Ethereum faces challenges due to the difficult macroeconomics
Ethereum, the second largest cryptocurrency in the world by market capitalization, was also affected by the price fluctuations that affected the market over the past eighteen months. Although the more well-known and established cryptocurrencies are generally more resilient, that’s not always the case. Regardless, many have remained dedicated to their list of holdings and are looking into how to buy crypto currency to add to their portfolios.
However, during these times, it is more important than ever to be mindful of your strategy and find ways to ensure that you won’t lose capital, considering the fact that market shifts can be pretty considerable. Here are some of the things you should keep in mind.
Although the market showed signs of recovery in January 2023, the situation has changed since then. Currently, the Ethereum market is navigating a situation similar to Bitcoin, as the prices dropped following the decision of the Federal Reserve on inflation and interest rates from the 21st of September. Ethereum decreased by 1.8% in the span of just one day, reaching its lowest levels in fourteen months and breaching through the critical 0.06 BTC support.
Many investors have considered the intricacies of this price decline, as well as what it would take to reverse the trend. Buyers have placed their hopes into the protocol upgrades that were set to minimize the need for new coins back when the network made the well-documented and highly-anticipated transition from proof-of-work to a proof-of-stake mechanism.
In mid-September 2022, these plans were realized, contributing to the emergence of an annual issuance rate of 0.25% of the supply. The change has created the community’s idea of “ultrasound money”. Then followed the Shapella upgrade on April 12th, which was also very much anticipated by investors, particularly as it had been previously delayed. As all these bumps in the road were passed successfully and with minimal issues, leading many to believe that following the achievement of the $2,000 milestone on April 14th, Ethereum will continue to evolve.
However, the current situation paints a very different picture, with the prices either stagnating indefinitely or going on a downward trend.
The regulatory factors have played an essential role in the developments and changes within the market. The fact that lawmakers and regulators continue to debate how they should proceed in regard to cryptocurrencies, as well as the failure to come up with an official ruling, have all created uncertainty within the market and for investors.
The Securities and Exchange Commission has been embroiled in a legal battle that has impacted the price momentum as well. Even if Ripple Labs, the American technology company involved in the controversy, were to secure an unquestionably favorable outcome, it still wouldn’t reverse the risks for Ethereum right away. However, solving the uncertain situation around the initial coin offerings would cease to be such a source of concern for the investors.
The good news
But is it all doom and gloom in the Ethereum ecosystem? There have been positive surprises for Ethereum investors, such as a recent request for a spot Ether ETF by ARK Invest and 21Shares. The proposal came on September 6th. In August, the two companies had proposed the inclusion of two Ethereum-based ETFs, which have benefited from more and more success in the aftermath of the SEC ruling of 2021.
On September 18th, Canto, a layer-1 blockchain, announced that it was expanding to Ethereum’s layer 2. That will make Ethereum more decentralized and enable trustless guarantees. This roll-up is compatible with the Ethereum Virtual Machine, primarily focused on bringing traditional finance systems and the blockchain together.
Moreover, there’s also the possibility that the approval of a spot Bitcoin exchange-traded fund will also bring growth to Ethereum. This has also occurred in the past, with Ethereum frequently following in the footsteps of Bitcoin. Inflation rates have an impact as well and could serve as catalysts. Traditionally, when fiat currency suffers from devaluation, people tend to move towards alternative financial methods and assets that allow them to preserve value.
Layer 2 migration
Many blockchains have been integrated into Ethereum over time, and many of the ones that have not eventually migrated to Ethereum Layer 2. Some analysts believe that the CELO stakeholders’ decision to shift operations to Layer 2 has ushered in the beginning of an era that will allow for the adoption of many others.
But not all Layer 2s are alike. The financial transactions that occur on this system will have different requirements. Some may be good for high-volume, while others support low costs. Complex decentralized systems and smart contracts will need the use of networks that can operate with the EVM and are fully compatible with it.
As more and more specialized networks continue to emerge, investors might wonder if there’s genuinely any purpose to promoting this interconnectivity. The most straightforward answer is yes. The primary reason is that tasks and procedures are far more streamlined this way, while products can flow more easily. All economic systems work better when they’re not isolated.
Given their sheer volume, it is also unlikely that a single network will be able to fully support all transactions. That’s why more networks will be necessary. In this regard, Ethereum’s managing to act as a binding layer across the platforms will offer considerable benefits.
South Korea’s second-largest city has been developing a public network working as part of the blockchain system that will be compatible with Ethereum and Cosmos. The primary purpose of this movement is to integrate the services of various mainnets into a single platform at the city level and make Busan a blockchain city.
The city has allocated a budget of 100 billion won, or $75 million, for blockchain development that is compatible with BIF standards, the Blockchain Innovation Fund. Nearly one hundred private companies have shown interest in the initiative. The Fund supports blockchain development within Busan, including infrastructure construction and conservation.
The project will improve the quality and efficiency of private services, encourage interconnectivity between them through the introduction of the blockchain technical system, and elevate security and performance levels. Public services in Busan will utilize the blockchain as well.
Ethereum has had a challenging year so far, but investors continue to believe in its potential and ability to change the world.