What is causing Ether (ETH) and Bitcoin (BTC) to part ways?
These top-two cryptocurrencies have historically moved in sync. Though the price difference between them is significant - and irrelevant - the two have exhibited relatively high beta, or price correlation, until this summer. As a consequence, over a trailing 12 months, Bitcoin has seen prices rise by 50%, while Ether has lost around 40%.
Recent trading days have magnified the price divergence as Bitcoin has traded on volume with strength and Ether prices continue to falter. The trend continued Thursday as Bitcoin climbed by 1.20% - slightly over $6,400 - while Ether continued to hover near $200 after being unable to sustain any momentum.
What's driving the split?
Ether's value is tied intrinsically to its usefulness as a development platform for dApps - short for developmental applications that sit on top of a blockchain protocol. And though Ethereum, the underlying platform for Ether the cryptocurrency, has seen some success in that department, the current model may hurt it more than help it. There are three major factors at play in the divergence, and they could easily be exacerbated if both Ether and Bitcoin stay their courses.
Blockchain Startups Sell Ether to Fund Operations
One of the paradoxical phenomena surrounding the ongoing initial coin offering, or ICO craze - a term for the controversial method of crowdfunding for blockchain-based cryptocurrencies - is the recent trend of companies converting funds raised in Ether in order to pay their operational costs in fiat currency. Hundreds of blockchain-based companies raised funds for their projects in U.S. dollar denominations - for example, "$30 million." But a sizable slice of that fundraising market included money raised in Ether, XRP, EOS, Ripple and other cryptocurrencies.
Now that the development bills are coming due, those companies are selling their holdings to pay their vendors and employees. The results aren't pretty for Ether price action, amplified in mid-August, when Ether prices crashed by 17% amid a purported "massive selloff" by investors. According to research and cryptocurrency analytics firm Santiment, more than 110,000 Ether were sold in the 30 days preceding the crash.
That trend continued in September, with more than 160,000 Ether sold in the first 10 days of the month. Cryptocurrency markets have seen Ether prices re-adjust due to large liquidations before. A purported sale by Ethereum competitor, EOS - which continues to hold billions of U.S.-dollar equivalent in Ether, caused Ether prices to tumble. In that case, the selloff came from one source, but the effect remains the same. The core of the problem is that while Ether is a valuable asset for raising funds, it is less useful when it comes to using that capital for operational expenses and functions. Its liquidity as a fundraising tool cuts both ways.
Bitcoin, in contrast, has not been used so extensively as a fundraising tool. Bitcoin's other uses buoy its prices, too.
Seen as a 'Reserve Currency,' Bitcoin Benefits From a 'Flight to Safety'
A second factor that continues to drag on Ether's prices when compared to Bitcoin is perception. While both are relatively popular cryptocurrencies, Bitcoin has taken up the lion's share of the headlines, and the majority of the public's interest. First-mover advantage plays a part, as Bitcoin was mined and served as a decentralized and less trackable fiat alternative for years before Ether first traded. Bitcoin's dominance still shows in trading volume - for comparison, on Sept. 20, the 24-hour volume of Bitcoin sold was $3.7 billion, while Ether volume traded was much lower at $1.4 billion.
Bitcoin established itself as a "store of value" to protect against inflation or the other government-led ailments that afflict fiat currencies. Investors that intended to stay invested in cryptocurrencies have sold off alternative coin holdings - including Ether - in favor of Bitcoin, based off its higher volumes, market cap and value proposition vs. fiat. And price action - including the divergence from Ether and other cryptocurrencies - has galvanized their position that Bitcoin is the "safest" among cryptocurrencies.
Even as the blockchain industry continues to predominantly build applications on Ethereum's blockchain, those applications seem to be mostly empty. Citing data pulled from DappRadar - a tool that tracks applications on top of various Blockchain protocols - blockchain researcher Kevin Rooke summarized in a tweet that Ethereum only has five applications with more than 300 daily active users. This is largely a result of Ethereum's well-chronicled bottleneck and scalability issues. In the wake of the Ethereum platform's well-publicized shortfalls, other applications and blockchain platforms have provided themselves as viable protocol alternatives on which to build.
Competition for Ethereum Heats Up
Competition, from a technical perspective, appears to be nipping at the Ethereum platform's heels. While Bitcoin had some years and first-mover advantage when the industry was new, Ethereum finds itself beset on all sides by upstarts that offer many of the same functionalities while adding key improvements.
Major protocol projects, like EOS and NEO, and smart contract platforms, like Qtum and Chainlink, have leached away some of Ethereum's market share. Unlike Bitcoin's relative dominance as a fully decentralized store of value, Ethereum has few advantages outside of its first-mover status. Miguel Palencia, CIO of the smart contracts platform Qtum weighed in to say that "Ethereum has a number of competitors that aim to offer more advanced smart-contract solutions and better scalability. Whereas with Bitcoin, it's hard to disrupt the gold standard."
But can Ethereum regain its momentum?
Ether's recent price woes, relative to Bitcoin, continue to extend while its own technical solutions and those of competitor platforms continues to evolve. The Ethereum platform on which Ether is based remains one of the most popular and widely used cryptocurrencies on the market but it must show its value, much like a publicly or privately held tech company would, and resolve many of the technical issues that still weigh on it.
The author holds stock in investment holding company, Leucadia, and is a partner in an emerging technology marketing firm, Notability Partners. He holds no positions in cryptocurrencies nor in any companies that invest in them.