Without any doubt, Ethereum is the second most popular yet valuable cryptocurrency out there. It has the biggest market capitalization after Bitcoin. As a result, many consider it a valuable investment instrument. Also, many new techs are being developed around Ethereum, such as NFT, dApps, and many more. But the question is, how does Ethereum gain its value?
Just like any other crypto coin, the price of Ethereum depends on the concept of market supply and demand. This is the same concept that the stock market follows.
However, unlike stocks, ethereum doesn’t publish yearly revenue, profit, or losses. Hence, it is hard to determine how the ETH coin actually gains its value. So we sat down with Sudhir from The Money Mongers, a crypto focused publication to understand all the factors that determine the true value of ethereum, and that’s what he will be explaining in brief below.
What is Ethereum?
Ethereum is a decentralized blockchain network. It has a peer-to-peer network that executes and verifies application code securely. This application code is known as smart contracts.
You can transact with other users without a central trust authority like a bank or court with smart contracts. Also, the transaction records cannot be changed, and they are verifiable. Plus, these transaction records get distributed across the network. As a result, you will get full ownership and visibility into transaction data.
These transactions are sent and received using ethereum accounts that you have to create. Also, you need to sign the transaction and spend ether or ETH coin as the processing fee.
Gas Fee Is a Primary Reason behind Ethereum’s Value
One of the primary reasons why Etherum gains its value is the gas fee. Whenever you send ETH to someone, you will need to pay a certain amount of coin as the transaction fee. This is what we know as a gas fee.
When you send ERC-20 tokens, you will need to pay gas fees. However, when you are sending an ERC-20 token, the transactor must also hold ETH in the same wallet to pay for the transaction. Along with that, when you trade on DEXs, you will also need to pay gas fees.
As a result, many consider holding ETH coins for gas fees. And this is what gives the coin a base level demand in the crypto market.
If you go by the data, when the crypto world saw the DeFi boom in 2020, Ethereum’s network saw high traffic. As a result, the Ethereum network did earn a huge gas fee.
How is Ethereum Value Determined?
As explained earlier, cryptocurrency’s price fluctuates depending on the market and supply and demand. Just like stock the market, when you buy or sell a crypto coin, there is an order book and sell order book.
Now if there is an increased demand for Ethereum in the market, then ETH coin price will rise up. Similarly, if there is a high supply, the price of the coin will fall.
But the thing with Ethereum is that you need to spend ETH when you are making a transaction on a decentralized application built on the Ethereum blockchain.
As a result, the more transactions happen on the Ethereum network, the transaction fee price will rise up. Since transaction fees are based on supply and demand.
What Affects the Price of Ethereum?
A wide range of factors affects the market supply and demand. Since ETH token price depends heavily on the market and supply. As a result, the price of Ethereum fluctuates from time to time. But what really affects the price of Ethereum? Well below are some common reasons:
- ERC-20 tokens increase Ethereum’s utility: On the Ethereum network, the developers can code smart contracts to create decentralized apps. These apps usually have their own ERC tokens. But still, when it comes to making transactions on the Ethereum blockchain, you need to spend ETH tokens. As a result, this increases the demand for the coin.
- Eth 2.0 staking: ETH 2.0 is an upgrade of the Ethereum network. It is a concept where you can stake Ethereum to earn interest. However, the ETH 2.0 network is in the best phase. But it is said that more than $1 billion of ETH is locked in staking. As a result, it is decreasing the market supply of the token.
- Price Of Bitcoin: Bitcoin and Ethereum are two different cryptocurrencies. But Bitcoin price affects the crypto market. When Bitcoin is bullish or rising up, other crypto coins like ETH also gain value.
- High transaction volume: High transaction volume helps increase the number of transaction fees on Ethereum’s blockchain. The Ethereum miners pay the fees, who often sell their tokens on the market. As a result, they increase Ethereum’s supply in the market. Also, when transaction fees are higher, there is a need for ETH tokens. As you will need to pay transaction fees. This helps Ethereum to gain it’s value.
- Rising Competitors: Rising competitors are another reason that can affect Ethereum’s price heavily. One such competitor is the Binance Smart Chain which is similar to Ethereum. But it uses Binance’s own BNB coin for transaction costs instead of ETH. Also, there are other similar networks that are rising up, such as Cardano, Neo, and many others.
Is Investing Ethereum Risky?
In general, investing in cryptocurrency can be a risky business. However, the same goes for any other investment instruments. You are risking your funds for rewards. But cryptocurrencies are much riskier than stocks or mutual funds. As there is no one who controls the price. But yes, they do offer higher potential rewards.
However, the general rule is to invest what you can afford to lose. Also, Ethereum is less riskier. As it is the second largest cryptocurrency by market cap. As a result, it is far less riskier than crypto coins with a smaller market cap.
So that was a quick explanation of how does Ethereum gains its value. I hope this has answered your query. If you have any other questions to ask, please feel free to drop a comment below.