A year of trading Ethereum
2017 was Ethereum’s year. In early January 2017 ETH was trading at $9.54. A year on ETH was selling for more than $1,116. An epic, out-of-this-world performance. (The total market cap for cryptos in Jan 2017 was $17.7bn rising to close to $500bn by December).
Roll forward to May 2018 and ETH’s value is down to just over $700. The volatility – for all cryptos – remains extreme.
2017 ushered in several value-defining moments with spring delivering the most momentous: in early March the formation of the Enterprise Ethereum Alliance (ETA) was announced, spanning membership across the institutional financial, engineering and IT landscape.
Institutional legitimacy for ETH was therefore more or less certified and a queue of blue-chip names behind the ETA lined up to prove the shift: BP, UBS, Accenture, Santander, Microsoft and JP Morgan, to name a handful.
By May, ETH had hit $200 and there was increasing speculation about the “flippening” – the point at which ETH would overtake bitcoin in value. But by early summer pressure on all cryptos were bearing down. The flashpoint came on 21 June when a crash from the Coinbase GDAX exchange saw valuations plummet, triggering many stop losses: ETH sank to just $13.
Yet within weeks it powered back to more than $300, with markets still stunned that Ethereum founder Vitalik Buterin had met, pre-crash, Vladimir Putin (Russia continues to seek ways to diversify its economy and blockchain is a contender).
The $400 mark loomed closer by August, but valuations were burning again by the autumn – the response to South Korea’s ban on ICO funding. By November ETH had raced beyond $500, rising to more than $800 by 19 December. Like most cryptos, ETH was clobbered by the larger 30% crypto slump just before Christmas on 22 December.
Evaluating the trading scene
Currently around 1.5%- 4% of Ethereum’s market cap is traded on a daily basis. But whiplash price volatility means cryptoassets can’t be assessed conventionally. Especially in the last 18 months. “It’s a complete bull***t market,” one trader told OpenLedger. “Normal rules don’t register. They’re [cryptos] 1% utility, 99% fake news, greed and hope. Right now, trading cryptos is like trading penny stocks on steroids and heroin.”
It’s difficult to estimate the number of Ethereum day traders with any accuracy. There are roughly 1.5 million ETH wallets (much fewer than the 14 million BTC wallets).
Assuming just 10% of these holders do day trading it is only likely to be a few hundred thousand people, says Julian Zegelman, founding partner of TMT Blockchain Fund. “Compare that to tens of millions of equity day traders worldwide – the crypto trading industry is in its infancy.”
Bitcoin, Litecoin and Ethereum remain easier to evaluate, relative to the asset class, because of lower trading volatility. Despite huge market immaturity Ethereum remains a clear favourite. It’s the WordPress of the crypto space, build-able and popular.
“What sets it [Ethereum] apart,” Luke Shipley, a co-founder of R_Block, a blockchain based work identity business, “from the other top ten cryptos is the usage of non-speculative volume. Ethereum is the most popular blockchain to build on top of because of its smart contract functionality and therefore its ability to create tokens.”
Ethereum still has a large and current (May 2018) advantage because it possesses one quality that many would kill for says investor Sian Kidd. The L-word – love. That build-up of feeling got especially intense in 2017.
“Ethereum is a much loved crypto – probably the most loved at the moment because it’s made a lot of people money. And Ethereum has a much-loved founder in Vitalik Buterin.” With the determination to throw everything up in the air and start again. “Yes,” says Kidd. “He has the brains, wealth and the influence to do that.”
Big changes – proof of stake and the futures market
2017 saw more awareness of ‘Proof of Stake’ – how blockchain transactions got mined and verified. “Mining has become inefficient and not nearly as decentralized as originally hoped due to financial constraints,” Julian Zegelman thinks.
To aid the transition from proof-of-work – a blockchain process increasingly energy-hungry and ‘non-green’ – to proof-of-stake, various systems are being tested, though the bottom line remains: the Ethereum network must be kept fully synchronised.
In terms of currency markets, there’s “negligible” difference on how the dollar and euro compared to Ethereum’s performance. Euro-dollar has oscillated between 1.1-1.3 for nearly three years now – the extreme volatility of cryptos is the opposite of what most people want from a currency.
The much bigger news for Ethereum is the futures market. Wall Street or institutional money generally doesn’t move into an asset until there is a futures market in place.
“That’s how they [Wall Street] control asset prices,” one investor told OpenLedger. “If they want to suppress or manipulate the price of an asset they do it through the futures market. That means you can do a naked short. If I’m Goldman Sachs I can then buy and sell $10m of bitcoin, even though I don’t own $10m of bitcoin, and that drops the price.” Which is why bitcoin has now slipped from $19,500 to $6,000, he adds.
Big Ethereum players remain South Korea, US and China. Around 36% of South Korean males own cryptos. Compare that to the UK (around 0.1%).
For now cryptos remain in the ‘Netscape-AltaVista-Nokia’ phase. There’s no out-and-out clear Google or Facebook yet. Those that do survive “will wipe the floor, like Amazon, Google, Microsoft and Dell,” one investor told OpenLedger.
2018 and beyond
Julian Zegelman says it’s unclear whether Ethereum, lodged in a brand new asset class – a new asset class hasn’t been seen since the introduction of government gilts in the 1700s – will be judged a legal currency, commodity, digital good or security.
The lack of regulation in the US and other jurisdictions on crypto wallet ownership remains unclear. Regulatory issues rear on how funds may hold Ethereum and be compliant with custody and audit rules. There’s also the susceptibility to pricing manipulation and insider trading, Zegelman adds; a big risk.
“Traders are getting more comfortable with ETH as a legitimate liquid crypto currency not far behind Bitcoin. Lawyers are worried that the SEC may declare Ethereum (as well as bitcoin) to be considered securities. This will severely impede liquidity and ability to trade ETH for the general public if it does happen.”