According to Coin Metrics data, ether, or ethereum as it is more commonly known, was up 9 percent in the last 24 hours Thursday, trading at a price of $2,715. So far this year, it has increased by more than 260 percent.
These returns are far greater than those of bitcoin. The top digital coin is currently up about 35% since the start of 2021.
Ether’s exorbitant gains have been attributed to a variety of factors, including the fact that smaller cryptocurrencies typically experience significant rallies following a large run up in the price of bitcoin.
However, market insiders believe there is another reason for the ether rally, and it is quite timely. The Ethereum blockchain, the network that underpins ether, is set to undergo a significant upgrade on Thursday.
The upgrade, dubbed the “London fork,” will alter how Ethereum miners are compensated.
Users must currently bid how much they are willing to pay for their transaction to be validated by a miner. This process is automated under the new protocol, with a set fee that varies depending on how congested the network is. Another significant change will be that a portion of each transaction fee will be “burned,” or destroyed, potentially making the cryptocurrency’s supply more scarce.
“Those changes may make Ethereum more useful and less plentiful,” said David Russell, vice president of market intelligence at online trading firm TradeStation. “More practical because the fees will be lower and the network will be faster. Less abundant as a result of the two-pronged attack of fee burning and proof of stake.”
The upgrade is part of a larger Ethereum overhaul aimed at making the network faster and more secure. The transition to a so-called “proof of stake” protocol, dubbed Ethereum 2.0, will be a critical improvement from the reforms.
Unlike the current “proof of work” mechanism used by Ethereum and bitcoin’s blockchain, proof of stake eliminates the power-intensive computing operation known as mining for generating new cryptocurrency units and validating transactions.
Instead, those with sufficient ether holdings — or a “stake” — can validate network transactions.
“The bulls hope it [the London fork] will result in a digital asset with surging demand and shrinking supply — a potentially powerful combination for prices,” Russell added.
After the Ethereum 2.0 update, the Ethereum Foundation estimates that the blockchain will use up to 99.9 percent less energy than before. This could make ether a more appealing bet for investors concerned about bitcoin’s environmental impact.
In a June note, Morgan Stanley analysts wrote, “ETH is considered more ‘green’ than bitcoin.” “As concerns about bitcoin’s energy consumption grew, ether became more appealing.”
Another factor boosting ether is the rapid rise of decentralized finance, or “DeFi,” projects that aim to replicate traditional financial products like loans and insurance without the use of middlemen like banks.
Uniswap, a decentralized crypto exchange, and Aave, a lending service, are two of the DeFi protocols that use Ethereum. The ability to build apps on top of ether’s network is a key selling point.
According to DappRadar data, the total value locked in decentralized applications is currently $104.8 billion.
“If Ethereum were a company, it would be like Alphabet, with enormous growth potential that is only now being realized,” Russell explained. “Bitcoin is more akin to Yahoo in 2005. It isn’t going away, but the story has become much less exciting.”
Russell predicted that ether could reach $10,000 this year.
“Assume Bitcoin returns to its year-to-date high of $64,895, and Ethereum returns to its previous ratio of 0.156. (from June 2017). “It would imply a price of around $10,000,” he explained. “Both of those scenarios are possible, especially if fear subsides after Congress passes its infrastructure bill and crypto disclosure rules.”
Genesis, a digital currency lender that lent out $25 billion in the second quarter, stated that there has recently been a “significant rotation” out of bitcoin into ether.
“By the end of 2020, bitcoin will have accounted for 54% of our loan book,” the firm stated in a report released this week. “By the end of Q2, that percentage had dropped to just over 42%, with ETH and smaller assets making up the majority of the difference.”
However, it is important to remember that digital currencies can be extremely volatile — ether is still down 38% from its all-time high above $4,000, while bitcoin is down 39% from its April peak.
Meanwhile, regulation is a significant impediment to the growth of all digital assets. Some are concerned that a provision in the US infrastructure bill, for example, will choke off a large portion of the crypto ecosystem.