Ether, the digital currency tied to Ethereum moved past the $3,000 threshold on Monday in a remarkable run that has beaten leading cryptocurrency bitcoin.
The gains in ether have outpaced the gains in bitcoin year-to-date. Ether is up more than 300%, whereas bitcoin is up about 95% based off of Monday afternoon prices.
The Ethereum digital currency rose 3% on the Bitstamp exchange to $3,144.81 in morning deals in London. It is up 325% for the year so far, easily outpacing a 95% rise in the more popular bitcoin.
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Ether now has a market capitalization of $366 million, according to data from CoinMarketCap.
Experts have attributed the growth to many factors including DeFi, (decentralized finance, which refers to transactions outside traditional banking for which the Ethereum blockchain is a crucial platform), institutional interest and imminent protocol upgrade.
“Institutions and companies like European Investment Bank and Visa have validated the Ethereum blockchain by announcing issuance and settlement use cases, respectively,” a Monday note from Ark Invest analyst Frank Downing said.
He added in the note that four ether ETFs have launched on the Toronto Stock Exchange over the past two weeks, “making it easy for institutions to gain access as demand for crypto exposure broadens beyond bitcoin.”
Another factor Downing pointed out is ‘strong-chain signals.’ He said the usage of the Ethereum network is increasing and, by some measures, outpacing that of Bitcoin, as shown by the number of active wallets and total transaction fees.
“In our view, Decentralized Finance (DeFi) and Non-fungible tokens (NFTs), both of which are burgeoning, explain Ethereum’s recent breakout,” Downing explained.
James Quinn, managing director at Q9 Capital, a Hong Kong cryptocurrency private wealth manager agrees with Downing’s assertion. He said the big rally is partly a catch-up to late 2020 gains in bitcoin. It also reflects improvements to the Ethereum blockchain, and a growing shift towards DeFi.
“At first, the rally was really led by bitcoin because as a lot of the institutional investors came into the space, that would be their natural first port of call,” Quinn said.
“But as the rally has matured over the last six months, you have DeFi and a lot of DeFi is built on Ethereum.”
Downing said Imminent protocol upgrades is another factor fueling ether’s rise. The note said Ethereum Improvement Proposal 1559 is slated to go live in July, and it will significantly change Ethereum’s transaction fee model.
“Aiming to lower the volatility of Ethereum’s fees, EIP-1559 introduces a mechanism to burn some transaction fees, detracting from circulating supply and introducing deflation to the Ethereum ecosystem. The impact on ether’s price could be like that associated with a bitcoin halving event,” Downing said.
But there is more to these factors. Ether is relatively cheap compared to bitcoin, offering many investors who did not embrace bitcoin on time, a chance to buy more coins and make up for what they lost.
Buying ether at $3,000 will offer futures’ investors the opportunity of quadrupling their gain in a short time, given the pace of the growth that is increasingly being spurred by many factors.
The launch of ether exchange-traded funds in Canada and surging demand for ether wallets to transact non-fungible tokens such as digital art are also among the factors pushing up the price.
Reuters reported last week, quoting Bloomberg, that the European Investment Bank plans on issuing a digital bond over the Ethereum blockchain, while JP Morgan plans a managed bitcoin fund.
However, while the growth appears unstoppable, Downing warned that it comes with risks.
The first risk relates to the frequent and significant leverage associated with DeFi applications, which “given interoperability within the Ethereum blockchain, might compound the leverage associated with other products,” he said.
“In the event of a downward spiral in ether’s price, the losses associated with deleveraging could be significant. Additionally, EIP-1559 could become a contentious upgrade, as miners will bear the brunt of fees burned. A miner revolt could impede the progress of the EIP-1559 upgrade,” Downing concluded.