Down in value to around £1,047 from just over £3,000 at the start of the year, Ethereum (ETH) has suffered the same fate as bitcoin and many other cryptocurrencies in 2022.
Cryptocurrencies are inherently and inevitably volatile. They are strongly influenced by supply, demand, competition and sentiment.
We’ve taken a look at how each of these four factors could affect ETH prices in the foreseeable future.
Supply
Unlike bitcoin, there’s no total limit to how much ETH can be mined. However, there is an annual cap of 18,000,000.
But a major change to Ethereum in September altered the way in which ETH is supplied, and the rate at which it is supplied.
Prior to September, miners were rewarded with 2 ETH for each block added to the Ethereum blockchain. While new blocks are added to bitcoin’s blockchain every 10 minutes, Ethereum blocks were added every 13 to 15 seconds.
Miners were also rewarded for creating so-called ‘Uncle Blocks’. An Uncle Block is created when two or more miners create blocks at the same time. Since only one can be added to the blockchain, the creators of blocks that aren’t added (Uncle Blocks) are compensated with between 0.06ETH and 1.75ETH.
While bitcoin’s value is derived, in part, from its scarcity, Ethereum’s supply doesn’t currently have a bearing on its value. Assuming there’s no immediate surge in demand for ETH, supply rates should remain relatively constant.
However, in September Ethereum changed its consensus mechanism from ‘proof of work’ to ‘proof of stake’.
In practical terms, this means ETH is no longer mined by those with the computational horsepower to guess a 64-character alphanumeric string from trillions of possible combinations.
Instead, it is mined by those with the greater probability of being chosen as a validator because of the amount of ETH they’ve staked for the opportunity.
Under Ethereum 2.0, supply could decline by 2% annually, according to Ethereum tracker Ultra Sound Money. Rewards for adding a block to the Ethereum blockchain are more than 90% lower than they were under proof of work.
Verdict on supply: Ethereum 2.0 could greatly reduce the rate of supply, but seems to have had little effect on prices. As such, prices will remain flat or fall.
Demand
The number of daily Ethereum transactions gives us an indication of the demand for the asset. Roughly 1.19 million transactions were carried out on 8 November 2022, which is down from an all-time high of around 1.7 million transactions on 9 May, but typical for the token.
The number of Google searches for the keyword ‘Ethereum’ peaked in May last year before falling significantly. Numbers peaked again in mid-September as Ethereum went through its merge, but have since sunk.
As you need an active Ethereum address to trade in ETH, the number of daily active addresses can also give us an indication of demand.
There were around 652,000 active Ethereum addresses as of 8 November – up from last month’s 464,00 but down from a peak of around one million in July. Spikes aside, the number of active addresses has remained relatively flat since 2020, according to Ycharts data.
Verdict on demand : While the Ethereum merger piqued interest, it hasn’t translated to increased demand, so prices may remain flat in the short term.
Competition
As the second largest cryptocurrency by market capitalisation, Ethereum is often pitted against the number one cryptocurrency, bitcoin.
While bitcoin was designed to only facilitate payments, Ethereum was designed to also facilitate dApps and smart contracts. But while, as such, the coins are not directly comparable, comparisons persist.
The merge of the two Ethereum blockchains in September moved Ethereum from being in competition with bitcoin and its proof of work consensus mechanism to being in competition with other altcoins that use proof of stake as a consensus mechanism, such as Cardano (ADA) and Solana (SOL).
The so-called crypto winter that wiped around 50% off the value of bitcoin and around 70% off the value of ETH since the start of the year has also affected Ethereum’s competition. Cardano (ADA) has fallen in value by around 60% since January and Solana (SOL) has fallen by around 80%, meaning Ethereum’s losses haven’t been its competitors’ gains.
Even stablecoins, created as less volatile alternatives to traditional crypto assets, have been negatively affected by global economic factors.
Verdict on competition: With unchanged pressure from competitors, prices could remain flat or climb.
Sentiment
ETH prices are affected by people’s opinions of it.
Investors use ‘fear and greed’ indices’ to gauge market sentiment. When an index shows a market is in a fear phase, it means asset holders are selling because they’re worried about prices falling. In a greed phase, traders are buying because they believe prices will increase and they’ll make a profit.
The widely cited Crypto Fear & Greed Index at alternative.me currently says the crypto market (not ETH specifically) is in a state of ‘Fear’, which could mean ETH prices have further to fall. However, this is improved from last month’s Extreme Fear status.
Critics of fear and greed indices argue that while they’re useful for tracking sentiment, they’re not a good predictor of price movements, however.
ETH outflow from crypto exchanges can also be used to gauge sentiment. The more a currency is flowing out of an exchange and into wallets, the more is being held on to – perhaps in anticipation of price rises.
Withdrawals figures have gone through peaks and troughs all year, but are currently spiking. On 8 November there were around 940,000 withdrawals – up from last month’s 224,000.
The merger of ETH1 and ETH2 is thought to have affected market sentiment positively too. Moving to a more sustainable consensus mechanism is seen as a positive by many, and could be a boon to ETH’s value, but the merger has yet to affect prices in any significant way.
Verdict on sentiment: Increased withdrawals signal hopes that prices will rise, but the merger has yet to show a significant impact. Prices may remain flat or rise in the medium term.
