Jason Guthrie, Director of Digital Assets, WisdomTree
The prospect of cryptocurrency has become a hot topic among market participants, audiences, and media. Although the cryptocurrency market has recently experienced a correction in a series of negative news, it is not all doom and pessimism. There are many talks about Bitcoin (BTC), but Ether (ETH) is increasingly providing investors with an interesting opportunity.
On May 12, 2021, Ether hit a record high, and with it investors questioned whether this momentum is sustainable and whether they should add digital assets to their portfolios. Although the recent sell-off may have disrupted the positive momentum, there are still many positive factors that should be encouraged. Any price development in the crypto space is complex, but I will try to provide some background and outline the key drivers of the ether narrative.
Ethereum is the native cryptocurrency of the Ethereum network. It is a cryptocurrency similar to Bitcoin, but there are fundamental differences at the network level, which leads to completely different use cases for each cryptocurrency. Bitcoin is primarily a store of value, driven by its hard supply cap, and is regarded as the first-tier solution for the global payment infrastructure. This is where the analogy of digital gold comes from.
Ether is used to “power” the Ethereum network. It is essentially a decentralized software platform designed to run compiled computer codes called smart contracts. These smart contracts can be used to automate a range of functions, from very simple value exchanges to insurance contracts to decentralized exchanges, all of which are run by the decentralized Ethereum network. The complexity of the smart contract determines the transaction fee (called gas fee) of the Ethereum pricing. In this way, the price of Ether is a factor in the expected volume and complexity of transactions on the network, as well as the potential value generated by various applications built on Ethereum smart contracts-if the transaction has high economic value, people Willing to pay more for transactions. In addition, Ether has also attracted a certain degree of “safe haven” status in the cryptocurrency field because it is the second largest cryptocurrency and its demand is very long-lasting, although it is not fixed, but Supply expansion is very predictable compared with the fiat currency standards after 2008, relatively modest.
So why have you been so interested in Ethereum in the past few months?
Excitement about ETH 2.0
The space proposed for the future development of the Ethereum network is exciting, and many people praise it as the next big thing to push the ecosystem forward. A wide range of changes are planned, but the two main developments are, first, the shift from Proof of Work (POW) to Proof of Stake (POS) as a consensus mechanism, and second, the development of “layer 2” solutions to help with network expansion. Some people speculate that these changes will help promote the use of the Ethereum network, bringing more users and more projects to the platform.
In addition, the potential changes in POS are taking advantage of the fierce debate in the field of encryption: energy use. The energy intensity of POS is much lower than that of POW, so some people speculate that this may be a tailwind for the platform.
Decentralized Finance (DeFi) Development
One of the most innovative deployments of smart contracts is the rapid growth of DeFi, which mainly occurs on the Ethereum network. This is essentially a way to use decentralized technology to automate the transfer of value. This role has always been performed by large institutions and is very profitable. There are DeFi products designed to replace exchanges, disrupt lending, innovative bond issuance, and so on. For example, the LINK and Uniswap DeFi projects on Ethereum have attracted a lot of funds and showed great potential. If Ethereum can maintain its dominance in this field, it should continue to drive demand for Ethereum.
As prices move sideways, Bitcoin’s cyclical rotation
Bitcoin is still the most common cryptocurrency. Its bull market has attracted the most attention in the media, and it is by far the most common entry point for new funds to enter the market. But we all know that market volatility is cyclical, so with the emergence of Bitcoin, we see investors looking to make a profit and turn to other areas. Ether is usually their next choice.This is not a new phenomenon, followed by cryptocurrency experts who discussed the market trend from BTC to ETH to large-cap altcoins And DeFi, and finally micro-capital projects. This is a pattern observed in the market in 2017, and we may see a similar situation now.
In other words, these trends will never follow a straight line. The recent sell-off helps remind us that any investment needs to be done in a risk-adjusted manner. The future of cryptocurrency looks bright, but it is almost impossible to crack the exact path taken. For this reason, digital assets currently represent a niche, but part of a growing investment portfolio whose distribution is distributed among highly credible encrypted assets.