Ethereum (ETH) has outpaced Bitcoin (BTC) this year, rising 33% year-on-year. This surge in prices is not just due to the potential approval of cash exchange-traded funds (ETFs), according to a research report from broker Bernstein.
One of the main factors contributing to Ether’s rise is deflationary supply. Since the Ethereum blockchain transitioned to a proof-of-stake consensus model in September 2022, Ethereum supply has remained constant. This aspect of cryptocurrency is often overlooked, but it plays a significant role in its value.
Another important factor is the amount of Ethereum locked up. Currently, only 11% of ETH is held on exchanges, indicating that more cryptocurrencies are being staked or utilized in decentralized finance (DeFi) smart contracts and layer 2 solutions. This trend is driven by the increase in Ethereum transaction fees due to increased blockchain activity such as DeFi, NFTs, and tokens.
The introduction of layer 2 networks will provide scalability and low fees to the Ethereum ecosystem in 2023, boosting decentralized finance. Additionally, regulatory clarity surrounding tokens could further encourage participation in the DeFi ecosystem by paving the way for revenue sharing with token holders.
Dencon’s Ethereum blockchain upgrade, scheduled for March this year, is expected to bring significant improvements to the layer 2 network and reduce transaction costs. This upgrade will relieve congestion on the mainnet and increase the volume of the ecosystem.
Overall, the combination of deflationary supply, increased staking activity, DeFi growth, layer 2 scalability improvements, and future protocol upgrades positions Ether for continued growth and value creation. Bernstein therefore sees Ethereum as a potential “institutional darling” in the cryptocurrency space.
The resurgence of decentralized finance and innovation within the Ethereum ecosystem is setting the stage for Ether’s continued success in the coming months. If this trend continues, Ether could solidify its position as the preferred asset for institutional investors seeking exposure to cryptocurrency markets.
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