Why Is Ethereum Valuable?

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Contributor, Benzinga
Updated: November 2, 2022
verified by Ryan McNamara

At this point in time, Bitcoin and Ethereum are household names that are largely synonymous with cryptocurrencies and blockchains as a whole. Despite this ubiquity, you might wonder why Ether commands such a high value, especially since there’s no strictly fixed supply along the lines of Bitcoin’s 21 million issuance.

What Is Ethereum?

Ethereum is the blockchain that Ether, the second biggest cryptocurrency by market capitalization (behind Bitcoin) runs on. The Ethereum Network is a decentralized blockchain platform that securely gives users the ability to periodically execute chunks of code called smart contracts in exchange for a service fee referred to as “gas.” Running these smart contracts on the Ethereum Network enables decentralized transactions and interactions with individuals who have an Ethereum wallet. The network aspect of Ethereum adds a nuance in Ether’s utility compared to that of Bitcoin and other cryptocurrencies. Ethereum 2.0 was released in September of 2022 by the Ethereum Foundation, improving the performance of the blockchain.

Ethereum Use Cases

Since Ether has a $350 billion market cap, the use cases of the Ethereum Network must clearly be manifold, substantial and constant to justify this valuation. They seem to, as almost every significant trend in the blockchain space exists in some form on the Ethereum Network. Across non-fungible tokens (NFTs), decentralized finance (DeFi), smart contracts and Layer 2 blockchains, Ethereum is the default blockchain and has been for quite some time. Its dominance is evident in that new Layer 1 blockchains feel the need to tout themselves as “Ethereum-killers.”

Most of the time, these Ethereum killers have lower transaction fees, or they’re branching into a new use case that the Ethereum Foundation would never have considered. In this way, Ethereum serves as the backbone for much of the growth in the crypto sector, allowing new projects to reduce gas fees.

Why Does Ethereum Have Value?

While earlier cryptocurrencies like Bitcoin primarily derive utility and value from being a store of value and an intermediary between other cryptocurrencies, Ether constitutes the denomination that the gas fees that the Ethereum Network — a distributed computing network used by various smart contracts and protocols thanks to the Ethereum Virtual Machine — uses. In this sense, Ether’s value is backed by the value of the use cases of the Ethereum Network along with the Ethereum Network’s traffic.

Ethereum also has value in a more traditional monetary sense, thanks to recent developments in its tokenomic policy. Since August, a portion of the gas fee for each transaction has been burned — or taken out of circulation — which has the dual effect of making gas fees more consistent and reducing the inflationary nature of Ethereum’s constant minting. By Q3 2022, Ethereum will have undergone further upgrades and changes to better balance deflation and issuance rates, making it more valuable to hold ETH relative to its total market cap. Therefore, every transaction in a crypto exchange is much more complex than you think.

How to Earn Ethereum

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Earning Ethereum is fairly straightforward once you’ve purchased Ether from a centralized exchange (CEX) like Coinbase Global Inc. (NASDAQ: COIN), Gemini or Voyager. If you’re uncomfortable with other tokens, then you can stake your Ether for interest, with Hodlnaut and Gemini offering nearly double digit APY rates on Ethereum, or stake ETH2 through a CEX’s validator node. While network upgrades have been completed and proof of stake trading is commonplace, you don’t necessarily need to buy and sell to make money. Staking is easier and it promotes hodling.

Cryptocurrency Regulation: Will the SEC Go After Ethereum?

Over the last few years, institutions have been adopting cryptocurrencies in various senses — funds using Bitcoin as a counter-market hedge in mid 2020, KPMG and other companies adding significant holdings to their balance sheet, banks building out research divisions dedicated to looking into the digital asset space and consulting firms fully committing to a blockchain future. Relatively smaller scale, non-financial companies have profited from cryptocurrencies like Bitcoin and Ethereum; for example, Tesla made more profit from cryptocurrency holdings and regulatory credits than it did from its actual business in Q1 2021.

Something worth noting with regards to the regulatory conversation is that Ethereum is essentially stateless as an entity, which means that it’s difficult for the U.S. Securities and Exchange Commission (SEC) to “go after” it in the same sense that they might be able to go after Coinbase or another CEX for selling a product that comes too close to resembling a security. 

However, governments certainly can regulate the cryptocurrency space, either through taxation or through oversight. Indeed, many of the CEXs have conceded that the space needs regulation to earn people’s trust and to develop further, much like the internet in the late 1990s. 

How to Use Ethereum

Once you own Ethereum, you have a range of options for its use. Most of these things require actually owning your Ether, which means getting it off a CEX account and into your own software or hardware wallet. A common phrase is “not my keys, not my coins,” which is to say that you can’t own coins in a wallet if you don’t have the private keys for the wallet. Broadly speaking, owning Ethereum opens you up to the entire DeFi space, including uniquely DeFi ideas like airdrops, flash loans and liquidity provision, to name a few things. Most Layer 2 blockchains are also explorable once you have Ether to put onto a bridge, simply by virtue of most Layer 2 blockchains being built directly on top of Ethereum.

Can Ethereum Reach $10,000?

Ethereum reaching $10,000 per token would mean a 1T market cap at the current issuance and would also entail passing several price ceilings that haven’t yet been reached. As such, Ethereum will likely need multiple bull and bear cycles in order to reach $10,000. It’d likely also require some significant changes to Ethereum’s utility as compared to the status quo. 

One possible narrative could be more overt or committed bullishness in Ethereum from a household name in the financial services industry directly following or responding to Ethereum’s upcoming upgrades.

Frequently Asked Questions

Q

Is Ethereum a safe investment?

A

Ethereum can be a safe investment if it’s stored in a crypto wallet and you research your investments carefully.

Q

Should you hodl Ethereum?

A

Hodling Ethereum is a good long term strategy, but there’s no way to know how much the token will rise in value over time.

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