The price of Ethereum (ETH) fell 10.34% against Bitcoin between September 1 and October 1. The ETH/BTC pair on Binance declined from 0.037237 BTC to 0.033385 BTC, struggling to find upside momentum against a dominant BTC. There are clear reasons for ETH’s underperformance in the past two months, but it is starting to recover.
Ethereum stagnated for three main reasons.
First, the volume of the cryptocurrency market flowed into Bitcoin, pulling volume out of other parts of the crypto market (including Ethereum).
Second, Ethereum declined in tandem with decentralized finance (DeFi) tokens amidst a marketwide altcoin pullback.
Third, there was uncertainty around ETH 2.0 and whether it would be completed by the year’s end.
But since then, things have looked better. Ethereum rose by around 9% against the US dollar in the three days from November 3 to 5, showing signs of improving momentum. ETH began to rally primarily after Ethereum co-creator Danny Ryan announced the release of the ETH2 deposit contract. Atop the imminent mainnet release of ETH 2.0, the DeFi market remains strong, and ETH’s high time frame charts, including the monthly chart, demonstrate signs of optimism.
Let’s dig deeper into four factors behind Ethereum’s recent rise:
Factor #1: ETH 2.0
On November 5, 2020, Buterin officially announced the launch of the ETH 2.0 deposit contract. This confirms the release of the ETH 2.0 network upgrade in the near term, scheduled to be activated on December 1, 2020.
“Today, we released v1.0 of the eth2 specs, including the mainnet deposit contract address – 0x00000000219ab540356cBB839Cbe05303d7705Fa. eth2 will have a MIN_GENESIS_TIME of 1606824000 (or for those of you who don’t think in unix time – December 1, 2020, 12pm UTC),” Danny Ryan, the coordinator of ETH 2.0, said.
ETH 2.0 is a positive catalyst for the price of Ethereum in both the short and the long term. The upgrade moves Ethereum from a proof-of-work (PoW) algorithm to a proof-of-stake (PoS) algorithm. This removes miners from the network and enables users on the Ethereum blockchain to verify transactions collectively.
Users confirm transactions through a process called “staking.” The term staking essentially refers to allocating user funds to the ETH 2.0 contract. When a user stakes ETH, that ETH cannot be moved or used during staking, but the user can choose to pull out from staking at any time.
The addition of staking is promising for the price of ETH for two main reasons. 32 ETH are required for staking, so it may encourage users to purchase more ETH so that they can earn incentives by staking. If many users stake ETH, that would decrease ETH’s circulating supply on exchanges, reducing the selling pressure.
Within an hour after Buterin officially confirmed the launch of ETH 2.0, the price of Ethereum soared by 3.7%. Since then, ETH has continuously rallied, recording a 3.1% price spike (against USD) since the initial announcement.
The market and community sentiment around ETH 2.0 has been overwhelmingly positive so far. Joseph Lubin, the co-creator of Ethereum and the founder of ConsenSys, emphasized the complexity of the network upgrade. He said:
“Coordinating the genesis of Eth2 has been no small undertaking — involving 5 different client teams, researchers, auditors, and a whole community of testnet validators, Eth2 economists, and security experts sharing critical knowledge. Masterful execution by @dannyryan.”
Factor #2: DeFi TVL Remains High
Accompanying the high anticipation about ETH 2.0 is positive sentiment about DeFi. According to data from Defipulse.com as of this writing, the total value locked (TVL) in DeFi exceeds $12.05 billion.
Although major DeFi tokens recently dropped by around 50% in price, the high TVL across DeFi protocols indicates that the demand for DeFi products is still intact.
ETH 2.0 complements DeFi because it increases the transaction capacity of the blockchain. Throughout September, especially when the DeFi craze reached its peak, the Ethereum blockchain struggled to meet the overwhelming demand. The blockchain became clogged and transaction fees surged.
Currently, the Ethereum blockchain network has the capacity to process 15 transactions per second. With ETH 2.0, Buterin said that the capacity could increase to between 1,000 and 5,000 transactions per second.
If a new DeFi cycle emerges post-ETH 2.0, it would enable Ethereum to settle a substantially higher number of transactions every second, lifting the overall user experience.
Factor #3: Technical Structure on High Time Frames
Ethereum has been stagnant since September, relative to Bitcoin. But that has resulted in ETH consolidating above key moving averages on the monthly candle chart.
The monthly candle log chart is a high time frame chart often used by traders to see the macro and long-term trends of an asset. Since one candle depicts a whole month of trading activity, a monthly candle chart can cover several years of trading activity.
The monthly candle chart of Ethereum shows that the candle for November opened right above the 5-day moving average. Consolidation above a key short-term moving average, especially on a high time frame chart, shows a positive medium-term outlook for ETH.
Factor #4: DEX Volumes Show ETH Has Room to Grow
In addition to the favorable technical structure of Ethereum, fundamental figures show ETH has room to grow. According to the data from cryptofees.info, the 7-day average fee of decentralized exchanges (DEXes) remain low compared to September and October.
On some days during the month of October, Uniswap, the largest DEX on Ethereum, surpassed Bitcoin in daily fees. This showed that the level of user activity across DEXes and DeFi was significantly high.
However, with the slump of DeFi, fees of DEXes have dropped considerably since September. Although Uniswap has been recording $668 million in daily fees, other DEXes including Sushiswap and Balancer have recorded daily fees around $100,000 to $130,000.
There are fewer users on DEXes and DeFi protocols while the fundamentals of Ethereum are strengthening, particularly thanks to ETH 2.0. Given that ETH has been rallying with a relatively low level of user activity, it’s likely ETH has room for additional growth in the near term.