Ethereum (ETH-USD) set a new record high for yet another consecutive day on Thursday, riding at least two macro themes entrenching themselves within the cryptocurrency sector.
The second-largest cryptocurrency traded above $4600 before paring those gains, but has logged record highs over the past week — thanks in part to the rising popularity of non-fungible tokens (NFT) and Decentralized Finance (DeFi) projects. Over the last year, ether has outperformed bitcoin, gaining more than 1025%.
Those factors have spurred short-term demand for paying transaction costs in the digital coin, plus growing speculation on its value for the so-called metaverse. The latter development is approaching warp speed, now that Facebook (FB) has rebranded itself in an aggressive push to lean into the next phase of digital's development.
Solana (SOL1-USD), another cryptocurrency similar to ethereum, also leapt to new all-time highs Wednesday with an almost 31% gain in the last week. Both moves follow an investment frenzy for NFTs or non-fungible tokens.
Ether's blockchain: The gas that propels crypto transactions
Up 9% this week alone, ETH might have further to go in the near term, according to Fundstrat Global Investment Advisors.
“Ethereum should still rally higher up to $4,951 with little to no resistance,’ wrote Fundstrat Global Investment Advisors on Wednesday. Ether’s Relative Strength Index (RSI), the technical gauge of buying momentum, shows the price has managed to churn higher without becoming noticeably overbought.
Everyone's hearing about Ethereum in ways that have never happened before because of NFT's. People get excited by NFTs,”David Hoffman, 'Bankless' podcast host
Ether’s underlying blockchain, Ethereum, is the world’s most established decentralized blockchain protocol (or "Layer-1" in technical terms) for smart contracts in the world.
While it doesn’t receive the same investor demand as Bitcoin (BTC-USD), ether often serves as the “next stop on the trip down the digital asset rabbit hole” according to Chris Matta, President of digital asset manager, 3iQ Digital. His firm has offered both a Canada-based spot Bitcoin exchange-traded fund (ETF) as well as the ether equivalent for several years.
Unlike Bitcoin, which is mainly used as a store of value, the price surge in Ether comes due to growing demand for people to use its blockchain to transact. Like fuel in a car, ether acts as the gas that propels transactions across its payments network.
The cost of transactions (or gas fee) varies based on the size of a transaction, and how congested the network remains at any given time.
The majority of DeFi protocols and NFTs reside on top of the Ethereum blockchain. Together, these two budding digital asset segments have created surging demand for transactions or “blockspace space” on Ethereum.
As of November, there’s $219 billion in total value locked (TVL) within decentralized finance or DeFi. During the same time frame, trading from NFTs amounted to $4.2 billion according to DappRadar.
“The demand for block space has continued to go up, and the transaction throughput has not been able to increase with that demand. You're seeing gas prices increase drastically as people fight for block space. That results in actual rising demand for Ether,” Matta told Yahoo Finance.
While great in the short-term, this surging demand for ether also poses a long term problem for the asset.
“Ethereum is struggling a bit right now under the amount of its network activity. Gas fees can vary drastically and there’s competition now with other blockchains that offer lower transaction costs,” said Matta.
The standard gas fee on various DeFi protocols vary widely but crypto exchange Crypto.com currently prices average transactions between $111 and $170 per transaction.
Ethereum is 'metaverse money'
Ethereum's price also stems from the latest wave of investor interest in NFTs, which has begun to catch the attention of both major U.S. consumer brands and pop-culture icons.
“Everyone's hearing about Ethereum in ways that have never happened before because of NFT's. People get excited by NFTs,” David Hoffman, an Ethereum bull and co-host of the crypto-focused podcast Bankless, told Yahoo Finance.
One of the hotter frontiers within the crypto sector, NFTs are serving as crypto-secured certificates of authenticity for a variety of digital goods from ine art and music albums to collectibles and video game assets.
Recently, big brands have hopped into the market. This week, fast food giant, Mcdonald's (MCD) created a sweepstakes to give away NFTs of their McRib sandwich while Nike (NKE) filed for a patent, signaling plans to launch digital versions of their sneakers and clothing as NFTs.
For these brands NFTs act like “digital merchandise,” Hoffman explained, with most of them still being created on top of Ethereum as the blockchain’s ERC-721 form of token.
And the frenzy has only accelerated this month thanks to Facebook’s official rebranding to Meta, which positions the company to propel investments into building the “metaverse,” a more immersive version of the internet.
NFTs will play a central role within the metaverse, both Hoffman and Matta said. That means, ETH and other cryptocurrencies propelling smart contract-based blockchains like Solana act as the underlying base layer for investor speculation on the metaverse.
“Ethereum is metaverse infrastructure and ETH is metaverse money,” Hoffman added.
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.
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