ETH/USD – Volatility Declines Following Speculative Price Swings

As Ether (ETH) celebrated its third birthday on July 30th, the cryptocurrency was showing signs of growing pains as the ETH/USD pair slipped below its 30-day moving average of $460.

The digital token has been slowly losing strength against the US dollar since shooting past $800 in May.

Together, the safe haven of the global economy and the young cryptocurrency are creating big price swings. Ethereum’s volatility (the rate of a change in price from standard returns) is a dizzying 7.2 — almost 10 points above a market-weighted basket of the top six cryptocurrencies.

While being whipped around by ETH, 30-day volatility in the ETH/USD pair has fallen from over 10 in 2016 to below 5 in 2018.

While the stable USD is strengthening on a positive economic outlook for the US economy, ETH is struggling to prove its legitimacy as the currency of the ‘real’ decentralized economy. ETH is the currency for over 1,700 decentralized apps (DApps) running on the Ethereum blockchain, yet it trades like a speculative instrument.

Although arbitrageurs love the wildly diverging currencies, a narrowing ETH/USD price range is inevitable as DApps grow into a productive interlinked economy and this wobbly cryptocurrency matures.

eth usd volatility

The Currency of the Token Economy

As the Ethereum network grows, investors will place more value on its intrinsic rather than speculative properties. Basing the network’s valuation on the future value of its productive assets will lessen ETH volatility and bring it closer in line with USD.

ETH wants more respect as the utility token that runs more than 90 percent of DApps through automated smart contracts. Thirty-five of those DApps have a market cap of over $100 million, among them the leading cryptocurrency exchange Binance with a market value of $1.3 billion.

The token’s price, though, seems decoupled from the productive digital asset base developing on the Ethereum network. Instead, it trades more closely with Bitcoin and other cryptocurrencies that serve as an investment instrument and store of value, and as such, primarily attract speculative investment, so-called hot money. The ETH market capis $42 billion versus $140 billion for Bitcoin.

Ether provides both the gas and currency for the Ethereum network. Both Ether and Bitcoin are used to pay miners (the gas) to lend their computing power to process and validate transactions on decentralized platforms.

On the Ethereum platform, Ether is also used to activate actions such as smart contract executions, trade goods and services, and provide rewards. In other words, like the greenback in the real economy, Ether backs productive activities in the crypto economy.

Any business activity that can benefit from decentralized applications with which users pay only for what they need can set up a ‘shop’ on the digital ledger.

Whether you are a logistics system, a game market developer, or a peer-to-peer lender, you will need to issue Ether or your own coin based on the Ether standards (ERC-20 compliant tokens) to operate your decentralized platform. These commercial activities create real demand for Ether tokens.

Recommended: 8 reasons you should consider accepting Cryptocurrencies

The Intrinsic Value of a Digital Economy

The Ethereum network is in the process of fixing the capacity problems that have made it a target of speculators. Universally agreed is that the network’s transaction speed and scalability need to increase to address network congestion issues already arising.

Like any economy, the Ethereum token economy needs to increase productivity to remain competitive. Ether transaction volume is rapidly growing. ETH has 800,000 daily transactions, jumping almost fourfold from just above 200,000 a year ago.

Currently, 1,765 DAppshave been launched on the Ethereumblockchain, creating 60,000 transactions daily, or close to one-tenth of Ethereum’s daily transaction volume. The other 90 percent of trading is presumably speculation.

While the level of speculative trading activity may seem high, it is comparable with the ratio of hedging-to-speculation in the fiat forex market.

Ethereum has several fixes and plans to start updating the network. Meanwhile, competitive blockchains for DApps using the same and different scalability solutions have been launched.

While some have developed their own blockchains, others, such as speedy transaction processor Zilliqa (aiming for Visa’s benchmark of 8,000 transactions per second), have upgraded the Ethereum network and use the ERC-20 standard, and thus will add liquidity to ETH.

However, strip out a few speculative pricing events and ETH shows signs of strengthening against the dollar. The current 30-day moving average is in the $450 range versus $200 in the year-ago period.

Like open trade in the fiat world, open and interlinked DApps markets will increase trade and transactions in ETH. Chinese blockchainWanchain gave Ethereum the best birthday present.

It demonstrated that the thousands of DApps on the Ethereum network can interoperate. Specifically, it swapped digital assets across the Ethereumblockchain through off-chain blockchains called side-chains.

Future interoperability was one of the major incentives for decentralized marketplaces to choose Ethereum, and specifically the ERC-20 token standard.

With interoperability, Ethereum’s vision of a world marketplace with no central authorities is becoming a reality. Next, Wanchain plans on opening its side-chains to the fiat world. The converging crypto and fiat worlds will lead to an even cozier relationship between Ether and the US dollar.

Recommended: How to become a Certified Cryptocurrency Expert

ETH – Holding Its Value

Will ETH become a better store of value than USD? Currently, like USD, Ether is inflationary, but that will soon change. The Ethereumblockchain is moving from a Proof of Work (mining) to a Proof of Stake protocol. Under PoS, users who own the most ETH become transaction validators.

PoS is expected to make ETH a deflationary token by slowing down the issuance of ETH. As a result, the coin will better hold its value. Whether or not ETH one day rivals USD as ‘safe’ money, the more efficient mining of Ether will lead to a stabler coin.

Owing to these changes in the technology and incentive mechanisms of the Ethereum network, the economy fueled by ETH is not only posed for rapid growth but also will become more interlinked with the real economy, and thus USD.

The day when volatility falls below one percent like that of EUR/USD is far off, but as spreads narrow, speculators will have a harder time pushing around the token since it grows as a bellwether currency of the crypto economy.

Comments are closed.