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Ethereum (ETH) has undoubtedly made a name for itself in the world of cryptocurrency, positioning itself as one of the most valuable digital assets available. As of July 2024, Ethereum has solidified its position as the second-largest cryptocurrency globally, boasting a market cap of over $395 billion. In the past year alone, Ethereum has seen a price increase of over 75%. This significant growth has sparked the interest of many investors looking to capitalize on the potential of Ethereum.
Understanding how Ethereum's price and value are determined is crucial for investors looking to make informed decisions when buying and selling ETH. Unlike traditional assets like stocks or commodities, cryptocurrencies are decentralized and operate on a blockchain network. This means that factors influencing the price of Ethereum are unique to the world of digital assets.
Let's explore the key factors that drive the price of Ethereum to better understand its market behavior.
Ethereum Overview
Ethereum is a decentralized blockchain network that supports smart contracts. Smart contracts execute agreements and holds escrow like traditional contracts. Unlike traditional contacts, you don’t need a third party, such as a court, to enforce the contract. Smart contracts are enforced by sets of code on Ethereum’s blockchain, commonly referred to as dApps.
Smart contracts are Ethereum’s main competitive advantage over Bitcoin. While Bitcoin is a great store of value, it doesn’t allow for complex financial transactions to be done on its blockchain. With smart contracts, you can loan or borrow money, insure property and even trade derivatives. All of these functions have already been made available on Ethereum, and many more protocols are being developed to extend the use case for smart contracts.
Technically, Ethereum is the blockchain network, and ether is Ethereum’s native token. ETH and Ethereum are commonly used interchangeably. Ethereum’s blockchain also allows for new tokens to be created which serve specific purposes. Here are some of the most common types of Ethereum tokens:
- ERC-20 tokens are the most common type of Ethereum token. These types of tokens are fungible tokens –– each coin is identical and holds the same value. To learn about ERC-20 tokens in more detail, check out the Ethereum Foundation’s website. Coins like Uniswap (UNI), Binance Coin (BNB) and Tether (USDT) are ERC-20 tokens.
- ERC-721 tokens are non fungible tokens (NFTs). These tokens all hold their own distinct value and have unique properties tied to each token. NFTs are most commonly used for in-game collectibles, such as video game skins or exclusive in-game items.
- ERC-223 tokens are fungible tokens that are very similar to ERC-20 tokens. While ERC-20 tokens can be lost in a failed transaction, ERC-223 behaves exactly like Ethereum transactions, so they cannot be lost.
- ERC-404 tokens are an experimental type of token that gained popularity in 2024. It combines features of ERC-20 tokens, such as divisibility and fungibility, with features of ERC-721 tokens.
Different types of tokens on Ethereum’s blockchain allow for a variety of use cases. Ethereum smart contracts have the potential to tokenize land deeds, auto loans, financial derivatives and even voting rights.
Brief History of Ethereum
Vitalik Buterin first conceptualized a smart contract-enabled blockchain in 2013. At the time, Buterin was only 18 years old, but he quickly gained the support of blockchain enthusiasts. Ethereum hosted its ICO (Initial Coin Offering) in 2014, and by 2015 it was trading on cryptocurrency exchanges for around $2.
Ethereum’s price first began to skyrocket in spring 2017. At the time, each ETH was trading for around $10, but by the summer of 2017, ETH reached triple digits. ERC-20 tokens were being created by developers daily, although few of these projects had long-term sustainability. Ethereum’s price topped out in January 2018, surpassing $1,400.
During the 2021 bull market, Ethereum's price approached nearly $5,000, recording an all-time high (ATH) of $4,891.70, before retracing over the following years. In 2024, Ethereum still holds the spot as the 2nd largest cryptocurrency by market capitalization with a market cap of over $395 billion.
The cryptocurrency bear market (2022-2023) washed out many ERC-20 tokens that were developed during the bull market. Many of these projects were rushed to the market and under-delivered on their promises.
During the bear market, however, more promising projects on Ethereum were developed. These new dApps (decentralized applications) mainly focus on Decentralized Finance (DeFi). This aims to replace traditional banking services with smart contracts on the blockchain. Decentralized lending, insurance and automated trading are all examples of promising new developments on Ethereum’s blockchain.
It comes as no surprise that DeFi tokens are trending up in tandem with Ethereum because it is the network that hosts the most prominent DeFi tokens.
How is Ethereum Value Determined?
Ethereum’s price is determined by market supply and demand for the cryptocurrency. Just like stocks, cryptocurrency markets have order books with buy and sell orders. An increase in demand for Ethereum will drive the price up and an increase in sell order supply will drive the price down.
Unlike Bitcoin, ether has more intrinsic utility. This is because ETH is needed to transact on any decentralized application built on the Ethereum blockchain. As more transactions on Ethereum occur, the price of transaction fees increases, as transaction fees are based on supply and demand.
Moreover, Ethereum's economic model is arguably stronger than Bitcoin's. While Bitcoin has a set, decreasing inflation with a max supply of 21 million, Ethereum's supply is dynamic. Following Ethereum's EIP-1559 upgrade, ether has been deflationary – getting scarcer as time goes on.
What Affects ETH Price?
Many factors affect the market supply and demand for Ethereum. As stated previously, the market supply and demand for Eth tokens is what solely determines the price of Ethereum. The most important factors that affect the supply and demand for Ethereum are outlined below.
Market Sentiment and Speculation
Investor and trader sentiment regarding Ethereum can impact its demand considerably. Positive factors like good news, technological progress, or support from well-known individuals can increase demand, whereas negative issues such as security incidents or regulatory worries can reduce it.
Utility and Adoption
Ethereum's practical applications, like smart contracts and decentralized applications (dApps), are key to its demand. As more businesses and developers start using Ethereum for different projects, the demand for ETH grows. On the other hand, a drop in adoption could lower demand.
Supply Dynamics
The overall supply of Ethereum can influence its market price. Unlike Bitcoin, which has a maximum supply, Ethereum does not have a set limit and is moving to a proof-of-stake model (Ethereum 2.0) that changes the way new ETH is generated, potentially affecting inflation rates. Adjustments to the supply mechanics or issuance rate can impact market supply and demand.
Regulatory Changes
Government regulations and legal changes related to cryptocurrencies can significantly influence the supply and demand for Ethereum. Tighter regulations may slow down adoption and decrease demand, whereas supportive legislation can attract investment and increase demand.
Competition from Other Cryptocurrencies
The rise of other blockchain platforms and cryptocurrencies that provide similar or enhanced features may impact Ethereum’s market share. If these new platforms become popular, it could result in decreased demand for ETH as developers and users may choose better or more efficient options.
How High Can the Price of Ethereum Go?
Historically speaking, Ethereum’s price has been more volatile than Bitcoin’s. If you invest in Ethereum instead of Bitcoin, you’d be increasing your risk for more upside potential.
Some investors claim that Ethereum’s market cap will surpass Bitcoin’s valuation due to the wide range of use cases on Ethereum. Some analysts predict that Ethereum can reach $40,055.99 in the coming years.
In the 2017 bull run, Ethereum reached a price of about 0.1 Bitcoin per Eth token. Assuming we can reach this proportion again, Ethereum would be trading around $7,000 at the current price of Bitcoin.
However, it’s unlikely that Bitcoin has reached its top for this bull market. In years past, Bitcoin has increased about 10 to 20 times in value each bull run. Bitcoin would have to increase around 125% this bull run to reach $150,000. If this happens and Ethereum reaches its previous Bitcoin proportion, Ethereum would be trading for over $4,000 per token.
Is Ethereum a Good Investment in 2024?
At the beginning of January this year, ETH was trading for around $2,100. As of writing, the price of ether climbed to over $3,000. Many investors believe we're still in the early stages of this bull market, with price predictions for ETH ranging from $5,000 all the way up to over $160,000.
Decentralized finance has recently gained attention from investors with applications in liquid staking and multi-chain lending gaining significant traction. Because no singular entity can control decentralized platforms, they cannot be corrupted by institutions. Decentralized Finance applications like Pendle (PENDLE) and EigenLayer have accrued billions of dollars in deposits, showcasing the demand for Ethereum's on-chain applications.
Ethereum Price Prediction
It’s hard to predict where the price of Ethereum is headed, but if history is any indicator Ethereum has much more room to grow. With new decentralized finance programs being built on Ethereum’s network, more ETH is demanded to pay transaction fees. This is why some investors see Ethereum as the economic bandwidth of the internet. ETH price forecasts from experts and analysts see the token could hit $42K by year 2030.
Bitcoin or Ethereum?
The biggest advantage Ethereum has over Bitcoin is its ability to host smart contracts on its blockchain. Bitcoin is great to use as a store of value, but its use-case in DeFi is limited. Also, some investors believe that Bitcoin has less growth potential than Ethereum.
While Bitcoin already boasts a market capitalization over $1.3 trillion, Ethereum's market cap sits at about a fifth of Bitcoin's. This means less capital inflows are needed to push the price of ether upwards, making it easier for ETH to appreciate than Bitcoin, given the same demand.
Best Exchanges for Ethereum
To buy ETH you need to set up a cryptocurrency brokerage account. Coinbase is a great option for beginners since it’s easy to use and offers a mobile app. Gemini is another cryptocurrency exchange that offers a wide variety of crypto tokens, including Ethereum.
Alternatively, you can use a decentralized exchange if you already own cryptocurrencies. Decentralized exchanges offer a platform for you to exchange your cryptocurrencies for Ethereum or any other ERC-20 token.
Unlock the Potential of Ethereum
As with any financial asset, the price of ETH is determined by a variety of factors that influence supply and demand. As the cryptocurrency market continues to evolve, understanding the factors discussed above, investors can make more informed decisions when trading ETH and navigate the volatile crypto market effectively.
Frequently Asked Questions
How is the Ethereum price determined?
The price of Ethereum is shaped by the dynamics of supply and demand in the cryptocurrency market, which are affected by factors like market sentiment, trading volume, and investor behavior. Furthermore, external elements such as regulatory updates and technological advancements can also influence Ethereum’s price.
What controls the price of ETH?
The price of ETH (Ethereum) is mainly determined by supply and demand in the cryptocurrency market, shaped by investor sentiment, market trends, and demand for decentralized applications and smart contracts. Moreover, external factors like regulatory changes, technological advancements, and macroeconomic trends can impact ETH’s price movements.
How do I back up my ETH wallet?
To create a backup of your Ethereum wallet, find the recovery seed phrase or private keys and keep them in a secure place, like a safe or fireproof box. You can also export the wallet data to a secure file format and save it on an encrypted USB drive or in cloud storage that has strong security protections.