Many new to crypto, such as institutional investors who have recently bought into bitcoin’s “digital gold” narrative, may now be on the lookout for the next big thing.
With the long-awaited launch of phase 0 of the Ethereum 2.0 upgrade on December 1, that could be ether, the network’s native token (ETH). Analysts, however, argue that ether should be judged on its own merits rather than as a bitcoin substitute.
“I’ve always thought this digital asset room is big – and it’s not just bitcoin,” Raoul Pal, CEO, and co-founder of financial media company Real Vision, said in Real Vision’s documentary “Ethereum – An Investigation,” which was released on November 30. “The two [bitcoin and ether] have a very nice combined asset allocation,” says the author.
Pal, an early bitcoin investor, believes the reason is even more compelling these days: as bitcoin’s price rises to a new all-time high, the world’s most valuable cryptocurrency is becoming more costly, potentially making it a riskier gamble for new investors.
It’s understandable that investors are searching for a new crypto opportunity at a reasonable price. Given that ether is currently trading at about 59 percent of its all-time peak of $1,432.88, it’s tempting to think there’s a good deal to be had. Furthermore, the Ethereum 2.0 update, which aims to improve the network’s scalability, stability, and energy efficiency, has sparked a lot of interest.
Analysts and traders who spoke with CoinDesk believe that, for the time being, ether will not be able to replace the fear of missing out on bitcoin.
According to Ryan Watkins, senior research analyst at Messari, “institutional investors are purchasing BTC for the digital gold narrative.” “ETH isn’t even included in the discussion right now.”
According to Vishal Shah, founder of derivatives exchange Alpha5, Ether “benefits from spillover” and “likely has more conversation from crypto-natives.” “It’s difficult to see how bitcoin isn’t the only on-ramp for the uninitiated.”
The relationship between bitcoin and ether is deteriorating.
According to some experts, ether and other cryptocurrencies would eventually decouple from bitcoin as more institutions pump money into it and drive up its price.
Indeed, while bitcoin hit a new high this week, ether is still nowhere near its all-time high of $1,448.18. The 90-day correlation coefficient between the prices of the top two cryptocurrencies has steadily weakened since the summer, from as high as 0.93 to nearly 0.7 at the beginning of December, according to CoinDesk data.
“The thing about correlation is that it can vanish at any time,” said Ashwath Balakrishnan, a research analyst at Delphi Digital, a digital asset research company. “In that scenario, you’ll want to know the fundamentals of what you’re holding because if you’re holding ether as a proxy for bitcoin exposure, and values decouple, you’ll be exposed to anything entirely different.”
Many investors have used Bitcoin as a hedge against a decrease in the US dollar buying power this year. Ether is the currency of “the world machine,” which strives to create a decentralized application ecosystem.
The historical closeness of bitcoin and other cryptocurrencies may be attributed to the digital-asset ecosystem’s small size compared to the global economy. The overall market capitalization of crypto assets is projected to be $562 billion, or 1.7 percent of the combined market capitalization of the S& P 500 stock index, which is $32.2 trillion. non-bitcoin cryptocurrencies might be trending with bitcoin prices simply because the nascent market is still so limited and insular, with almost every crypto asset based on different fundamentals.
The data on correlation does not tell the whole story. Prices can move in lockstep, but the extent to which this occurs is a different story. Since most DeFi projects are based on the Ethereum blockchain, ether’s price surged to its highest in more than two years when the explosive decentralized finance (DeFi) boom hit the market this summer. Bitcoin was struggling to break a two-year record at the time.
What does Ethereum 2.0 mean for investors?
Since the final step of the process is expected to be completed in 2023, the market will have to wait to see the natural effect the ongoing Ethereum update will have on its native currency. However, a major structural upgrade to the network that underpins ether could cause its price to shift based on its fundamentals rather than just following bitcoin’s price.
According to a paper by Messari, “the center of ETH 2.0, which makes the whole device possible, is ether.” “ETH will not only be Ethereum’s native store of value asset and transaction power, but it will also be the [proof-of-stake] system’s ultimate source of security.”
On the “asset superclass triangle,” bitcoin falls somewhere between a store of value and a commodity. Still, ether can be the first asset to combine all three asset classes: capital assets, resources, and stores of value.
“Holding ether as a proxy for getting BTC exposure will not function as predicted when its price begins to be powered by its catalysts,” Balakrishnan added.