Ethereum is the second most valuable cryptocurrency by market capitalization, second to only Bitcoin. Ethereum’s price is determined by the market supply and demand for the token, similarly to how the price of stocks are determined.
Unlike stocks, Ethereum doesn’t have revenues, profits or a formal balance sheet, so it’s hard to determine the intrinsic value of Eth tokens. Although hard to value, Ethereum still holds intrinsic value. Eth tokens are necessary for transacting on Ethereum’s blockchain, which supports a variety of financial functions.
This past year Ethereum’s price has appreciated much faster than Bitcoin’s, despite Bitcoin being over double its previous all-time high of $19,800. Since March of last year, the price of Ethereum has risen over 1,200%. But what is Ethereum, and what actually determines Ethereum’s price?
What is Ethereum?
Ethereum, a decentralized blockchain network that supports smart contracts, executes agreements and holds escrow like traditional contracts. You don’t need a 3rd party, such as a court, to enforce the contract. Smart contracts get enforced by sets of code on Ethereum’s blockchain.
Smart contracts are Ethereum’s main competitive advantage over Bitcoin. While Bitcoin is a great store of value, it doesn’t allow for complex financial transactions to be done on its blockchain. With smart contracts, you can loan or borrow money, insure property and trade derivatives. All of these functions have already been made available on Ethereum, and many more protocols are being developed to extend the use case for smart contracts.
Technically, Ethereum is the blockchain network that powers Eth tokens, Ethereum’s native token. Eth and Ethereum are commonly used interchangeably. Ethereum’s blockchain also allows for new tokens to be created which serve specific purposes. Here are some of the most common types of Ethereum tokens:
- ERC-20 tokens are the most common type of Ethereum token. These types of tokens are fungible tokens –– each coin is identical and holds the same value. To learn about ERC-20 tokens in more detail, check out the Ethereum Foundation’s website. Coins like Uniswap (UNI), Binance Coin (BNB) and Tether (USDT) are ERC-20 tokens.
- ERC-721 tokens are non fungible tokens (NFTs). These tokens all hold their own distinct value and have unique properties tied to each token. NFTs are most commonly used for in-game collectibles, such as video game skins or exclusive in-game items.
- ERC-223 tokens are fungible tokens that are very similar to ERC-20 tokens. While ERC-20 tokens can be lost in a failed transaction, ERC-223 behaves exactly like Ethereum transactions, so they cannot be lost.
Different types of tokens on Ethereum’s blockchain allow for a variety of use cases. Ethereum smart contracts have the potential to tokenize land deeds, auto loans, financial derivatives and even voting rights.
Brief History of Ethereum
Vitalik Buterin first conceptualized a smart contract-enabled blockchain in 2013. At the time, Buterin was only 18 years old, but he quickly gained the support of blockchain enthusiasts. Ethereum hosted its ICO (Initial Coin Offering) in 2014 and by 2015 it was trading on exchanges for around $2.
Ethereum’s price first began to skyrocket in spring 2017. At the time, each Eth token was trading for around $10, but by the summer of 2017 Eth reached triple digits. ERC-20 tokens were being created by developers daily, although few of these projects had long-term sustainability. Ethereum’s price topped out in January 2018, surpassing $1,400.
It wasn’t until recently that Ethereum reached new all-time highs. In February 2021, Ethereum’s price hit $1,770 before retracing back to around $1,600.
The cryptocurrency bear market (2018-2020) washed out many ERC-20 tokens that were developed during the bull market. Many of these projects were rushed to the market and under-delivered on their promises.
During the bear market, however, more promising projects on Ethereum were developed. These new dApps (decentralized applications) mainly focus on Decentralized Finance (DeFi). This aims to replace traditional banking services with smart contracts on the blockchain. Decentralized lending, insurance and automated trading are all examples of promising new developments on Ethereum’s blockchain.
It comes as no surprise that DeFi tokens are trending up in tandem with Ethereum because it is the network that hosts these DeFi tokens.
How is Ethereum Value Determined?
Ethereum’s price is determined by market supply and demand for the cryptocurrency. Just like stocks, cryptocurrency markets have order books with buy and sell orders. An increase in demand for Etherum will drive the price up and an increase in sell order supply will drive the price down.
Unlike Bitcoin, Eth tokens have more intrinsic utility. This is because Eth tokens are needed to transact on any decentralized application built on the Ethereum blockchain. As more transactions on Ethereum occur, the price of transaction fees increases, as transaction fees are based on supply and demand.
How High Can the Price of Ethereum go?
Historically speaking, Ethereum’s price has been more volatile than Bitcoin’s. If you invest in Ethereum instead of Bitcoin, you’d be increasing your risk for more upside potential.
Some investors claim that Ethereum’s market cap will surpass Bitcoin’s valuation due to the wide range of use cases on Ethereum. Some analysts predict that Ethereum can reach $10,500 in the coming years.
In the 2017 bull run, Ethereum reached a price of about 0.1 Bitcoin per Eth token. Assuming we can reach this proportion again, Ethereum would be trading at $3,850, given the current price of Bitcoin.
However, it’s unlikely that Bitcoin has reached its top for this bull market. In years past, Bitcoin has increased about 20 times in value each bull run. Bitcoin would have to increase 5 times this bull run to reach $100,000. If this happens and Ethereum reaches its previous Bitcoin proportion, Ethereum would be trading for $10,000 per token.
What Affects the Price of Ethereum?
Many factors affect the market supply and demand for Ethereum. As stated previously, the market supply and demand for Eth tokens is what solely determines the price of Ethereum. The most important factors that affect the supply and demand for Ethereum are outlined below.
- Eth 2.0 staking is an upgrade to Ethereum’s network that allows you to stake Ethereum for interest. The Eth 2.0 network is still in beta, but there has already been over $1 billion of Eth locked in staking, decreasing the market supply of the token.
- Media coverage plays a large role in stimulating demand for cryptocurrencies. While most mainstream media covers Bitcoin, few have yet to broadcast Ethereum to the masses.
- Price of Bitcoin affects the cryptocurrency market as a whole. When Bitcoin is bullish, it’s likely other tokens like Ethereum will be, too.
- High transaction volume increases the amount of transaction fees on Ethereum’s blockchain. These fees are paid to Ethereum miners, who often sell their tokens on the market, increasing the supply of Eth. Conversely, more Eth tokens are demanded when transaction fees are higher, as you need to own Ethereum to pay transaction fees.
- ERC-20 tokens increase Ethereum’s utility. Developers can code smart contracts on Ethereum to create decentralized applications that typically host their own ERC tokens. Regardless, Ethereum tokens are still needed to transact on Ethereum’s blockchain, further increasing the demand for Eth.
Is Ethereum a Good Investment in 2021?
At the beginning of January this year, Ethereum was trading for around $730, less than half its current market price. Ethereum is an attractive investment for any risk-tolerant investor looking to diversify their portfolio.
Decentralized finance has recently gained attention from investors after the trading halts from the recent Gamestop (GME) pump. Because no singular entity can control decentralized platforms, they cannot be corrupted by institutions. Decentralized exchanges like Uniswap (UNI) and 0x (ZRX) have more than doubled in value over the last couple of weeks, as investors are realizing DeFi’s potential.
Bitcoin or Ethereum?
The biggest advantage Ethereum has over Bitcoin is its ability to host smart contracts on its blockchain. Bitcoin is great to use as a store of value, but its use-case in DeFi is limited. Also, Bitcoin has less growth potential than Ethereum.
While Bitcoin has already doubled from its previous all-time high in December 2017, Ethereum recently just broke new all-time highs this past week. Some investors predict Ethereum will move similarly to Bitcoin, expecting Ethereum’s price to double from its previous high of $1,400 in the short term.
Risks of Investing in Ethereum
Like any investment, you’re risking your capital for potential reward. Cryptocurrencies are much more risky assets than traditional investments, but they offer a much higher potential reward.
As a general rule, a cryptocurrency’s market cap and level of risk are inversely related. Ethereum is the 2nd largest cryptocurrency by market cap and it’s historically less risky than smaller market cap cryptocurrencies.
Best Exchanges for Ethereum
To purchase Eth tokens you need to set up a cryptocurrency brokerage account. Coinbase is a great option for beginners since it’s easy to use and offers a mobile app. Gemini is another cryptocurrency exchange that offers a wide variety of crypto tokens, including Ethereum.
Alternatively, you can use a decentralized exchange if you already own cryptocurrencies. Decentralized exchanges offer a platform for you to exchange your cryptocurrencies for Ethereum or any other ERC-20 token.
Ethereum Price Prediction
It’s hard to predict where the price of Ethereum is headed, but if history is any indicator Ethereum has much more room to grow. With new decentralized finance programs being built on Ethereum’s network, more Eth tokens are demanded to pay transaction fees. This is why some investors see Ethereum as the economic bandwidth of the internet.