How Ethereum Rose So Much in Value

Only Technical Analysis is Possible With Instruments like Ethereum

Ethereum, being a virtual commodity, has no base value to it, and its value is therefore purely determined by the market. If we were looking to evaluate Ethereum and other digital currencies by way of fundamental analysis, there is no other conclusion that we could come to other than it is worthless.

The value of anything that is traded in a public market is dependent upon forces of supply and demand, not partly or even substantially, but entirely. To be fair to the fundamental analysts, some of their projections at least are based upon forecasts of changing demand, even though this may be true indirectly.

If, for instance, you project that an economy will grow, then it is reasonable to expect that the pie will become larger and that there will be more of an inflow of funds into investments generally. It’s not much of a leap to get to projecting that a particular investment will rise in this case, because if all things remained equal, if it maintained its competitive position among all investments, this would likely happen.

Technicians will measure changes in price and therefore measure momentum, either positive or negative, and use this data in their projections, where the probability of an asset may higher for its price to move in one direction rather than another over a period of time.

This is because changes in demand tend to be of a longer duration than random. There are actually people who believe markets actually behave randomly, but even a glance at pretty much any chart along with even the most basic understanding of probability will easily show that this is not only mistaken but ridiculous.

Charles Dow, back in the 19th century, is widely regarded as the father of modern technical analysis, noticing that price moves in three distinct patterns, up, down, and sideways. In spite of this being obvious, Dow sought to use analysis to better predict where prices are going in the long term.

Since then, we have continued to study ways to better predict these movements using past price data and other market indicators as tools. Whether or not technical analysis is preferable to fundamental analysis, it is the only tool we have with deciding on something like Ethereum.

Ethereum is actually perfect testimony to the suitability of technical analysis though, as its rise and current pullback are certainly not events that can only be explained as random outcomes.

What Drives the Price of Ethereum and Other Assets

We need to ask ourselves what is really behind this movement, what really moves prices of assets, what is behind the data we see on charts. The answer is that it all depends on the price people are willing to pay for something at any given point in time.

If no one wanted to pay the current price for something, Ethereum for instance, then it would not trade at that price obviously, it would trade for a lower price, at a price that someone wishes to pay for it.

This does not imply that is what the asset is worth, for instance if Ethereum last traded at $1000, this means all the Ethereum out there is worth that much, only the amount that was traded in the last trade.

This sounds obvious, but we often allow the last trade of something to overly influence our view of what the asset is worth generally. This is called mark to market valuation, and while this is convenient, it’s not really an accurate way to even think of valuation.

Instead, valuation exists in a queue, where a certain amount can be sold at a certain price, an amount at a little lower price, and so on down the line. We see this in order books, which represent the actual bids and asks present that are currently active, but all holdings of the asset can be understood this way.

However, this queue is not fixed, it is dynamic, meaning that as the market changes, people’s valuations of the asset change along with it. For example, as Ethereum’s price rocketed up, a lot of holders of it were not looking to sell under these circumstances, because their expectations were that holding it longer would be more profitable.

When the price started dropping though, this affected the mood, and many decided that holding it was no longer the best option. Those who were close to selling saw things tipped in that direction. The zeal that drove the demand for it waned in turn, and this is now prices decline, when the enthusiasm for selling overcomes the enthusiasm for buying.

Ethereum’s price at any given time depending on the queue of those holding it together with the queue of those considering buying it being in a certain relationship, which we could call the relative enthusiasm of each side. This is all driven by belief, and that’s what moves prices, not fundamentals and certainly not technicals, as that just measures the direction of these beliefs essentially.

These price preferences therefore exist in spite of what the last trade was, and we especially need to look at how future price movement will affect desires to either buy or sell something. While we really don’t have this information, we can look at price and gain a fair bit of insight into the direction of these changes at a given point in time.

With Ethereum, Beliefs Are Unopposed

What makes Ethereum and other cybercurrencies stand out so much in the financial world, and why they can be so massively volatile, is the fact that the beliefs themselves are the only driver of the price of the assets.

If we compare this with a stock for instance, while people could in theory bid up the price of a stock to the moon as they did with Ethereum, this would require the market to completely ignore the limiting factors that fundamentals place on it.

So, it’s not that fundamentals don’t matter, they do, but only to the extent that people believe they should. At some point, the momentum for our stock is going to be influenced by things such as comparative value, why this stock should be worth so much versus other stocks, and people will compare fundamentals such as earnings and the like to constrain these beliefs.

At some point there will be a wave of thinking that is going to be based upon it being overvalued relative to either its intrinsic value or relative to other stocks, and this will put the brakes on the increase.

During the dot com craze of the 1990’s, for instance, we saw companies with negative earnings go up a lot, because people believed the stock would rise in price, but eventually this momentum waned and we saw prices drop.

Ethereum does not have any real intrinsic value though, and when you combine this with the fact that its competitors in the financial market, Bitcoin and a few other digital currencies that have attracted a lot of investment, don’t have any intrinsic value either, the normal factors that constrain large advances simply did not exist.

What Caused Ethereum to Drop in Price?

The beliefs themselves were therefore unopposed during Ethereum’s massive rise, and the only limiting factor was how much people were willing to invest in it. The belief of something going up, in itself, isn’t enough to sustain price increases forever, as these beliefs must be backed by money for its effect to be maintained.

Like all markets, there was an ebb and flow in Ethereum’s rise, and there are always traders who are looking to take profits even during a rise like this, even with one of a magnitude that the world has never seen.

To put this in perspective, we all know of the potential of the stock market, which has been by far the best performing asset of modern times. Over the last 100 years, net of inflation, the Dow increased 17 fold, net of inflation, and this is even accounting for the fact that stocks have been added and removed from the index over the years which serves to overstate this.

Ethereum, in a single year, increased 140 fold, more than 8 times more than the stock market managed in 100 years. This, or anything close to it, could never happen in the stock market because of limiting factors, but without these limitations, we truly saw what a monster unconstrained demand can become.

The limiting factor that did come into play was the fact that markets will always become saturated, meaning that if most of the people who would intend to enter the market are already in it, new investment dwindles enough to allow the sellers, the bears in other words, to gain control, then we will see a reversal.

Just as momentum from increasing demand drove the price of Ethereum up, downward momentum will serve to drive it down, especially among those who may have entered the market late. Together with those who had made a lot of money already and are looking to take profits, once things started going the other way, it was only expected that the downward momentum would be significant.

At least some of this changing belief was probably driven by the greater media coverage that Ethereum and especially Bitcoin has received lately, and they say that once the popular media takes to a story, this often indicates a top.

Among this was negative prognostications, with some believing that the currencies would collapse, and this is the sort of thing that gets at least some people selling. Once the selling starts, the resulting drop in price will bring more along with them, until the queue of those this eager to sell is cleared.

Needless to say, trading in Ethereum requires a great deal more caution and attention than other assets, any other asset in the history of the world actually, but for those who are up for the challenge, trading Ethereum can still be managed, and even managed very profitably if one is successful enough.