Ether (ETH) has had a great 2020 so far. Though down nearly 20 percent from recent highs, the second-largest cryptocurrency by market value is still up a solid 80 percent on a year-to-date basis.
Ether bottomed out near $115 on Dec. 18 and rose sharply to a high of $289 on Feb. 15. That was the highest level since July 2019, according to CoinDesk’s Ether Price Index.
To be sure, prices have pulled back in the last few days along with bitcoin (BTC), which has declined below the $9,000 from a recent high around $10,500. Nonetheless, ether’s gains look more impressive when compared to bitcoin’s 21 percent year-to-date rally.
Several factors could explain ether’s spectacular gains and determine whether they will continue.
According to market observers and participants, ether has been driven higher mainly by the upcoming bitcoin reward halving and the resulting rise in bitcoin, the anticipated release of ETH 2.0 and the breakout of the decentralized finance (DeFi) industry.
Bitcoin bottomed out near $6,430 in mid-December and reached a multi-month high of $10,500 on Feb. 14. Currently, it is trading at $9,250, representing nearly 30 percent gains on a year-to-date basis.
The cryptocurrency has put on a good show, mainly due to the bullish narrative surrounding the upcoming reward halving – a programmed cut of 50 percent in rewards block per mined – that has been the driving force for bitcoin’s year-to-date gains and the entire crypto market rally, Connor Abendschein, crypto research analyst at Digital Assets Data, told CoinDesk.
Historically, reward halvings marked the beginning of bull markets. The popular narrative is that the reduction in rewards created supply deficits and boosted prices. The analyst community extensively discussed the positive impact of halving on price throughout 2019. As a result, bullish expectations may have made their way into the marketplace, with investors buying the cryptocurrency after the downside momentum ebbed in mid-December, possibly on the hope the price would go up ahead of the upcoming halving — in other words, a self-fulfilling prophecy.
Whatever the reason, bitcoin may have helped ether and other cryptocurrencies stage a solid rally.
The total market capitalization of all cryptocurrencies excluding bitcoin rose from $52.86 billion to $117 billion in the six weeks to Feb. 15, according to data source TradingView.
This is in stark contrast to the second half of 2019, when ether took a beating, falling from $360 to $116. One of the big reasons for the price drop, other than the bitcoin sell-off during that period, was the decline in investor confidence due to ethereum’s persistent scalability issues.
Back then, ethereum had consistently missed deadlines for protocol upgrades to ETH 2.0 – a major network upgrade that will shift the blockchain’s current proof-of-work consensus algorithm to proof-of-stake and transfer validation function from miners to special network validators.
However, clarity emerged on that front after developers informed markets on Feb. 5 they are planning to launch the upgrade on the networks’ fifth anniversary, July 30, 2020. “I have 95 percent confidence we will launch in 2020,” Ethereum 2.0 researcher Justin Drake wrote during an Ask Me Anything Reddit Discussion on Feb. 5.
The assurance from developers likely helped ether, said Abendschein. The cryptocurrency jumped by 8 percent, from $186 to $207, the same day as Drake’s comments and went on to chart a rise to $289 in the following 11 days.
“Investors likely bought into the promise of ETH 2.0, which is said to scale the Ethereum blockchain significantly,” according to Sharan Nair, chief business officer at CRUXPay and CoinSwitch.co. Also, some investors may have snapped up coins for staking after the protocol upgrade, Nair added.
The decentralized finance (DeFi) space exploded in 2019, with the total value locked (TVL) in protocols rising from $320 million to $670 million. The TVL rose further to a record high of $1.219 billion on Feb. 15, according to DefiPulse.
“The numbers tell us that investors see DeFi to be truly disruptive and believe it can replace traditional finance, leading to increased accumulation of ether,” said Nair.
MakerDAO, the largest DeFi project, and most other protocols are based on ethereum’s blockchain. Thus, demand for ether may be rising with the growth of DeFi.
The number of ethers locked in DeFi rose from 1.912 million on Jan. 1, 2019 to 2.921 million on Dec. 31. The number increased further to a high of 3.192 million on Jan. 29, before falling back to 2.8 million this week.
With halving due in two months, bitcoin is expected to remain better bid. Notably, historical data show the cryptocurrency tends to hit a new market cycle top (the highest point from the preceding bear market low) in the calendar year of a halving, before the event.
If history were to repeat itself, bitcoin could clock highs above $13,880 (2019 high) ahead of the reward halving. Such a rally would most likely bode well for ether.
Further, miners and other investors could continue to accumulate ether for staking once the consensus algorithm changes to proof-of-stake.
Staking refers to holding funds in a cryptocurrency wallet to support the operations of a blockchain network. Instead of miners cracking algorithms to verify transactions in the proof-of-work (PoW), the proof-of-stake (PoS) users with coins verify transactions in proportion to the amount of coins they have locked in or staked.
The demand for ether through DeFi applications could also continue to grow in the long run, despite the recent hacks, said Abendschein of Digital Assets Data.
On Feb. 14, Valentine’s Day, a trader exploited the bZx protocol – the eight-largest DeFi protocol by TVL – via a complex set of transactions and took home $350,000. The platform was again compromised on Feb. 18 with the trader netting $645,000. Since Feb. 17, the total ether locked in DeFi has dropped from 3.07 million to 2.8 million.
“The recent bZx hack may have a short-term negative impact on ether as many investors who previously accumulated ETH due to the faith they had on DeFi might refrain from participating in DeFi ecosystem for a while,” said Nair of CoinSwitch.co.
Nair, however, expects investors to return to DeFi and ether over the long run. “The progress that is currently being shown by the DeFi ecosystem will soon make it lucrative enough for investors to participate again,” added Nair.