Ethereum Outperforms Bitcoin In Cryptocurrency Horse Race, Price May Still Have A Way To Go

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Ethereum (ETH-USD) challenges large cryptocurrency underperformance, its recent price gains reflecting renewed interest in smart contract platforms that are rapidly being co-opted by the boom in non-fungible tokens (NFT) .

Amid new investor interest, the digital coin’s performance even eclipsed that of Bitcoin (BTC-USD), which languished for more than a month after setting a new record high of nearly $ 68,000.

Currently trading around $ 4,400, Ethereum is the second largest cryptocurrency by market cap. Like Bitcoin, ETH has turned into a sort of reserve currency for crypto investors. It could also mean headwinds for the longer-term asset, not to mention an opportunity for competing blockchains.

Unlike BTC, which is most often used as a store of speculative value like gold, the primary use of ether is to provide fuel or gas for transactions through the Ethereum blockchain.

“As the price increased, it became very expensive to obtain [transaction] space on a block of the Ethereum blockchain, ”Aaron Lammer, decentralized finance (DeFi) specialist at crypto-focused quantitative hedge fund Radkl, told Yahoo Finance.

“There are still a large number of people waiting to be transferred to DeFi and NFT, we could see the price of Ether rise even more and only really become available to people who use it institutionally at large scale. Lammer added.

As Lammer explained, one of the consequences of the high fees is that projects and users have a financial incentive to ditch Ethereum for cheaper smart contract-enabled blockchain alternatives like Solana, Avalanche, and Terra.

It is no coincidence that tokens from these chains competing behind smaller digital coins like Terra (LUNA1-USD), Avalanche (AVAX-USD) and Solana (SOL1-USD) have also performed well over the past month. .

The Terra token doubled last week, overtaking the Shiba Inu coin (SHIB-USD) as the 12th largest cryptocurrency with a market cap of $ 25 billion.

The story continues

Similar to Ripple (XRP), the token’s creator, Terra Labs, is also at the center of the U.S. Securities and Exchange Commissions investigation into whether some of the world’s major cryptocurrencies are in fact securities. At least for now, ETH does not suffer from a similar regulatory uncertainty.

However, ETH’s developer team initiated a drop in parts supply during its August upgrade, which will continue to exacerbate transaction costs – and potentially cause its proposal to value is better suited to larger institutions that can afford to pay the fees.

“Applications, like within DeFi, compete for institutional capital, which is less concerned with high fees due to the more nominal sums of money they transact,” said Mason Nystrom, research analyst at Messari.

Data tracked on watchtheburn.com, a project supported by the Ethereum Foundation, shows how quickly burnt ETH has increased since the Ethereum upgrade. The net supply (block rewards issued – ETH burnt) fell 80% from August to November.

The challenges of DeFi

As Lammer pointed out, another reason for the rise in the price of Ether can be attributed to investor interest in DeFi. The emerging sector is allowing investors to reap loan returns that are making regulators nervous and salivating Wall Street over how to exploit the market.

“Much of DeFi is based on the idea of ​​individual investors providing capital in decentralized markets,” Lammer explained.

“Except when you trade, you’re actually in a pool that people have contributed money to, so you’re rewarded in chips. Other services are lending platforms, where you can lend your Bitcoin, or Ethereum, or all kinds of tokens in exchange for a percentage paid in APR. [annual percentage rate],” he added.

Such financial applications may seem overwhelming to some investors, but returns on asset lending within exchanges and DeFi protocols range from 15% to 45% as an annual percentage (APR). For context, this is exponentially higher than what Americans can earn by holding US dollars in a savings account (0.04% according to the FDIC).

In October, Securities and Exchange Commission chairman Gary Gensler told Yahoo Finance that DeFi “was going to end badly” unless protections were tightened for those who invest. The agency has already acted on the assumption that lending products from centralized crypto companies must also be registered as securities.

Meanwhile, attackers have stolen more than $ 700 million this year alone, with the latest exploit coming at the expense of the DeFi Autonomous Organization (DAO), also known as BadgerDAO. The crypto hack could cost the organization $ 120 million, according to one of its members.

David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.

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