Ethereum (CCC:ETH-USD) futures contracts went live this week, sending the cryptocurrency moving higher in anticipation of this development. Ether, the world’s second-largest digital coin by market value, climbed 5% to a price of $1,796 in late morning trading today.
At this point, Ethereum is up more than 130% in 2021 alone. And we’re just a month into the New Year. Bitcoin (CCC:BTC-USD) more than quadrupled in price over the course of 2020 and is up 65% in 2021. Trading just under $48,000, Bitcoin is near its all-time high.
However, cryptocurrencies continue to be extremely volatile. Last month, Bitcoin’s price slipped 10% in two days, falling below the $32,000 level. The total market value of all cryptocurrencies dropped over $100 billion in that 48-hour period.
Although it’s tough to pinpoint the main reason for the fall, many attributed it to the new U.S. Treasury Secretary, Janet Yellen, who warned about cryptocurrencies being used “mainly for illicit financing.” She added she would “need to examine ways in which we can curtail their use and make sure that money laundering doesn’t occur through those channels.”
However, the current cryptocurrency rally is far from a bubble. “Corrections are a natural part of any market and are especially natural in the bitcoin ecosystem,” Michael Sonnenshein, CEO of Grayscale Investments, told CNBC. “From 2016-2017, we experienced 6 corrections of approximately 30% or more on the way to new highs.”
I couldn’t agree more. Cryptocurrency prices will continue to ebb and flow. However, the long-term sentiment towards Ethreum is bullish.
CME’s Launch of Ethereum Trading Is a Short-Term Catalyst
A major factor driving demand for ether is the Chicago Mercantile Exchange’s launch of Ethereum futures on Feb. 8. CME’s decision to list the currency has enabled investors to expand their cryptocurrency holdings to a name other than Bitcoin. It also provides a way for investors to hedge their exposure to Ethereum.
It’s an important step for ether to escape Bitcoin’s shadow. Bitcoin heralded the emergence of a radical, new form of digital money that is not overseen by any central authority. Distributed ledgers and cryptography power both the Bitcoin and Ethereum networks. However, Bitcoin is designed as an alternative to national currencies, while Ethereum is meant to facilitate immutable, programmatic contracts and applications.
Ethereum has emerged as a leading financial infrastructure, settling over $12 billion of daily transactions. But the main purpose of ether is not to be an alternative monetary system. Instead, it’s supposed to facilitate and monetize the Ethereum smart contract’s operation and decentralized application (dapp) platform.
Ethereum plans to differentiate itself further by changing its consensus algorithm from proof-of-work to proof-of-stake in 2021, allowing Ethereum’s network to run itself with far less energy and improved transaction speed. The proof-of-stake system enables network participants to “stake” their ether to the network, helping them to secure the network and process the transactions that occur.
By doing so, they get ether, which is similar to a savings account. In contrast, with Bitcoin’s proof-of-work mechanism, miners get more Bitcoin in exchange for processing transactions.
JPMorgan has said that ether futures’ listing could be followed by a fall in the price of the underlying currency. A similar phenomenon occurred when Bitcoin futures started trading. I concur with InvestorPlace columnist Ian Cooper, who said it’s best to wait for a pullback by Ethereum before taking a bullish position in it.
Greater Institutional Support Will Help Ethereum
Undoubtedly, the interest in cryptocurrency is surging primarily due to the rally of Bitcoin prices. However, another reason is because of greater interest by institutions in the currency. PayPal (NASDAQ:PYPL) now allows customers to buy, hold, and sell cryptocurrencies such as Bitcoin and Ethereum directly within its PayPal and Venmo app. We have already discussed how CME Group (NASDAQ:CME) is now offering Ethereum futures contracts.
According to Messari analyst Ryan Watkins, Ethereum could have a similar appeal for institutional investors in 2021 to what Bitcoin had in 2020, creating a strong catalyst for Ethereum.
The bottom line is that the adoption of Ethereum will continue to soar, sending its price of higher. Major upgrades are waiting in the wings for the currency, and they will increase its scalability and security. Once the pullback happens, investors should strike.
Disclosure: On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence.