The price of Ether (ETH) hit $1,400 on March 10, which turned out to be a bargain as the cryptocurrency was up 27.1% through March 21 as of this writing. However, the three reasons behind the price gain, including the correlation with tech stocks, their locked-in rising total value, and their deflationary token economics, suggest that the path to $2,000 is set in stone.
There are numerous explanations for Ether’s 19.4% drop in the past six months. The Shanghai hard fork update was pushed back from March to early April and after Shanghai, the Ethereum roadmap includes “Surge”, “Verge”, “Purge” and “Splurge” updates. In fact, the longer these intermediate steps to achieve scalability take, the more likely it is that competing networks will demonstrate efficiency and possibly establish a competitive advantage.
Another potentially worrisome issue on investors’ minds is the real possibility of a price shock when validators are finally able to unlock their 32 ETH deposits after completing the Shappela hard fork. While it is impossible to predict how many of the 16 million ETH currently staked on the Beacon Chain will be sold on the market. There is a compelling case for transitioning to liquid staking platforms, as they can use liquid staking derivatives on other decentralized finance networks without sacrificing their staking performance.
Traders could build a narrative based on regulatory uncertainty, especially after SEC Chairman Gary Gensler’s September 2022 statement that proof-of-stake cryptocurrencies could be subject to securities laws. In February 2023, the SEC reached a settlement that forced cryptocurrency exchange Kraken to stop offering cryptocurrency staking services to US-based clients, and the exchange also paid $30 million in repayment.
Correlation vs. App-Centric Tech Firms
To understand why Ether gained 15% in less than three days after briefly trading below $1,400 on March 10, traders need to move from price-based analysis to market cap comparison. On March 10, Ethereum’s market capitalization closed at $175 billion.
Oracle, SAP, and Salesforce are similar to Ethereum in that their software allows users to access shared computing resources and resources. This is in contrast to chipmakers NVidia and TSM, infrastructure providers Microsoft and Oracle, and technology companies Apple and Cisco that rely heavily on equipment.
The market capitalizations of Oracle, Salesforce, and SAP are comparable to Ether at $233 billion, $188 billion, and $149 billion, respectively. Ultimately, centralized and decentralized solutions allow companies to integrate their proprietary software so that all relevant third parties and departments can query, process, share, and store data.
Taking into account the data of the last six months, the price of Ether has behaved in a similar way to those of these companies. The drop below $1400 on March 10 was illogical if the correlation between app-focused tech stocks and the Ether price is still valid.
The total value of ETH locked remains at $30 billion
The Total Value Locked (TVL) of the Ethereum network was $24 billion on November 24, 2022 and increased by 30% to $30 billion on March 21, 2023. Therefore, if there are no other factors influencing price, you could anticipate a 30% price increase during that six-month period. Except that was not the case on March 10, when Ether was trading at $1,400, which is an increase of only 8% from the previous six months and indicates a disconnect between the value held in the smart contracts of the network and the price of ETH.
This 22% difference between the 30% increase in TVL and the 8% increase in ETH price indicated that the real value of Ether should have been near $1,700, a level that was reached three days later on the 13th of March 2023. This simple model excludes a number of variables that influence supply and demand and the resulting price level, but provides an indication based on historical data.
Related: Coinbase Files Petition With SEC Explaining Staking Is Not Securities
Ether’s deflationary mechanism is in full force
On November 10, 2021, the price of Ether was $4,869, a record for the cryptocurrency. However, many things have changed since then, including the fire of 3,016,607 ETH through the Improvement Proposal EIP-1559. This equates to an additional $5.4 billion of capitalization that would otherwise have been created, thus increasing the supply side and restraining price appreciation.
Currently, the market leader, Bitcoin (BTC), is trading down 59% from its all-time high of $69,000. That doesn’t necessarily mean Ether should close the gap against Bitcoin, but it does show how discounted ETH is currently sitting at $1,780. The deflationary standard paves the way for the perception of Ether as a scarce digital asset, which is particularly promising during inflationary periods in the global economy.
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