Ethereum and the world of Cryptos. Love them or hate them?

Marius Paun | London, UK | Senior dealer | Wednesday, 27th November 2019

Part of the cryptocurrencies’ world, Ethereum was released in July 2015 and currently has a market capitalization of around $16 billion (according to second only to bitcoin ($131 billion). But what makes it rather different from bitcoin is its dual-use. It is both a cryptocurrency and a platform which enables other issuers to get their tokens to market. One example widely circulated is that Ethereum is for the crypto space what Google represents for the internet.

Currently, over 90% of all tokens are Ethereum based tokens. That means they don’t have their own platform and are created on top of platform cryptos, like Ethereum. So no surprise to see why so many people back Ethereum to take over eventually as the number one crypto despite bitcoin’s advantage of being the ‘firstborn’.

But why have cryptos have become so talked about? It’s because they could potentially solve the problem of trust. Cryptos cannot be forged, no one can send fake cryptos and you can’t pretend you have sent or received cryptos. And that’s because all the information is permanently recorded into a ledger called blockchain and is available for everyone to have a look. Furthermore, no one controls that ledger. It is created and maintained by users all over the world. Anyone can become a miner and there is no central authority to restrict or control the network. In other words, the blockchain is a decentralised ledger.

Since early 2009 when bitcoin was the first crypto to appear, things have evolved. For example, first-generation used blockchain to record financial transactions. The second-generation used blockchain to execute so-called smart contracts. They have been named that because they execute automatically without the need of a third party to verify them. Smart contracts bring more efficiency and transparency into the traditional world of deal-making and contract enforcement.

Let consider the following example; there is a business which provides a service. The customers pay for that service at a price agreed in advance, which is then delivered in a timeframe and according to a standard also previously agreed. That is the basic contract used in a traditional way.

Smart contracts automate the whole process which means faster execution, more reliable and fewer costs and the need for intermediaries is reduced.

Another big advantage for cryptos in general, and ether, in particular, is that in times of distress, portfolio managers will be on the lookout for uncorrelated assets to offer that extra diversity, and therefore stability; and cryptos offer just that.

However popular cryptos like bitcoin and Ethereum are, they still have a problem on their hands. They don’t scale very well. Which means there is a limit to the number of transactions or contracts that can be executed per second. Ethereum can only do about 15 transactions per second and, so far, the efforts to improve this has not borne fruits. As a comparison, VISA processes around 2,000 transactions per second on average and maxes out around 45,000. So if cryptos are to get wide-scale adoption, they need to address that issue rather fast.

To mitigate the risk from a prolonged trade dispute, China has been accused by the White House of embarking on devaluing its currency in order to maintain the competitiveness of its massive exports. Whether true or not, the Chinese know they cannot devalue too abruptly as that would potentially trigger a significant capital flight. How do you stop that?…. Capital controls….which for the world of cryptos means both an opportunity and a risk.

Recently Central Bank of China has announced its intention to crack down on blockchain which has sparked a sharp selloff for all cryptos. Ethereum reached a high of $1396 during early 2018 capitalising on the buying fever of late 2017 but has been on a downtrend ever since. It started 2019 around $135 and although at some point in late June it reached $350 it has retraced to $148.Clearly, the notoriously high volatility is still present in the crypto space!

The chart clearly points downwards with both short and medium-term moving averages pointing south. In addition, in August this year the 9 weeks MA crossed below the 21 week MA signalling further trouble.

On the downside, we can see support at $113 followed by psychologically important $100 mark. Above, $150 is the next immediate resistance. Then there is a tough hurdle at $190-$200 range.

We also note the $20 gap between low of July 12 ($261) and high of July 15 ($231) which eventually should be filled.

So fundamentally one can find plenty of reasons to consider the great potential for Ethereum and cryptocurrencies in general. Nonetheless, in the short term, it might be a different scenario at least from a technical point of view.