Ethereum (ETH) has plummeted to around £942 from just over £3,000 at the start of the year and has suffered the same fate as Bitcoin and many other cryptocurrencies in 2022, taking it to its lowest price since January 2021.
Crypto prices are inherently and inevitably volatile. They are heavily influenced by supply, demand, competition and sentiment. We’ve looked at how each of these four factors could impact ETH prices in the foreseeable future, along with the upcoming merger of the ETH1 and ETH2 blockchains.
Unlike Bitcoin, there is no cap on how much ETH can be mined. However, there is an annual cap of 18,000,000.
miners are currently rewarded with 2 ETH for each block added to Ethereum Blockchain. While new blocks are added to the Bitcoin blockchain every 10 minutes, Ethereum blocks are added every 13-15 seconds.
Miners are 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 are not added (uncle blocks) are compensated with between 0.06 ETH and 1.75 ETH.
While Bitcoin’s value is derived in part from its scarcity, Ethereum’s supply currently has no impact on its value. Assuming there is no immediate surge in demand for ETH, supply rates should remain relatively flat.
However, an upcoming change in Ethereum’s infrastructure could reduce supply and increase prices.
Ethereum is changing its consensus mechanism out proof of work to Proof of Involvement.
In practice, this means that ETH will no longer be mined by those with the computing power to guess a 64-character alphanumeric string from trillions of possible combinations.
Instead, it will instead be mined by those who are more likely to be chosen as validators based on the amount of ETH they have staked for the opportunity.
Under Ethereum 2.0Supply could drop by 2% annually, according to Ethereum tracker Ultra Sound Money. The rewards for adding a block to the Ethereum blockchain will be more than 90% lower than under Proof of Work.
This will greatly reduce the supply rate and theoretically increase demand, potentially causing prices to rise.
The number of daily Ethereum transactions gives us an indication of the demand for the asset. Just over a million Ethereum transactions were processed on June 20th – down from the all-time high of around 1.7 million transactions on May 9th.
After a period of growth between early 2020 and summer 20202, during which daily transactions increased from around half a million to a million, daily transactions have remained relatively flat since last summer.
The number of Google searches for the keyword “Ethereum” peaked in May of last year before falling significantly. Since May of this year, however, interest has increased.
Since you need an active Ethereum address to trade ETH, the number of daily active addresses can also give us an indication of demand.
As of June 20, there were around 445,000 active addresses, down from a peak of around 800,000 on May 9 last year. However, the number of active addresses has remained relatively flat since last summer, they say Glassnode data.
As the second largest cryptocurrency by market cap, Ethereum is often pitted against the number one cryptocurrency, Bitcoin.
While Bitcoin was only developed to facilitate payments, Ethereum was also developed to facilitate payments dApps and smart contracts. As such, they are not directly comparable. However, comparisons remain.
The upcoming merger of the two Ethereum blockchains shifts Ethereum from competing with Bitcoin and its proof-of-work consensus mechanism to competing with other altcoins that use proof-of-stake as a consensus mechanism, such as Cardano (ADA) and Solana (SOL ).
The so-called crypto winter, which has wiped out around 50% of the value of Bitcoin and around 70% of the value of ETH since the beginning of the year, has also had an impact on Ethereum’s competition. Cardano (ADA) is down around 60% since January, and Solana (SOL) is down around 80% — meaning Ethereum’s losses have not been the gains of its peers.
Even stablecoins, created as less volatile alternatives to traditional crypto assets, have been negatively impacted by global economic factors.
ETH prices are influenced by people’s opinions.
Investors use “fear and greed indices” to gauge market sentiment. When an index shows that a market is in a period of fear, it means asset owners are selling because they are worried about falling prices. In a period of greed, traders buy because they believe prices will rise and they will make a profit.
The much-cited Crypto Fear & Greed Index at alternative.me currently states that the crypto market (not specifically ETH) is in a state of “extreme fear,” which could mean ETH prices need to fall further. Critics of fear and greed indices argue that while they are useful for tracking sentiment, they are not a good indicator of price action.
ETH outflow from crypto exchanges can also be used to gauge sentiment. The less a currency flows out of an exchange, the more is held – perhaps in anticipation of price increases.
Coinmetrics data shows ETH withdrawals surged from 121,328 ETH three weeks ago to 373,831 ETH in the past few days. This could indicate that holders are selling their assets before prices fall further. However, that number dropped significantly on June 13, when 1.16 million ETH was withdrawn from exchanges.
The merger of ETH1 and ETH2, expected in August after several delays, is also likely to impact market sentiment.
The move to a more sustainable consensus mechanism is seen by many as a positive and could be a boon to ETH’s value. While successful pre-Fusion testing has had a positive impact on prices, problems with the real Fusion could have the opposite effect.
eToro crypto advisor and author Glen Goodman think the merger could have a positive impact on prices, but it could also pose risks.
He said: “The really big benefit of the merger is the 99% reduction in energy consumption. The existing Ethereum network consumes about as much energy as the entire Netherlands. Of course, in a world worried about the effects of climate change, this is a major downside and the merger will allow Ethereum to showcase its green credentials.
“This could potentially give it a huge advantage over bitcoin as large investors are often under a lot of pressure to be environmentally conscious in their investments. If customers decide Bitcoin isn’t green enough, Ethereum is more likely to attract the big investment institutions, which could push the price higher in the longer term.
“Also, Ethereum often becomes expensive and slow to use, congestion builds up. Merging is like building two extra lanes on a freeway.
“These benefits are too delicious to ignore, but critics argue there are downsides too. They say the merger could make Ethereum more vulnerable to domination by a small cartel of coin holders and potentially more vulnerable to larger attacks by hackers.”