After a very strong 2021 where ETH was powered higher by growth in ETH-based projects, analysts expect a strong 2022.
2021 has been a stunning year for Ethereum. On the 31st of December 2020, ETH/USD was trading in the low $700 area. As the end of December 2021 approaches, ETH is trading to the north of $4000 per token. That amounts to on-the-year gains of well over 300%. That compares to a year-to-date return for BTC/USD of only around 80% at the time of writing.
ETH/BTC subsequently rose substantially in 2021 from under 0.03 to current levels close to yearly highs around 0.08. As of Friday morning, Ethereum’s total market capitalisation sits at just under $500B, whilst Bitcoin’s is just under $1T.
Nascent Growth in Web3 Drives ETH Outperformance
Cryptocurrency analysts have attributed this year’s outperformance of ethereum versus bitcoin to the former’s greater flexibility when it comes to integration with dApps, DeFi and NFT projects. Indeed, there was an explosion of interest these areas in 2021, as well as in popular meme coins such as Shiba Inu, with most of the projects in these areas built up from the Ethereum blockchain.
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“Ethereum, helped by excitement over its potential to power the nascent web3 and the hype surrounding ethereum-based NFTs (non-fungible tokens)… soared this last year, climbing at a faster clip than bitcoin as venture capitalist (VC) companies and investors rush to fund ethereum-based projects,” said BOOX Research.
“In many ways, NFTs and alt-tokens operating within Ethereum are the first manifestations of the Metaverse potential… Ethereum can play an important role in (making) the digital economy accessible on a global scale… It’s still unclear what direction the applications will take over the next several years, but we view ETH as a bet on that future” the cryptocurrency research house continued.
Interest in web3 picking up over the course of 2021. Source: Google Trends
Key Themes For 2022
Web3 has been a major buzzword in the cryptocurrency space in 2021 and most tech analysts suspect that hype behind the idea is only set to gain momentum in 2022. As long as the Etheruem blockchain continues to be viewed as a key building block for the emerging decentralised web, growth in this space should keep ETH bid.
According to billionaire investor Mike Novogratz speaking on CNBC recently, “people see ethereum as a technology bet and bitcoin more as a debasement of fiat currency bet”. As the US Federal Reserve adopts a more hawkish posture in 2022 to tackle inflation that soured to near four-decade highs in the US in November at 6.8% YoY, Novogratz expects the macro backdrop to continue to favour ethereum.
Another theme to take note of in 2022 is etheruem’s upcoming “protocol 2.0” transition that will see the process of Ethereum mining shift from the highly energy-intensive “proof of word” methodology to the much more energy-efficient “proof of stake” method. Once the transition for “proof of stake” is complete, ethereum mining energy consumption should fall by about 99%, which should radically improve the cryptocurrency’s appeal to ESG investors.
Of course, institutional adoption was a major theme for 2022, with bitcoin suffering as investors (including Tesla CEO Elon Musk) soured on the cryptocurrency after becoming aware of how environmentally unfriendly it is. Whilst bitcoin miners are doing their best to source their energy from renewables, ethereum’s transition to “proof of stake” is one step better. Thus, in 2022, ESG preference for ethereum could be another major driver of ETH outperformance versus BTC.
As ever, regulation is a big risk to the sector. In 2021, China took steps to ban cryptocurrency mining given the country’s dire pollution problem, while India took steps to ban cryptocurrency usage altogether. But comments from SEC Chairman Gary Gensler suggest that the US is not currently be thinking about a blanket crypto ban. Indeed, the US Treasury Department even took steps to update its financial market framework to cement the legality of cryptocurrencies within the banking sector.
According to WalletInvestor.com’s proprietary algorithm, ethereum is forecast to gain just short of 70% in 2022, taking it to near the $7000 level by the end of the year. That of course would mark a significant slowdown on the pace of gains enjoyed in 2021.
WalletInvestor forecast for 2022. Source: WallerInvestor
BOOX Research are slightly more bullish on the cryptocurrency; “we are bullish on ETH while recognizing it won’t be a straight line higher… To the upside, a move above $5,000 can make way for a run towards $7,500 as our 2022 price target for ETH”.