Recent global developments have put a spotlight on the cryptocurrency sector as people across the world begin to question the decision making process of governments and central banks.
Multiple metrics like the increasing amount of Ether (ETH) and Bitcoin (BTC) locked in DeFi, soaring transaction and on-chain activity and the plummeting BTC and Ether reserves of top exchanges show that investors are becoming increasingly interested in cryptocurrency.
Data from CryptoQuant, an on-chain analytics firm, shows that as Ether (ETH) established a new all-time high above $1,500 on Feb. 2, the amount of Ether held on all centralized exchange’s reserves continued to drop to new lows as token holders withdrew their coins.
Price vs. all ETH reserves on exchanges. Source: CryptoQuant
Many analysts believe that the rapidly expanding DeFi sector, launch of Eth2 and increasing participation from institutional investors are the primary reasons for the drop in BTC and Ether held on centralized exchanges.
The rise of DeFi and yield farming
Each week the number of participants interacting with the DeFi sector seems to reach a new high and as of Feb. 2, the total value locked in DeFi platforms has reached $28.67 billion.
Total value locked in DeFi. Source: Defi Pulse
Data from Defi Pulse shows that the majority of DeFi platforms are built on the Ethereum network and require Ether to transact with the protocol.
In addition to offering attractive ways to earn a yield from simply lending Ether, an increasing amount of the available supply is being directed towards DeFi-related activities and not available for trading purposes.
A similar phenomenon is happening with BTC as holders looking to participate in the DeFi space without selling their Bitcoin have been wrapping them into ERC-20 synthetic versions of Ether.
BTC balance in exchange wallets. Source: Glassnode
Platforms like REN and BadgerDAO lead in this effort and a similar drain on the available Bitcoin supply could also be helping to push the price of BTC higher.
Eth2 and extended lock-up staking
Since the launch of the Beacon chain on Dec. 1, 2020, the Eth2 contract has enabled token holders to stake their Ether in the new PoS contract by becoming validators for the network.
Data from the Eth2 Launch Pad shows that there are currently 2,907,298 Ether worth a total of $4.39 billion staked on the network earning an estimated APR of 9.2%
Total ETH staked vs Estimated APR. Source: Eth2 Launch Pad
The contract has a multi-year commitment but for holders who refuse to stomach the risk and volatility of DeFi yield farming, Eth2 staking offers a way to earn a yield over time rather than let tokens sit on exchanges or in cold wallets.
Institutional investors begin to see the value proposition of Ether
Since 2020, Bitcoin has received the lion’s share of attention from the institutional investment crowd as investors like MicroStrategy CEO Michael Saylor lead the way by buying up immense sums of Bitcoin and tweeting non-stop about its estimated future value.
Now that Bitcoin is more than a decade old and seen as more established, firms are increasingly open to looking for the next big opportunity that the cryptocurrency sector has to offer. With the explosion of DeFi and its current dependence on the Ethereum network, Ether is quickly becoming a recommended choice for the institutional investors.
Grayscale Investments temporarily closed their various crypto trusts to new investments in late December following the rise in the price of Bitcoin, but inflow resumed in early January and their total Ether holdings have increased by 242% over the past 3 months.
Grayscale Ethereum Trust ETH holdings over time. Source: Grayscale Investments
Coinbase also noted in its annual 2020 review that institutional investors are increasingly seeing Ether as a store of value with “a growing number” of its institutional clients taking a position in the token due to the strong returns offered.
The exchange also noted that while a majority of their clients bought BTC throughout 2020, Ether’s strong finish to the year saw it surpass BTC in terms of price growth and this is a trend which has continued into 2021.
Bitcoin and Ethereum YTD performance. Source: Digital Asset Data-NYDIG
DeFi’s continued growth, the allure of the Eth2 contract and increasing participation from institutional investors are all signals that Eth price may continue to rise.