Market Insights

July could be a pivotal month for Ethereum as the No. 2 cryptocurrency works on key upgrades. The efforts follow a sharp pullback in its price, which may create opportunities for investors.

Ethereum developers have started testing the “London Hard Fork” upgrade, which will introduce a process known as “fee burning.” Included under EIP-1559 (short for “Ethereum Improvement Protocol”), the change limits transaction fees by “burning” fees above a certain base level.

Ropsten, one of the three “testnets,” began operation on June 24. Goerli launches tomorrow and Rinkeby follows on July 7. If successful, the changes will be deployed across the entire blockchain. Network operators should “be on the lookout for the mainnet upgrade announcement in the coming weeks,” the Ethereum Foundation said in its blog post announcing the effort.

Ethereum Gas Fees

Some cryptocurrency investors think the changes will be positive for a few reasons. First, controlling “gas” fees will make transaction costs more predictable and reduce price spikes. They’re now down to about 24 Gwei but were near 300 Gwei in mid-May, according to Etherscan.io. (A Gwei is one-billionth of an Ether.) That will make the system more reliable for a wider user base.

Second, fee-burning will eliminate Ethereum supply and potentially increase Ethereum’s scarcity value. Third, it’s a key step for migrating the protocol to the “proof of stake” validation system. Ethereum currently uses “proof of work,” where miners compete to solve blocks and are paid in new tokens. Proof of stake will assign work to developers work based on Ethereum owned (or “staked.”)

That big change to proof of stake will make the network faster, more secure and more efficient. Some analysts even think it will slash energy consumption by more than 99 percent. (After all, miners will no longer waste computing power competing against each other.) The transition to proof of stake is expected to occur late this year or in early 2022. It’s a potentially huge upgrade that could usher in “Ethereum 2.0,” a supercomputer for the world’s financial system.

Ethereum vs. PayPal?

Ethereum may already grown into a behemoth — even before the key upgrades occur. Messari analyst Ryan Watkins tweeted on April 20 that Ethereum settled $1.5 trillion of transactions in the first quarter. Last week YouTube personality Lark Davis observed that total exceeded PayPal’s (PYPL) volume in all of 2020. Davis also highlighted that Ethereum’s daily activity has roughly doubled since the end of March and noted that its user base is likely to grow more quickly that PYPL’s.

He then noted that Ethereum’s market capitalization of about $245 billion is about $100 billion less than its Nasdaq-listed rival. The main reason for this lower valuation was a violent selloff last month.

Ethereum began the year by rallying along with Bitcoin as mainstream institutions adopted cryptocurrencies. The pullback occurred as Bitcoin lost momentum and then crashed on worries about its energy usage. Prices have stabilized in recent weeks but remain around half their May 12 peak.

The big question for investors now could be whether the market is pricing in too much pessimism and overlooking the positives that could occur in coming weeks. Keep reading Market Insights for more information as the testing of EIP-1559 continues.