Up in value to around £1,475 from just over £991 at the start of the year, Ethereum (ETH) has had a good year to date, but its current value only puts it back to roughly where it was this time last year.
Like all cryptocurrencies, Ethereum (ETH) is volatile and 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 last September altered the way in which and the rate at which ETH is supplied.
Prior to September 2022, 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, Ethereum has 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: ETH prices have been trending upwards since the new consensus mechanism took effect. In general, prices are likely to keep rising.
Demand
The number of daily Ethereum transactions gives us an indication of the demand for the asset. 1.07 million transactions were carried out on 7 June 2023, this is down from 1.14 million last month and significantly down from its all-time high of around 1.7 million transactions on 9 May 2022, but typical for the token.
The number of Google searches for the keyword ‘Ethereum’ peaked in May last year before falling significantly. For 2023 so far, searches are continuing to trend downwards.
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 441,000 active Ethereum addresses as of 7 June, which is up from 357,000 last month but down significantly since January’s peak of 631,000 active addresses.
Verdict on demand : Transactions and active addresses are trending downwards. Prices could follow suit. Active addresses, however, are up.
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 2022 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.
One recent change was the introduction of BRC-20 tokens on the Bitcoin blockchain, as an analogue to ERC-20 tokens. While there was an initial surge in interest in BRC-20 tokens such as Ordi and Pepe, prices fell sharply and it remains to be seen whether the new standard has any staying power.
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 Neutral state, which means people aren’t expecting prices to rise or fall. The index’s status is unchanged for the past few months, meaning sentiment hasn’t changed either way.
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 outflow numbers are broadly flat for the year to date.
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: Prices may remain flat or rise in the medium term.
