In the discussion about Bitcoin last year, a lot was about establishing it as a store of value. Since institutional investors continue to take positions in Bitcoin and some even explicitly refer to BTC as a “hedge against inflation”, the presentation is stronger than ever.
Earlier this month, Coinbase released a report with an interesting finding: In fact, the exchange’s institutional clients told the exchange that Bitcoin’s evolving role as a store of value was an important part of their reason for investing in the company. However, Coinbase noted that the same group of investors began to look at another large-cap asset as a potential store of value: Ether (ETH), the native asset of the Ethereum network.
In fact, “the reason we own Ethereum most often that we hear from our customers is a combination of i) its evolving potential as a store of value and ii) its status as a digital asset necessary to power transactions on its network is, “explained a summary of the year-end report.
“While our institutional clients mostly bought Bitcoin in 2020, a growing number also took positions in Ethereum, the second largest crypto-asset by market capitalization,” the report said.
“Ethereum performed well against the USD in 2020, outperforming Bitcoin to end the year up 487% to $ 745.” Since then, the price of ETH has risen even further: at the time of going to press, the price of ETH was ~ USD 1,275; At the beginning of the year, ETH rose to $ 1,470. According to Messar.io, the ETH has increased by more than 75 percent since the beginning of the year, while the price for BTC has increased by almost 6 percent.
Could institutional investors be the source of some of these gains? And do institutional investors really see ether as a store of value? And if so, what impact can this have on the Ethereum network and DeFi space as a whole?
BTC is fundamentally different from ETH
Let’s look back for a moment: while both Bitcoin (BTC) and Ether are perceived by some investors as stores of value, there are some very important differences between the two assets. For example, the value of Bitcoin is functionality. In the earlier days of Bitcoin, Bitcoin was discussed as a transaction network: “digital money”. However, as the network grew, due to scalability issues, the network was viewed as a kind of “digital gold”: a store of value.
On the other hand, ether has a wide variety of functions. Sure, ETH tokens have value, but the tokens are used in a practical way on the Ethereum network. While other tokens (called ERC20 tokens) have been introduced on the Ethereum network, ETH is the currency in which transaction fees must be paid on the network. As such, the ETH is the “mediator” of the network: It is the currency in which transactions, intelligent contracts and decentralized applications (dApps) can be carried out.
Doug Schwenk, chairman of DAR (Digital Asset Research), told Finance Magnates that ETH can therefore “perhaps be viewed as a store of value in the short term”, but in the long term “correctly viewed” as valuable for its usefulness. “
The growth of the DeFi ecosystem is driving the ether upwards
In addition, Schwenk explained that there are other fundamental differences between the two assets that make their status as a store of value very different in the long run: “Bitcoin, like gold, has a limited supply that adds to the business’s value creation narrative,” he said.
“ETH, on the other hand, has no fixed upper limit. The price of ETH may be more directly related to its use in processing transactions that are used in many applications, ”including a number of DeFi-dApps (Decentralized Finance).
Eloisa Marchesoni, a token-based fundraising advisor, told Finance Magnates that “decentralized financing” is a set of decentralized platforms that offer traditional financial services, including lending and investing.
However, the DeFi ecosystem is still at a very early stage: “[DeFi is] A new financial “wild west” that takes place largely on Ethereum and, according to some experts, could lead to a new “digital gold rush” similar to the ICO boom in late 2017, ”explained Marchesoni.
In contrast to the ICO era, analysts see much more potential in many DeFi projects to keep growing in the coming years.
Doug Schwenk told Finance Magnates, “As more mature applications are based on Ethereum that offer greater value to the end user, the asset should naturally increase in value.”
“As ETH grows, the price of tokens in the Ethereum ecosystem will also rise.”
While ether may not be a store of value like bitcoin, so is ETH does have a kind of correlation value relationship with the decentralized financial ecosystem. As the number of applications that build on top of the Ethereum network continues to grow, so does the amount of capital flowing through this ecosystem. The more transactions that take place in the network, the more often Ether is used.
“The core movement of DeFi tokens takes place on decentralized exchanges such as Uniswap, Mooniswap, Sushiswap, etc.,” Doug Schwenk told Finance Magnates. “The most important trading couple these tokens are traded on is ETH. As the ETH grows, the price of tokens in the Ethereum ecosystem will also rise. “
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“It’s not directly correlated, but it’s the main driving force alongside the DeFi hype,” he added.
Indeed, the growth of the DeFi ecosystem could have increased the value of Ether in the short term. Eloisa Marchesoni told Finance Magnates: “The high demand for Ether in DeFi applications is likely to have a long-term effect on the price of Ethereum.”
“Ethereum prices are currently following the current market sentiment and have fallen 17.7% in the last seven days,” explained Ms. Marchesoni.
The transition to Eth2.0
While this growth in Ethereum’s DeFi ecosystem has repeatedly resulted in slow transaction speeds and high transaction fees, the team responsible for developing the technology behind the Ethereum network recently welcomed the Ethereum community by taking the first step towards Eth2. 0 resulted in a software upgrade that aims to address some of the network’s scalability issues.
This could have very important implications for the future of the Ethereum network and the price of Ether.
Eloisa Marchesoni told Finance Magnates that “without going into the very complicated technical details” regarding the transition to Eth2.0, “it is enough to know that it is thanks to a mechanism known as sharding and the transition to proof -of-stake will be able to process thousands of transactions per second using very little energy. “
“These innovations will allow Ethereum to solve the age-old ‘blockchain trilemma’ that says it is not possible to achieve security, speed and decentralization at the same time,” she said. “If all goes well, Ethereum will therefore be efficient and sustainable.”
Ms. Marchesoni also stated that developments towards Eth2.0 have apparently been welcomed by investors: “The value of Ethereum’s cryptocurrency has more than quadrupled from its 2018 lows,” she said. In addition, the amount of Ether currently in the Eth2.0 smart contract has risen to over $ 3 billion since Eth2.0 launched its so-called “beacon chain” on December 1st.
In addition, Ms. Marchesoni pointed out that since the launch of the chain of lights “[the number of transactions on] The Ethereum blockchain has surpassed that of Bitcoin, “which was previously the most widely used cryptocurrency network.
Therefore, ether is not a store of value like Bitcoin. However, this does not mean that it is not valuable and will not continue to grow in the long run.
Konstantin Boyko-Romanovsky, CEO and founder of Allnodes, told Finance Magnates that he believes that “sooner or later the majority of institutional investors will turn their attention to Ethereum, which is known to have many more uses than the number one currency, [Bitcoin]. ”
“This of course creates positive expectations for investors with regard to possible profits. There is currently no discussion in the crypto community about flippening, a term used to describe the possibility that Ethereum will outperform Bitcoin as the leading cryptocurrency. However, the fact remains the same, Ethereum is currently more energetic than ever. “
The growth of the DeFi ecosystem is positive for both BTC and ETH
Interestingly, the fact that the growth of the DeFi ecosystem is good for not only the growth of Ether and the Ethereum network, but also good for Bitcoin.
“BTC was certainly an important part of the DeFi ecosystem, especially as a security,” Doug Schwenk told Finance Magnates. In other words, the more DeFi grows, the more Bitcoin is used in DeFi. For example, at press time, the Total Locked-Up Value (TVL) in the DeFi Ecosystem had reached $ 25.49 billion. DeFis TVL’s $ 5.02 billion is made up of bitcoin.
As Finance Magnates previously reported, “The amount of Bitcoin currently used in the DeFi ecosystem may not be enough to have a significant impact on the price of Bitcoin. Currently, the amount of bitcoin used in the DeFi ecosystem is just under 1% of the circulating bitcoin supply. “
In addition, Doug Schwenk believes that a healthy Bitcoin price could lead to further growth of the DeFi ecosystem: “If the BTC price continues to grow and becomes more stable over time, this could enable a robust DeFi ecosystem,” he said . “The DeFi ecosystem will ultimately be held back if there is no asset with sufficient market capitalization that can be considered reliable security.”