Bitcoin may be approaching its all-time high and getting stuck just short, but when it comes to Ethereum, a significant milestone has been hit where the $500 mark has been breached, and a new year high of $620 topped.
The entire cryptocurrency market place has benefited from a strong run lead by the major coin, Bitcoin. The original cryptocurrency is known for raising those other coins around it. Thus it is unsurprising that the second largest coin, Ethereum, is also way up and breaking new ground.
However, Ethereum is a major cryptocurrency project that provides a robust platform for many of the DeFi action dominating the news. It is also going through a major upgrade and recently ticked a significant milestone on the journey to Ethereum 2.0—reaching its new staking goal.
Many are interested to see the development of Ethereum into a staking blockchain rather than a proof of work one, as this is set to bolster the performance. However, when it comes to affecting Ether’s market value and worth, many feel that DeFi is the more significant factor.
True Value Locked (TVL) in the DeFi space has shown a loose correlation with the growing price of Ethereum, so even though there is a bit of a market correction going on with Bitcoin at the moment, there is good news when it comes to TVL.
PrimeXBT’s lead analyst Kim Chua has seen the growing TVL through November but also noted that there has been a delay in the market price catching up. So, in her opinion, there is still more room to grow for the price of Ethereum, thanks to DeFi’s ongoing boom.
ETH Heads Above $500 and Has Room to Grow
ETH has finally broken out above $500 despite heavy selling pressure that depressed its price many times throughout November due to uncertainty over the launch of ETH 2.0. Having cleared $500, ETH shot up to a high of $620 like a coiled spring. “There is nothing much in the way for ETH to rise to $830, its next area of resistance,” explained PrimeXBT’s Chua.
On November 20, Vitalik Buterin, the founder of ETH, perhaps sensing the inadequate response for staking ETH in ETH 2.0, warned that the full Proof of Stake might take another year to be implemented. The staking goal for ETH 2.0 has only been 25% met as of November 20, but ETH’s deposit contract met its threshold of 524,288 ETH on November 24—locking ETH’s beacon chain genesis for December 1.
Before that was met, ETH’s price posted strong gains and broke above its interim $488 resistance in a rush to $560 on Saturday.
This shows that ETH’s price is not as impacted by the state of ETH 2.0 as widely believed. Another reason could be that many investors expect the supply of ETH in the open market to fall as the date of December 1 approaches and the ETH that got deposited into ETH 2.0 contract would have flooded things.
As such, many investors are buying ETH ahead of December in anticipation of a supply glut. After November 21’s solid rise, the staking percentage grew with lightning speed as all that remaining 75% required was matched in just two days on November 23.
The ETH 2.0 staking objective has already been met, with around 400,000 ETH went into the deposit contract in just two days. At the time of writing, more ETH is being deposited into the contract. The number of ETH deposited at the time of writing stands is heading towards 600,000 and rising. This speaks volumes about the community’s confidence, helped by a recent resurgence of the altcoin market, leading many to believe the alt season is here.
DeFi—The Main Driver
Other than ETH 2.0, the other most direct effect on ETH price seems to be developments in the DeFi space. Chua said,
Most projects in DeFi are built and run on ETH. Whenever demand in DeFi picks up, the price of ETH follows shortly after.
However, as DeFi matures and more new users come on board, the price movement may precede the TVL movement since new users to the crypto scene may not have ETH and need to buy before they can lock up their value in a DeFi platform.
As we can see from the above chart, the TVL in DeFi projects has grown from beginning November’s $10.5 billion to the current $14.4 billion, a growth of 40% in just three weeks. ETH is the most common and popular DeFi engine, occupying almost 90% of all DeFi projects.
Whoever wishes to participate in yield farming on an ETH-based platform will need to buy ETH to send to the platform to begin yield farming. Hence, surges in DeFi TVL naturally translates into rises in ETH demand and, in return, ETH price. Therefore, this movement in ETH price does not come as a surprise since TVL in DeFi has surged since the start of November, but the price of ETH remained stuck between $430 and $480. Price has finally caught up to demand last weekend.
With falling confidence in traditional banking products like fixed deposit due to ultra-low interest rates, and a corresponding confidence surge in cryptocurrencies, DeFi products are expected to challenge and take away some part of the traditional finance demand from the more adventurous and tech-savvy investors.
Therefore, TVL in DeFi platforms is expected to continue growing, despite some minor hiccups about funds being lost or stolen along the way, which is a natural part of growing pain. The demand for ETH is thus expected to increase in tandem. If one thinks that DeFi is the future of finance, then one cannot hold ETH.
Looking above, nothing much seems to be in the way of ETH to rise towards $800. However, it is possible to think that its rise may be slowing down or may have a slight pullback now that ETH 2.0 deposits have been met.
“This is because part of the quick rise in price was due to participants wanting to join the ETH 2.0 rushing to buy up ETH to make their deposits,” said, The PrimeXBT analyst. He added, “Now that most of that rush-buying is completed, we may need to wait till Dec 1 when ETH 2.0 officially launches for the euphoria to come back to ETH.”
Any fall should be quite well supported around the $500 level, which acts as a support now. As a cryptocurrency that Paypal currently supports, it is expected that organic investors (investors buying ETH just for its fundamentals, not for joining DeFi projects) demand to increase with time. With DeFi, ETH simply has that added price catalyst that other cryptocurrencies do not have. Its DeFi use-case alone will spring the price of ETH upwards, while ETH 2.0 upgrade is the icing on the cake.
After ETH 2.0 successfully launches, there will be another potential price catalyst for ETH—the EIP 1559, which has been postponed till after the launch of ETH 2.0. Looking past the technicalities of this upgrade and going straight to what is essential for investors, this upgrade has a built-in coin burn mechanism. Part of the ETH fees miners generates from validating transactions will be burned instead of paid to them.
This reduces the circulating supply of ETH. The more ETH is being used, the more ETH is going to be removed from the system. This is a crucial price catalyst which has not yet been actively talked about in the market. The implementation may happen soon once ETH 2.0 gets going and will be the next major event to look out for. Some Ethereum clients, such as Nethermind and Besu, have already begun implementing EIP 1559 on testnets. Once ETH 2.0 successfully takes off, full implementation of EIP 1559 should not be too far away.
Full On Fundamentals
In conclusion, fundamentals are improving in a big way for ETH.
1) The rising popularity of DeFi also causes an increase in demand for ETH.
2) Implementation of the EIP 1559 upgrade will reduce the supply of ETH with each transaction.
3) The reduction of ETH’s inflation rate in two years according to the ETH masterplan (supply of new ETH will also be reduced to two million a year from the current 4.7 million when ETH 1.0 and ETH 2.0 merge, expected to be two years from now).
With so many factors that can influence the demand and supply for ETH, and importantly, with all these happening at the beginning of a crypto market bull run, we expect nothing less than fireworks from a price explosion in ETH with time to come to exceed its ATH of $1,400.
PrimeXBT’s market analyst Kim Chua provided all analysis. Traders can short or long ETH and other cryptos with PrimeXBT along with margin trading, gold, forex, silver, commodities, oil, and stock indices.