Cryptocurrencies Part 1: The rise and fall of Ether

(Nathan Nowbuth and Josh Gill)

Casting our minds back to the tail end of 2017 and for the majority of 2018, digital currency, more commonly referred to as cryptocurrency, was the hot topic on every trader’s mind. There are numerous cryptocurrencies which can be purchased such as Bitcoin, Litecoin and Ripple. However, in this article, we will focus on Ether, the second largest cryptocurrency by market capitalisation, and more specifically, how its performance has fared compared to the American dollar. Ether is built on top of the open source Ethereum blockchain, which runs smart contracts, meaning it is a unit of currency on a peer-to-peer payment network. Ethereum was proposed in late 2013 by Vitalik Buterin, a Russian-Canadian programmer and the system went live on July 30th 2015, with 72 million coins minted. Ether differs from cryptocurrencies such as Bitcoin as its supply is infinite and its supply schedule (often described as minimum necessary to secure the network) is determined by the members of the Ethereum’s community. Conceptually, the manner in which an alternative form of payment to credit cards, notes and coins might seem extremely confusing, especially since how cryptocurrencies are technically derived off computer algorithms. Therefore, the link of two websites which provide a clear breakdown of how cryptocurrencies work and holds its value as a legitimate form of exchange can be found at the bottom of this article.  

Historical performance of ETH/USD 

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From simply observing performance of ETH/USD dating back to August 2015, it is obviously the pairing has gone through a period of almost unrecognisable growth before rapidly falling to a more sustainable price level. The pairing peaked at a phenomenal USD 1595.36 for a brief moment on January 13th, 2018 but closed on the day at USD 1352. However, from early to mid-March 2018, ETH/USD began to lose momentum and its floating price fell drastically. Analysing this fall in perspective, between January 13th and April 1st, 2018 (a period of less than 3 months), ETH/USD had fallen by 72.1% in value – this is typically unheard of in other asset markets, perhaps the exception being the occurrence of major external economic shocks such as Coronavirus. ETH/USD plummeted to its lowest level since Ether gained initial traction in early 2017 on December 15th, 2018 to a level of USD 84. Nonetheless, since then, ETH/USD has picked up in performance and become less volatile and is now trading at USD 368.12. 

Fundamental Analysis 

Ether’s plummet  

One of the biggest reasons for the seismic fall in Ether was actually related to variable outside of its control. On November 15th 2018, a cryptocurrency rival called ‘Bitcoin Cash’ experienced something called a hard fork, whereby a new cryptocurrency was created. This led to uncertainty in the market and a major sell-off of bitcoin cash. With a market capitalisation of around USD 4 billion, bitcoin cash was the world’s fourth most valuable cryptocurrency, however the sell-off consequently caused half of its value has been wiped off and sent the whole cryptocurrency market into turmoil. The repercussions of investor induced speculation and also the ‘cryptocurrency bubble’ have wreaked havoc for market confidence, thus causing the floating price of ETH/USD to be adversely affected. 

Nonetheless, despite the aforementioned, there are a series of other factors at play behind Ether’s fall. During the 2017 boom, entrepreneurs and get-rich-quick investors rushed to create hundreds of their own tokens via so-called “initial coin offerings” (ICOs), a barely regulated way of tapping retail investors for money. Many of these ICOs used Ether’s underlying blockchain technology platform, Ethereum, and investors used Ether to buy the new tokens. Experts noted that as Ether’s value began to slide, many ICO projects sold down the balances of Ether they held, turning it into ‘fiat currency’ and putting pressure on Ether’s price. The fall in Ether was compounded by the fact that this trend wasn’t only short term. As more projects failed to start generating significant revenue, the Ether sell off rate increased, leading ETH/USD to fall to as low as USD 84. 

“Demand for ICOs really drove up the price. However, the money which came out of the ICOs is one of the things that’s really battered Ether in the following months.” Martin Walker, director at the Centre for Evidence-Based Management, stated. 

The data suggest it is largely retail investors who borne the brunt of the price fall, rather than the ICO projects. Analysis of in excess of 220 ICOs by trading platform BitMEX found they had sold almost as much Ether as they raised in US dollar terms (around $5bn worth) while many are still sitting on ‘unrealised gains’, which essentially refers to potential profit that exists only on paper. Technically speaking, the massive sell off and lack of confidence in the long-run success of ICO projects jeopardised the value of Ether and highlights a very evident aspect of the crypto market – the price of any cryptocurrency is determined by its blockchain users and miners, underlining the how speculation is a leading indicator of momentum and price.  

Many supporters contest that the price of Ether is not how success should be measured and instead, the real focus should be on Ethereum and its technological potential. It was designed to allow internet users to be more in control of their data. Whilst bitcoin aims to eliminate the middlemen in finance (commercial banks and central banks), Ethereum hopes to bypass online giants such as Amazon, Facebook or Uber by allowing automated agreements to guarantee users a service. Theoretically, this appears to be a technological revelation, but in reality, sceptics of Ethereum have correctly identified that to date, it has few practical uses outside of the gaming industry with limitations with scalability and user friendliness. For instance, Ethereum can only process around 9 transactions per second — 5000 times less than the 45,000 processed by Visa. Therefore, looking at Ethereum’s performance holistically, it mightn’t be inaccurate to base the valuation of Ether from its real floating price.  

The recent revival of Ether  

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However, as is the unpredictable nature of the cryptocurrency market, Ether has been experiencing something of a revival. It hit new 2020 highs in August and according to blockchain intelligence firm Glassnode, more than 90% of the circulating ETH is now in “a state of profit.” This can be seen in the screenshot of Glassnode’s Tweet which was released on August 3rd. Moreover, Glassnode mentioned that the last time Ether saw this level of state of profit was in February 2018 when it was trading at about USD 925. Could this potentially signify a sense of optimism for the long-run performance of ETH/USD?  

If future prospects are anything to go by, then the answer is certainly yes – there is tangible excitement courtesy of the anticipated launch of the Ethereum 2.0, a major upgrade to the network that is poised to shift from a proof-of-work consensus algorithm to proof-of-stake. It is reported that Ethereum 2.0 will enable massive growth of decentralised financial applications which has been a stumbling block for Ether’s practicality in past years. Nevertheless, as previously illuded to, the financial landscape of cryptocurrencies is ever shifting so being wary of new press releases are essential for adjust one’s stance on the long-term prospects of Ether.   

*https://www.investopedia.com/tech/how-does-bitcoin-mining-work/ 

*https://www.genesis-mining.com/how-cryptocurrency-works 

Technical Analysis: 

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(Figure 2: To Show 1 Day Price Chart of ETH/USD Pair with RSI indicator on 22 October) 

Since the demand for USD dropped as a result of economic decline, the ETH has had significant bullish trends. A strong uptrend above the approximate $400 support line and no break above resistance of $412. Consistent uptrend showed great selling potential for Ethereum just below resistance. By the gaining momentum of Ether, it can be predicted that price will break resistance and move into new higher highs. The RSI indicator of 80, shows the high buy trades taken. For the next day the RSI dropped off by 20 to 60 RSI and downtrend was seen for majority of the day. 

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(Figure 3: To Show 1-month Price Chart of ETH/USD) 

Over a monthly view in figure 2, there was overall consistent uptrend with buy trade potential on 8th October at $335 and sell at $394. RSI 70 at buy point indicates high buy potential. However, RSI remains high around 50 at sell off point indicating investors were eager to wait for more sell potential which didn’t occur, and so actually slight downtrend occurred. The MACD (12, 26) is crossed by the EMA-9 indicating the bearish movement and so indicates good exit point for the buy trades taken earlier in the week. This overlap is suggestive of strong sell off potential. 

Overall bullish trend for the Ether/USD pair is consistent. It can be predicted that price could reach new highs of $450 following the 50% FIB retracement. The RSI is on an increase indicating strong buy potential. MACD (12,26) is staying over the EMA-9 indicating strong bullish theme with minimal downtrend potential.  

Jargon Buster:  

  1. Blockchain: a system in which a record of transactions made in bitcoin or another cryptocurrency are maintained across several computers that are linked in a peer-to-peer network. 
  1. Fiat currency: Fiat money is a government-issued currency that isn’t backed by a commodity such as gold. Fiat money gives central banks greater control over the economy because they can control how much money is printed. 
  1. Market Capitalisation: Market capitalisation in the context cryptocurrency is the total value of the number of units mined (i.e. in the possession of its users) multiplied by the price of each unit.  
  1. Mining: Mining is the process of creating new cryptocurrency units by solving a computational puzzle. Mining is necessary to maintain the ledger of transactions upon which a cryptocurrency is based. Miners have become very sophisticated over the last several years using complex machinery to speed up mining operations. 
  1. Proof-of-stake: Proof of Stake (PoS) concept states that a person can mine or validate block transactions according to how many coins he or she holds. This means that the more Ether or Bitcoin owned by a miner, the more mining power he or she has. 

References 

  1. Anon, 2020. ETH/USD ETHEREUM. [online] FXStreet. Available from: https://www.fxstreet.com/rates-charts/ethusd [Accessed 17 Oct. 2020]. 
  1. Anon, 2020. Ethereum Price | Live ETH Price, Charts, Analysis | Cointelegraph. [online] Cointelegraph. Available from: https://cointelegraph.com/ethereum-price-index [Accessed 18 Oct. 2020]. 
  1. Anon, 2020. Ethereum Price Index. [online] CoinDesk. Available from: https://www.coindesk.com/price/ethereum [Accessed 18 Oct. 2020]. 
  1. Anon, 2020. Trading View. [online] Available from: https://uk.tradingview.com/chart/ZAFRBNzd/ [Accessed 17 Oct. 2020]. 
  1. Chen, J., 2020. Fiat Money. [online] Investopedia. Available from: https://www.investopedia.com/terms/f/fiatmoney.asp#:~:text=Fiat%20money%20is%20a%20government,U.S.%20dollar%2C%20are%20fiat%20currencies. [Accessed 18 Oct. 2020]. 
  1. Cuthbertson, A., 2018. Why has bitcoin’s price suddenly collapsed?. [online] The Independent. Available from: https://www.independent.co.uk/life-style/gadgets-and-tech/news/cryptocurrency-price-bitcoin-cash-ethereum-ripple-crash-a8642551.html [Accessed 18 Oct. 2020]. 
  1. Frankenfield, J., 2020. Ethereum. [online] Investopedia. Available from: https://www.investopedia.com/terms/e/ethereum.asp [Accessed 17 Oct. 2020]. 
  1. Murphy, H., 2018. The rise and fall of Ethereum. [online] Ft.com. Available from: https://www.ft.com/content/a8d2c280-d2b6-11e8-a9f2-7574db66bcd5 [Accessed 18 Oct. 2020]. 
  1. Partz, H., 2020. Over 90% of Ether Supply Is Now in ‘State of Profit,’ Says Glassnode. [online] Cointelegraph. Available from: https://cointelegraph.com/news/over-90-of-ether-supply-is-now-in-state-of-profit-says-glassnode [Accessed 18 Oct. 2020]. 
  1. Quintal, J., 2020. Ethereum Overview. [online] Truffle Suite. Available from: https://www.trufflesuite.com/tutorials/ethereum-overview#:~:text=Ethereum%20is%20a%20blockchain%20that,Ethereum%20Virtual%20Machine%20(EVM). [Accessed 18 Oct. 2020]. 

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