(Kitco News) Ethereum, the world’s second-largest cryptocurrency, is on its way to becoming “the collateral of the internet,” which is similar to Bitcoin’s path of becoming “the global digital reserve asset,” said Bloomberg Intelligence. But before returning to its record highs, Ethereum faces a risk of dropping to last summer’s lows of $1,700.
“Ethereum is in a top position to lead the wave of digitalization, tokenization, DeFi, fintech and NFTs,” said Bloomberg Intelligence senior commodity strategist Mike McGlone. “The price of the No. 2 crypto [is] running about parallel with the total market cap of crypto assets from Coinmarketcap. Most NFTs are denominated in Ethereum, which means an expanding ecosystem represents demand.”
Working in Ethereum’s favor is its use case in the larger crypto universe. One example is Tether —the most widely traded crypto asset that is an Ethereum token, which is pegged to the value of a U.S. dollar.
“Ethereum has earned depth and dominance. Success spurs competition and there are plenty of would-be Ethereum rivals, but we see the No. 2 crypto fending off challenges to its leadership,” McGlone concluded.
However, there are a number of risks to watch out for — one is the upcoming ‘Merge,’ which will see Ethereum transition from a proof-of-work model to a proof-of-stake one, resulting in a 99.95% reduction in total energy use.
“The Merge, shifting Ethereum from a proof-of-work model to proof-of-stake, will convert Ether into an equity-like instrument with elegant supply/demand dynamics that could drive significant interest in the asset. Stakers of Ether (owners that validate) will be entitled to a share of future revenue (fees) generated on the network, with EIP-1559 dictating a portion of the fees (about 70%) should be burnt (akin to a buyback) and the rest distributed as a reward (dividend), McGlone explained.
But there is still a lot that could go wrong with the ‘Merge,’ McGlone warned. The price outlook for the short-term also looks dicey because of crypto’s current correlation to risk-on assets like tech stocks, which have been seeing a massive selloff in April. Because of this, McGlone does not rule out Ethereum dropping to last summer’s low of $1,700.
“If the stock market declines further and lowers the tide for risk assets, Ethereum could repeat last summer’s performance and revisit about $1,700. Once the weaker, leveraged long positions were purged, Ethereum hit a new high around $4,800 in November,” he said. “Ethereum faces headwinds along with most risk assets as the Federal Reserve fights the highest inflation in 40 years. We see the potential for stock-market reversion as a primary headwind for Ethereum.”
Longer-term, however, Ethereum will continue to outperform after building a base between $2,000 and $4,000 — the trading range it has been stuck in since Q2 2021.
“Ethereum appears to be in an enduring bull market,” McGlone noted. “Since May 2021, the crypto’s price has held resistance at about one-to-one with the S&P 500, but what’s notable … is the enduring decline in the relative risk of Ethereum vs. the stock market. Migration into the mainstream is our takeaway, and once the dust settles from some necessary reversion in risk assets amid inflation pressures, Ethereum is more likely to resume doing what it has been — outperforming.”
The supply side is also supportive of higher price levels. McGlone pointed out that Ethereum’s supply may edge lower than that of Bitcoin. “According to Etherchain.org, about 2.2 million ETH (roughly 60% of normal supply) have been removed since the start of August to April 25,” he said.
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