not only will this help run the network, but it will also allow Ethereum enthusiasts to earn rewards. Institutional investors will surely see it as an obvious advantage, as in this case, ETH acts less like a commodity and more like a yield-generating asset.
Another obvious advantage of switching to a different consensus algorithm is the need for an ecologically responsible alternative. Proof of Stake is a lot milder to the environment, as it doesn’t depend on energy-consuming mining. Recently, Elon Musk raised this topic regarding Bitcoin, encouraging crypto communities to switch over to sustainable solutions. And anything labeled as sustainable immediately becomes more attractive for investors.
Moreover, a new Ethereum Improvement Proposal has captured the interest of investors. It was initially suggested by Vitalik Buterin in 2018 and is about to be introduced to the network shortly. The idea behind EIP 1559 is to implement a base fee amount for all transactions in the Ethereum network, fighting deflation and potentially using the coin as a store of value. A quality like storing value will attract new investors who didn’t think of Ethereum as a scarce asset due to its unlimited supply.
The recent crypto rally demonstrated that Bitcoin is no longer the only digital asset people choose to invest in. BTC has been reigning for quite some time now, and investors have started looking elsewhere. The idea of becoming an early adopter while the asset’s price is still affordable resonates with the public. It’s only fair that Ethereum, the second-largest crypto out there, is gaining a lot of attention.
In April, The European Investment Bank used Ethereum to issue €100 million in two-year digital notes. Undoubtedly, Ethereum entering the public bonds segment is a huge step towards greater credibility, and speeding up Ethereum 2.0 transition is as relevant as ever.
At the moment, Ethereum is one of the most utilized blockchains, and institutional investors are reacting to it positively. However, the network’s technological challenges are standing in the way of even larger adoption.