Why is Ethereum price going parabolic?

The price of the world’s second largest cryptocurrency, ether, hit a new all-time high of US $ 1,440 (£ 1,050) on January 19. This breached a previous high set three years ago and gave ether a total value (market capitalization) of US $ 160 billion, although it has since fallen back to around US $ 140 billion.

Ether, which runs on a technology system known as the ethereum blockchain, is worth over ten times the price it was when it bottomed during the COVID market panic of March 2020. And the cryptocurrency is still only five years old. In part, this remarkable rise in the value is due to excess money flowing into all the leading cryptocurrencies, which are now seen as relatively safe store-of-value assets and a good speculative investment.

Ether / US $ price

But ether’s price rise has even outstripped that of the number one cryptocurrency, bitcoin, which “only” had a seven-fold increase since March. Ether has outperformed partly due to several improvements and new features being rolled out over the next few months. So what are ether and ethereum and why is this cryptocurrency now worth more than corporate giants such as Starbucks and AstraZeneca?

Ether and bitcoin

Blockchains are online ledgers that keep permanent tamper-proof records of information. These records are continually verified by a network of computer nodes similar to servers, which are not centrally controlled by anyone. Ether is just one of over 8,000 cryptocurrencies that use some form of this technology, which was invented by the anonymous “Satoshi Nakamoto” when he released bitcoin over a decade ago.

The ethereum blockchain was first outlined in 2013 by Vitalik Buterin, a 19-year old prodigy who was born in Russia but mostly grew up in Canada. After crowdfunding and development in 2014, the platform was launched in July 2015.

As with the bitcoin blockchain, each ethereum transaction is confirmed when the nodes on the network reach a consensus that it took place – these verifiers are rewarded in ether for their work, in a process known as mining.

But the bitcoin blockchain is confined to enabling digital, decentralized money – meaning money that is not issued from any central institution unlike, say, dollars. Ethereum’s blockchain is categorically different in that it can host both other digital tokens or coins, and decentralized applications.

Decentralised applications or “dapps” are open-source programs developed by communities of coders not attached to any company. Any changes to the software are voted on by the community using a consensus mechanism.

Perhaps the best known applications running on the ethereum blockchain are “smart contracts”, which are programs that automatically execute all or parts of an agreement when certain conditions are met. For instance, a smart contract could automatically reimburse a customer if, say, a flight was delayed more than a prescribed amount of time.

Many of the dapp communities are also operating what is known as decentralized autonomous organisations or DAOs. These are essentially alternatives to companies and seen by many as the building blocks of the next phase of the internet or “web 3.0”. A good example is the burgeoning trading exchange Sushiswap.

Ethereum has evolved and developed since its launch six years ago. In 2016, a set of smart contracts known as “The DAO” raised a record US $ 150 million in a crowdsale but was quickly exploited by a hacker who siphoned off one- third of the funds. However, since then, the ethereum ecosystem has matured ca However. While hacks and scams remain common, the overall level of professionalism appears to have improved significantly.

Why the price explosion

Financial interest in ether tends to follow in the wake of bitcoin rallies because it is the second-largest cryptocurrency and, as such, quickly draws the attention of the novice investor. All the same, there are other factors behind its recent rally.

The first is the pace of innovation on the platform. Most activity in the cryptocurrency space happens on ethereum. In 2020, we saw the emergence of decentralized finance (DeFi). DeFi is analogous to the mainstream financial world, but with the middleman banks cut out.

Users can borrow, trade, lend and invest through autonomous smart contracts via protocols like Compound, Aave and Yearn Finance. It sounds like science fiction, but this is no hypothetical market – approximately US $ 24 billion is locked into various DeFi projects right now. Importantly, DeFi allows users to generate income on their cryptocurrency holdings, especially their ether tokens.

The second factor behind the ether surge is the launch of ethereum 2.0. This upgrade addresses major concerns impacting the current version of ethereum. In particular, it will reduce transaction fees – especially useful in DeFi trading, where each transaction can end up costing the equivalent of tens of US dollars.

Ethereum 2.0 will also eliminate the wasteful mining currently required to make the ethereum blockchain function (the same is true of many other cryptocurrencies, including bitcoin). Within the year, ethereum should be able to drop the need for vast industrial mining that consume huge amounts of energy.

Instead, transactions will be validated using a different system known as “proof-of-stake”. The sense that ethereum addresses problems like these quickly rather than letting them sit could prove a major differential from the sometimes sluggish and conservative pace of the bitcoin development culture.

A final factor is the launch of ethereum futures trading on February 8. This means that traders will be able to speculate on what ether will be worth at a given date in the future for the first time – a hallmark of any mature financial asset. Some analysts have said the recent bitcoin rally has been fueled by traditional investment firms, and the launch of ethereum futures is often touted as opening the doors for the same price action.

However, as every seasoned cryptocurrency user knows, both currencies are extremely volatile and are as as extremes as rise by them. Bitcoin’s price fell 85% in the year after the last bull market in 2017, while ether was down by 95% at one stage from its previous high of US $ 1,428.

Whatever the valuation, the future of ethereum as a platform looks bright. Its challenge is ultimately external: projects such as Cardano and Polkadot, created by individuals who helped launch ethereum itself, are attempting to steal ethereum’s crown.

But as bitcoin has shown, first-mover advantage matters in cryptocurrency, and despite bitcoin’s relative lack of features it is unlikely to be moved from its dominant position for some time. The same is most likely true for the foreseeable future with ethereum.

Bitcoin and Taxes

Taxes are a complicated matter with many rules for determining what kind of income is taxable, what is not, and which assets are subject to inventory. Meanwhile, the cryptocurrency and the government’s stance on it are equally complicated, leading many to question the relationship between Bitcoin and taxes.

In the US, for example, you are subject to tax on any money you receive in the form of payments for services and products. Applied to bitcoin, this principle does not change. Bitcoins exchanged with others are treated as your income, meaning you have to pay income tax. Bitcoin earned through trading or exchanging bitcoin is also seen as profit, capital gains, like gold, so it is taxable. Bitcoins mined will be deemed profitable from mining and are taxable with the accrual consumption that can be deducted (such as computer electricity). When miners sell their bitcoins, they pay tax if the bitcoins increase in value when they sell compared to when they mine.

The US Internal Revenue Service of 2014 outlined a note on “virtual currency”, which provides some information about bitcoin as an inherently taxable asset. However, users need to study the tax terms carefully and find out how their governments classify cryptocurrencies like bitcoin.

To prepare to pay taxes, bitcoin holders need to be extremely cautious about how much a bitcoins in local currency are worth. In addition, users should also keep detailed bitcoin spending reports and store the bitcoin price at the time it was used to prevent those spending being deleted.

Hiring an experienced accountant will help ensure your tax returns are correct. In addition, there are many services that help users pay Bitcoin tax, such as CoinReporting and Bitcoin Taxes.

While there is no fun in paying taxes, it is still important to pay attention to properly storing and reporting your Bitcoin earnings.

Dislaimer: This is information provided in the form of a personal blog, not general information or investment advice. We are not responsible for your investment decisions.

Bitcoin price sits at $ 15500 when there are many Bitcoin whales selling

Bitcoin whales sold the highest amount of BTC since March, which is a bullish sign for BTC price based on previous market cycles.

The price of Bitcoin (BTC) has reclaimed $15,500 on Nov. 11 after whales sold the highest amount of BTC since March. In the past cycles, the dominant cryptocurrency typically rallied after a sell-off from whales.

On March 12, for instance, the All Exchanges Inflow Mean (MA7) indicator hit 3. At the time, BTC declined to as low as $3,596 on BitMEX after seeing cascading liquidations.

Since then, the MA7 has never increased above 1.7. On Nov. 11, for the first time since March, the MA7 neared 2. This indicates that whales sold a significant amount of BTC in the past few days.

All Exchanges Inflow Mean. Source: CryptoQuant

Why does big Bitcoin sell-off indicate a bull trend?

Bitcoin whales, or high-net-worth individuals who hold large amounts of BTC, do not necessarily short BTC because they are bearish.

Many whales prefer to take profits amidst a bull run and build up positions along the way. This is because whales trade substantially larger positions than most retail traders. As such, they seek liquidity and high buyer demand to sell or adjust their positions.

Bitcoin tends to rally after a whale-induced sell-off as it decreases selling pressure on the cryptocurrency in the short to medium term.

While the Bitcoin market has become more evenly balanced among retail traders, institutions, and whales, high-net-worth individuals still impact the market.

Ki Young Ju, the CEO at CryptoQuant, emphasized that Bitcoin has historically rallied after “victim whales” deposit BTC to exchanges. He wrote:

“The buy-the-dip indicator. Buy $BTC when victim whales deposited to exchanges after the plunge.”

Bitcoin has seen extreme volatility in the past week, possibly as a result of whales taking profits. However, every major dip was aggressively bought up by other whales and retail investors.

Major Bitcoin dips bought up since early November. Source: TradingView.com

BTC recorded large drops on Nov. 8, Nov. 10 and Nov. 11. Bitcoin recovered from every pullback with strength, rebounding to previous support levels within a matter of hours.

On-chain fundamentals are also highly positive

Atop the favorable technical structure of Bitcoin, on-chain fundamentals signify an overall bullish outlook.

According to Glassnode’s data, the number of active Bitcoin addresses achieved a multi-year high. Elias Simos, Bison Trails protocol operations manager, said:

“Did you know that $BTC active addresses hit a multi-year high this week, and are now at Jan-2018 bubble top levels? In the chain’s entire history, it’s only been about 1.5 months that aa’s stood at > 1M. How about that.”

Daily active addresses is an important on-chain metric for Bitcoin because it could indicate two key trends.

The number of active Bitcoin addresses. Source: Glassnode

First, retail investors might be increasingly accumulating BTC and transferring to personal wallets. This shows an intent to “HODL” Bitcoin for a prolonged period.

Second, there could be an increase in over-the-counter (OTC) deals, particularly among whales and high-net-worth individuals.

The combination of positive technical and fundamental trends raises the probability of a broader rally before the end of the year. With the halving occurring just 6 months ago, the chances of a more sustainable uptrend remain high.

The world’s leading bank issues bonds and can buy them with Bitcoin

China Construction Bank has used blockchain technology to issue the first tranche of a planned $3 billion worth of debt.

China Construction Bank has partnered with a Hong Kong-based fintech to issue the first-ever blockchain-based digital security issued by a Chinese financial institution.

One of the “Big Four” banks in the People’s Republic of China, CCB is ranked the second largest bank worldwide by total assets as of fall 2020.

The megabank’s plan with the new blockchain-based debt issuance is to raise up to $3 billion in total, starting with a tranche of $58 million, from individuals and institutions. The digital bonds will be issued through an offshore branch of CCB in Labuan, Malaysia, at a minimum of as little as $100 each, and will have a tenor of three months. They pay an annualized interest of Libor plus 50 basis points, or roughly 0.75%.

The innovation is that these bonds are being used as tokenized certificates of deposit on the blockchain, which supports the issuance of such small-sum bonds; non-blockchain-based bonds are typically sold at higher minimums, and are therefore limited to professional investors or other banks.

Moreover, the tokenized certificates of deposit will be tradeable on the Fusan exchange. The exchange, which is regulated in Labuan, will launch live trading of the bonds on Nov. 13. Notably, as Fusan supports cryptocurrency trading, traders will be able to exchange Bitcoin (BTC) for U.S. dollars in order to purchase the bonds. The transactions will be charged at a commission.

Fusang’s CEO Henry Chong has told reporters that if the bonds are popular, the digital exchange intends to initiate similar products denominated in other currencies. The bonds’ 0.75% annualized interest is higher than most U.S. dollar bank-deposit rates, as the Wall Street Journal has emphasized.

Tax residents of the United States and China, as well as entities or persons in Iran and North Korea, will not be able to purchase the digital security. All proceeds from the issuance will be deposited at the CCB’s offshore Labuan branch. Labuan is a small island, and is described by the WSJ as a tax haven.

CCB is “not dealing in bitcoin or cryptocurrencies,” but rather, “taking bank deposits, which is our core business,” CCB Malaysia’s COO Steven Wong has stressed. The offering is nonetheless being heralded as a big innovation. This is “the first publicly listed debt security on a blockchain,” said Felix Feng Qi, the CEO of CCB’s offshore Malaysian business and principal officer of the CCB Labuan branch.

Up to now Bitcoin is the best reserve asset

You could easily lose up to 90% of your fiat savings to inflation alone in 100 years, but that would never happen with Bitcoin.

At the time of writing this article, around 3.6% of Bitcoin (BTC) is locked up in long-term holdings by institutional investors. According to the data, 13 entities have amassed close to 600,000 BTC — about 2.85% of all Bitcoins and worth approximately $6.9 billion.

The list includes MicroStrategy at the top, with close to 38,250 BTC (about $450 million). The second on the list is Galaxy Digital Holdings with 16,651 BTC (about $198 million). The third, with 4,709 BTC, is the payment company Square Inc., founded by Twitter’s CEO Jack Dorsey. Separately, some companies help their clients invest in BTC. One such company is Grayscale Investments through its GBTC trust, which holds around 450,000 BTC.

With that stated, the amount of Bitcoin that publicly traded companies hold as a reserve is a tiny fraction of the corporate treasuries around the world. Indeed, the actual amount of cash held in reserves is in the trillions of U.S. dollars. But consider this: Nine companies in the S&P 500 are sitting on close to $600 billion in cash and short-term investments, and if just 5% (or $30 billion) of that amount is converted into Bitcoin, the price could easily increase fivefold.

Of course, there is the question of where to place Bitcoin in company investment portfolios. The most likely category is “alternative investment.” The need to strike a balance between traditional and alternative investments might reduce the appetite the market might have for the cryptocurrency.

Nevertheless, the potential demand is still huge. As mentioned in a recent report by Fidelity, the alternative investment market grew to $13.4 trillion by the end of 2018, and very little of it was in Bitcoin. It might take converting as little as 5% of that to see the Bitcoin price moon.

Some investment firms have chosen to create entirely separate holding companies for Bitcoin and other crypto assets. For example, Stone Ridge launched New York Digital Investment Group, which today has over $1 billion worth of crypto.

What drives this movement?

To understand this phenomenon better, I recently had an enlightening chat with Michael Saylor, the founder of MicroStrategy. In particular, I found his pick of 100 years as the base on which to measure the success or failure of a reserve asset very interesting.

Of course, most companies are founded with the expectation that they are going to be around for quite some time — centuries, preferably. Even for individuals, it still makes sense to look at how investments might change over a hundred years, as a person might amass wealth intended for heirs or even causes that are close to the heart, such as climate change. As Michael Saylor said:

“An excellent way to evaluate any investment is to take $100 million and move it forward a hundred years and ask the question what happens. If I had $100 million worth of currency in any of the largest cities of the world in the year 1900, and I went forward for 100 years, and I put the money into the best bank in the city, I have two types of risks; counterparty risks and inflation risk. Regarding counterparty risk, every major bank in every major city around the world failed in 100 years. And that is a 90% probability you lose everything.”
Of course, the most obvious weakness to spot when considering the performance of any reserve asset in 100 years is inflation. Out of all asset types, fiat currency experiences the most inflation over time. For example, what $5 could buy in the 1920s is far more than what it can in 2020. According to a website that collects and processes government data for the benefit of the public, the U.S. dollar loses close to 2% of its purchasing power every year.

What about the other assets?

While real estate might seem like a great asset to hold as a reserve for the long term, it is susceptible to losing value through things like taxes. More importantly, though, real estate faces risks that come with changes in regulation or public governance. In the span of 100 years, it is highly likely that a government that respects private property ownership is replaced with one that does not. This has already happened several times around the world in the last century.

Meanwhile, stocks also face risks of poor management and regulation changes. Michael Saylor gave the example of power and water utilities, industries in which highly lucrative companies have become nationalized. We cannot say with conviction that in the next 100 years, internet service providers, for example, aren’t going to be turned into public utilities.

Even gold and other precious metals run into issues when you look at them in terms of 100 years. While they appreciate over time, the logistics of holding them can be stressful. You could use third-party storage services such as commercial banks, but history has taught us that gold can get lost even there, especially during wartime or political upheavals such as revolutions. This has also happened several times in the last century. During World War II, large masses of gold were stolen by both state and non-state actors. Similarly, during the Soviet revolution, a lot of privately owned gold was seized by the incoming government.

What about Bitcoin?

As for now, Bitcoin has no counterparty risks. In other words, we don’t have to worry that the actions of a third party are going to lead to a significant loss of the asset’s value. It is also protected from risks that might come from regulation or extreme change in government policy. The holders of Bitcoin are always going to be in complete control of it.

As a peer-to-peer network, the Bitcoin platform gives holders of the asset a level of control that bypasses regulation or the use of state force. Meanwhile, we are almost assured that its value will continue growing over the years, as the supply is determined and the emission rate of new units halves every four years.

The autonomy and increasing scarcity of Bitcoin is most likely going to drive its value up over time, and it would come as no surprise in 100 years to see its price considerably higher than where it is today.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision.