November saw ether climb to fresh records as cryptocurrencies rode a wave of momentum, flows, favorable news and inflation fears. Ether, which underpins the Ethereum network, rose to an all- time high of $4,847.88 on Nov. 10, according to the CME CF Ether-Dollar reference rate.
The rally, with ether up close to 60% since the start of Q4 2021, is being driven by a multitude of interrelated factors. Ether could be an inflation hedge due to its links to decentralized finance (DeFi) and the market for non-fungible tokens (NFTs), two areas that greatly accelerated in 2021. There is also large value placed on the underlying technology. Compared to bitcoin, ethereum's faster transaction speeds, lower fees and versatility in running these Defi applications and hosting NFTs has made ether hugely popular among investors. A number of crypto experts believe ether is on pace to eventually overtake bitcoin as the top cryptocurrency by market capitalization, in an event dubbed the “flippening”.
Let’s look at each of these areas in more detail.
The Heartbeat of Dapps and Defi
Ethereum long ago passed Bitcoin as the most used blockchain. Ethereum is a decentralized software platform, serving as the building blocks for distributing decentralized applications and smart contracts over its blockchain network, without any third-party control and in a secure, seamless manner. In fact, Ethereum’s protocol serves as the backbone for some of the most popular projects like MakerDAO and Uniswap. In total, more than 3,600 decentralized apps (Dapps) run on the Ethereum blockchain.
Ethereum is also a key player in DeFi, which seeks to build financial applications like lending and trading on the blockchain. Such DeFi projects are met with growing excitement and have seen an uptick in usage and popularity in 2021.
With its increased adoption, Ethereum appeals to developers looking to build new applications and thereby investing in ether’s growth and boosting its market value.
NFTS are Booming
Ethereum has grown more important over the past year as the network has become a central platform for NFTs, which have exploded in popularity.
NFTs have lured billions of dollars of investment. They can take the form of digital art, sports trading cards or contain video clips of historic sporting moments. Either way, they contain the ownership, copyright and authorization information coded into the token and stored in the blockchain network.
As enthusiasts increase their investment in NFTs, it positively impacts ether’s value because a sizable portion of the NFT market is hosted on the Ethereum network which in turn requires ether to be used in the minting, acquisition and trading of NFTs and further increases demand for the token. Further, with the advent of the metaverse – a virtual immersive world – it could lead to more people investing in products that run on Ethereum itself.
Inflation has continuously edged higher in recent months, driven by bottlenecks in demand and supply chains in the aftermath of COVID-19. U.S. core inflation increased to 4.6 percent, the highest since 1991*. Against this backdrop of falling real yields, many analysts see the attractiveness of assets such as gold and cryptocurrencies as a hedge against rising inflation.
Fewer and Cleaner Ethereum Tokens
Cryptocurrencies have long been, rightly or wrongly, criticized for their swelling consumption of energy. Ethereum is undergoing a major upgrade – dubbed Eth 2.0 – which investors hope will make the network faster and more environmentally friendly. This is yet another factor in the 2021 price surge.
Another recent upgrade – the August London hard fork -- was a code change that burns ether as part of each transaction. This will help reduce the transaction fees, which is especially useful in DeFi trading, where each transaction can become costly. As the ether are burned, the number of ether tokens on the market will grow more slowly. This limits the number of ether in circulation, exerting deflationary pressure on its supply.
Robust and Liquid Futures Market
Robust activity in the futures market was another sign of growing acceptance for ether by institutional clients. The development of liquid futures products is essential for ether to truly act as a hedging tool. Outstanding futures in the larger-sized 50 multiplier Ether contract soared to $1.29 billion in November**. The existence of the contract, launched in February 2021, has been particularly helpful to institutional market participants in managing risk as ether has risen in popularity.
Micro Ether – A Right Sized Offering
In addition to institutional traders, sophisticated, active retail traders are increasingly looking to add crypto to their portfolios to diversify, particularly against the backdrop of inflation.
Micro Ether futures, launched December 6 and sized at 1/10 of one ether, provide an efficient, cost-effective way for traders of all sizes to precisely manage ether exposures and further optimize trading strategies.
Making an ether futures contract accessible to the market will help ensure that more participants can precisely manage their ether exposure as the market continues to grow in importance. The development of smaller and right-sized cryptocurrency futures has huge potential for all types of traders – the crypto-curious asset manager, crypto-focused hedge funds, crypto native organizations and the retail trader.
The launch of Micro Ether futures aims to bring more investors to the market by enabling investment precision and lower capital outlay in dollar terms in a transparent, regulated and efficient manner.
We will continue to follow the contract’s performance as a growing number of factors continue to influence the ether market.
* Source: Bureau of Labor Statistics
** Source: CME Group
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