Have Ether Prices Become Overheated After Their Latest Gains?

Ether prices have been on a tear lately, breaking through both $3,000 and $4,000 just this month as many altcoins (cryptocurrencies besides bitcoin) rally during this latest bull market.

The digital currency, which serves as the native asset of the Ethereum platform, surpassed $4,000 yesterday, reaching an all-time high of $4,213.46 today, according to CoinDesk.

At this point, the cryptocurrency had risen more than 400% year-to-date, after starting 2021 below $750, additional CoinDesk figures reveal.

[Ed note: Investing in cryptocoins or tokens is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]

While ether has enjoyed some astronomical upside this year, certain market observers have expressed concerns that it may have become overheated.

“The continued divergence of its price relative to network activity raise questions about its valuation,” J.P. Morgan analysts warned in a recent client note, according to Reuters.

Fundamental Analysis

In light of this claim, several market experts weighed in, offering their two cents on the digital currency’s fundamentals.

Jeff Dorman, chief investment officer of asset manager Arca, offered some helpful background context on the situation.

“To borrow a phrase from my friend Jesse Proudman at Strix Leviathan, digital assets have ‘opaque fundamental value, but that doesn't mean no fundamental value.’ It means most market participants don't share the same valuation model for each asset.”

“The value a DeFi user places on ETH's utility may be different than the speculative value a trader places on ETH, which may differ greatly from the value a fundamental investor places on ETH,” he noted.

That being said, Dorman provided an optimistic assessment of the digital asset’s future prospects, focusing on the Network Value to Transactions Ratio (NVT Ratio) and some key developments surrounding the Ethereum network.

“Fundamentally, there are definitely still reasons to be bullish. NVT is declining, which indicates the price of ETH is actually climbing slower than the growth of the underlying transactions on the network.”

“Similarly, with ETH 2.0 and the EIP-1559 proposal forthcoming, you can now come up with a DCF valuation for ETH based on expected cash flows to ETH token holders, which based on a variety of assumptions, could value ETH as high as $7,200. As always, valuation is fluid — the only incorrect analysis would be a static analysis.”

Analyst: Ether ‘Poised’ For Further Gains

Scott Melker, a crypto investor and analyst, also offered a bullish take.

“Ether looks poised for continued price appreciation,” he stated.

“Active digital addresses recently surpassed the 2018 peak, and NVT has been dropping, generally considered a bullish sign for price appreciation. This drop indicates that transaction volume is rising dramatically while price has risen relatively less to meet its higher activity,” said Melker.

“All signs point up for Ethereum.”

Growing Activity

Jason Lau, COO of cryptocurrency exchange OKCoin, chimed in too, stating that:

“While some of ETH's on-chain metrics have recently just surpassed 2017 peaks, other metrics continue to reach all time highs,” he stated.

“With gas fees high, volume and activity based metrics are being suppressed, while others are like total value locked (TVL) are rising. For example, the TVL in ETH defi is now at $85B with another $17.6B worth of ETH staked for ETH 2.0,” said Lau.

“This shows that on-chain users are interacting with the network and activity is vibrant.”

He shed further light on the matter, specifying that:

“Whether these metrics show ETH as overvalued is harder to say. We are in a phase of the market where fundamentals don't necessarily line up with price action.”

“Ultimately, the potential and emergence of a decentralized future is a narrative that is attracting speculators, investors, users, and developers across Ethereum and other crypto ecosystems.”

Why This Bull Cycle Differs

It is easy to see why the sharp gains that digital currencies have been enjoying could make market observers reminisce about the bull run of 2017-2018.

However, this time is different, according to Amber Ghaddar, cofounder of decentralized capital marketplace AllianceBlock.

“Looking at NUPL (net unrealized profits/losses), the cycle has been steadily moving forward and we have just entered the last phase, called the euphoria-greed phase.”

“This phase can hold for a few months, as we saw from March 2017 to July 2017 where ETH steadily stayed in a ‘euphoric’ state with a rise from the $40 range to $270 followed by a number of corrections before hitting its previous ATH of $1359 in Jan 2018,” she stated.

“However the market structure today is very different,” claimed Ghaddar.

“From a qualitative point of view, the continuation of the summer of DeFi and what it means in terms of ETH locked in smart contracts, the boom in NFTs, ETH2.0 staking, the Berlin and London fork and their consequence on gas fees, the talks of ETH ETF are all positive and solid drivers for the market that didn't exist in 2018,” she noted.

“Supply in smart contracts has decreased by less than 0.50% since mid-April, and exchange inflows are tame, strengthening our thesis of the stickiness of ETH holders.”

Options Markets

“Additionally, with ETH options breaching $1bn notional in May, looking at what option markets are pricing is becoming relevant.”

“As an example, Jun21 options are pricing probability of ETH above $5K at more than 25%. The $5K strike has gathered the strongest open interest with roughly $390mn of call notional already positioned.”

Above the $3K strike, calls heavily outweighs puts. It is interesting to see that puts positions are minimal between the $3.5K and $4.5k strike, further confirming the data from NUPL.”

With all this in mind, Ghaddar summed the situation up nicely.

“Overall, small corrections going forward are to be expected but the market is solid enough to break the $5K resistance.”

Disclosure: I own some bitcoin, bitcoin cash, litecoin, ether and EOS.