Without a doubt, Ethereum is the second most popular and valuable cryptocurrency out there. It has the largest market capitalization after bitcoin. as a result, it is considered by many to be a valuable investment instrument. Furthermore, many new technologies are being developed around Ethereum, such as NFT, Dapps, and many more. but the question is, how does ethereum earn its value?
Reading: Why is ethereum valuable
Like any other crypto currency, the price of ethereum depends on the concept of supply and demand in the market. this is the same concept that the stock market follows.
However, unlike stocks, ethereum does not post annual income, profit or loss. therefore it is difficult to determine how the eth coin actually gains its value. so we sat down with sudhir from money mongers, a cryptocurrency focused publication to understand all the factors that determine the true value of ethereum, and that is what he will briefly explain below.
what is ethereum?
ethereum is a decentralized blockchain network. has a peer-to-peer network that securely executes and verifies application code. this application code is known as smart contracts.
You can transact with other users without a central trusted authority like a bank or court with smart contracts. furthermore, transaction records cannot be changed and are verifiable. furthermore, these transaction logs are distributed over the network. As a result, you get full ownership and visibility of transaction data.
These transactions are sent and received through ethereum accounts that you must create. additionally, you must sign the transaction and spend ether or eth coin as a processing fee.
gas fee is a main reason behind the value of ethereum
One of the main reasons etherum gains its value is the gas fee. Every time you send someone eth, you will need to pay a certain number of coins as a transaction fee. this is what we know as the gas rate.
When you send erc-20 tokens, you will need to pay gas fees. however, when sending an erc-20 token, the transactor must also have eth in the same wallet to pay for the transaction. Along with that, when you trade dexes, you will also have to pay gas fees.
As a result, many consider having ethical coins for gas rates. and this is what gives the coin base level demand in the cryptocurrency market.
if you go by the data, when the crypto world saw the defi boom in 2020, the ethereum network experienced high traffic. as a result, the ethereum network earned a huge gas fee.
How is the value of ethereum determined?
As explained above, the price of cryptocurrencies fluctuates based on the market and supply and demand. Just like in the stock market, when you buy or sell a cryptocurrency, there is an order book and a sell order book.
See also: Proof-of-work (PoW) | ethereum.org
now if there is a higher demand for ethereum in the market then the price of the eth coin will go up. Similarly, if there is a large supply, the price of the coin will fall.
but the thing with ethereum is that you need to spend eth when you make a transaction in a decentralized application built on the ethereum blockchain.
As a result, the more transactions are made on the ethereum network, the price of the transaction fee will increase. as transaction fees are based on supply and demand.
what affects the price of ethereum?
A wide range of factors affect market supply and demand. since the price of the eth token is highly dependent 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? Far below are some common reasons:
- erc-20 tokens increase the utility of ethereum: On the ethereum network, developers can code smart contracts to create decentralized applications. these apps usually have their own erc tokens. but still, when it comes to transacting on the ethereum blockchain, you have to spend eth tokens. as a result, this increases the demand for the coin.
- eth 2.0 staking: eth 2.0 is an update to the ethereum network. it is a concept where you can stake ethereum to earn interest. however, the eth 2.0 network is in its best phase. but more than $1 billion eth is said to be locked in staking. as a result, the token supply in the market is decreasing.
- bitcoin price: bitcoin and ethereum are two different cryptocurrencies. but the price of bitcoin affects the crypto market. when bitcoin is bullish or rising, other crypto currencies like eth also gain in value.
- high transaction volume: high transaction volume helps increase the amount of transaction fees on the ethereum blockchain. Fees are paid by ethereum miners, who often sell their tokens on the market. as a result, they increase the supply of ethereum on the market. Also, when transaction fees are higher, there is a need for eth tokens. as you will have to pay transaction fees. this helps ethereum gain its value.
- growing competitors: growing competitors is another reason that can strongly affect the price of ethereum. one of those competitors is the smart chain binance, which is similar to ethereum. but uses binance’s own bnb coin for transaction costs instead of eth. in addition, there are other similar networks that are emerging, such as cardano, neo and many others.
In general, investing in cryptocurrencies can be a risky business. however, the same goes for any other investment instrument. you are risking your funds for rewards. but cryptocurrencies are much riskier than stocks or mutual funds. since there is no one to control the price. but yes, they offer higher potential rewards.
However, the general rule of thumb is to invest what you can afford to lose. furthermore, ethereum is less risky. as it is the second largest cryptocurrency by market capitalization. As a result, it is much less risky than cryptocurrencies with a smaller market capitalization.
so that was a quick explanation of how ethereum gains its value. I hope this has answered your query. If you have any other questions, feel free to leave a comment below.