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Dado Ruvic/Reuters


Ether, the digital cryptocurrency tied to the ethereum network, soared as much as 5% to new records on Monday, hitting a high of $3,203.

The digital currency, which is often used for transactions in the digital market place for NFTs, now has a total market capitalization of $366 billion, according to data from CoinMarketCap. Bitcoin's total value currently sits at $1.07 trillion.

The gains in ether have outpaced the gains in bitcoin year-to-date. Ether is up more than 300%, where as bitcoin is up about 95% based off of Monday afternoon prices.

These are the three reasons why ether continues to break higher, according to a Monday note from Ark Invest analyst Frank Downing.

1. "Increased institutional interest."

Downing points out that four ether ETFs have launched on the Toronto Stock Exchange over the past two weeks, "making it easy for institutions to gain access as demand for crypto exposure broadens beyond bitcoin," the note said.

"In addition, institutions and companies like European Investment Bank and Visa have validated the Ethereum blockchain by announcing issuance and settlement use cases, respectively," Downing said.

2. "Strong on-chain signals."

"Usage of the Ethereum network is increasing and, by some measures, outpacing that of Bitcoin, as shown by the number of active wallets and total transaction fees. In our view, Decentralized Finance (DeFi) and Non-fungible tokens (NFTs), both of which are burgeoning, explain Ethereum's recent breakout," Downing explained.

3. "Imminent protocol upgrades."

The Ethereum Improvement Proposal 1559 is slated to go live in July, and will significantly change Ethereum's transaction fee model, according to the note.

"Aiming to lower the volatility of ethereum's fees, EIP-1559 introduces a mechanism to burn some transaction fees, detracting from circulating supply and introducing deflation to the ethereum ecosystem. The impact on ether's price could be like that associated with a bitcoin halving event," Downing said.

Two risks associated with ether's recent rise

But there are still risks associated with ether and its rising price, Downing cautioned.

The first risk relates to the frequent and significant leverage associated with DeFi applications, which "given interoperability within the ethereum blockchain, might compound the leverage associated with other products," Downing said.

"In the event of a downward spiral in ether's price, the losses associated with deleveraging could be significant. Additionally, EIP-1559 could become a contentious upgrade, as miners will bear the brunt of fees burned. A miner revolt could impede the progress of the EIP-1559 upgrade," Downing concluded.

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