Crypto News

Excessive Overvaluation Risks Paring Ethereum’s Supersonic Price Rally

In retrospect, the cost to purchase one Ethereum token has surged from $730 at the beginning of 2021 to as high as  $3,534 as of this week. Traders raised their bids on the second-largest cryptocurrency believing its adoption would boom due to emerging digital asset sectors, including decentralized finance and non-fungible tokens.
Image by Steve Buissinne from Pixabay

Yerevan (CoinChapter.com) — How worried should one be about the Ethereum market’s overvaluation? It seems traders are unsure.

In retrospect, the cost to purchase one Ethereum token has surged from $730 at the beginning of 2021 to as high as $3,534 as of this week. Traders raised their bids on the second-largest cryptocurrency believing its adoption would boom due to emerging digital asset sectors, including decentralized finance and non-fungible tokens.

Ethereum’s blockchain supports a majority of the projects in the DeFi and NFT industries. It is similar to how Apple Store and Play Store hosts applications atop their platforms. Nevertheless, Ethereum offers decentralization, providing developers unlimited control over their applications (aka dapps). That intends to make hosting applications cheaper.

Read More: Ethereum Price Hits $3,000-Milestone; Are Institutions Behind The Latest Bull Run?

The verdict is out on adaption. Ethereum is now one of the most active blockchain networks. This year alone, the protocol has added seven million Ether addresses, according to data fetched by IntoTheBlock.com. That has pushed the total number of ETH wallets to more than 55 million. Meanwhile, its network has processed $1.5 trillion worth of value in the first quarter. That is more than the figures recorded in the previous seven quarters.

But…

…a lot of speculation rides on Ethereum’s forward valuation. No metric is available that could measure the true value of its token Ether. Many leading analysts in the cryptocurrency space believe ETH/USD should hit $5,000, ignoring fundamental risks that concern its expensive transaction costs and network congestion in times of higher traffic.

Ethereum is attempting to solve the issue by switching from its energy-intensive proof-of-work protocol to a faster proof-of-stake mechanism. There is no guarantee of whether the upgrade would payoff per the expectations. But emotions favor a bullish scenario, so the ETH/USD exchange rate booms higher.

Read More: 3 Reasons Why Ethereum Price Could Hit $3,200

The pair’s gains this year also came alongside a boom across every other traditional market, ranging from commodities to stocks. That raised fears among analysts that the global finance market is turning into a massive hype bubble, ballooned broader by the Federal Reserve’s expansionary policies, including near-zero interest rates and unlimited bond-buying programs.

That again puts Ethereum, and every other excessively bullish token at risk of losing a considerable part of their gains should the Fed decide to hike rates, primarily as the US economy recovers from the coronavirus pandemic’s shock.

Ethereum Technical Outlook

The Ethereum’s weekly Relative Strength Index shows it as an overbought asset. It means the cryptocurrency would undergo a neutralizing downside correction in the coming sessions.

Ethereum corrects lower entering the Tuesday US session. Source: ETHUSD on TradingView.com
Ethereum corrects lower entering the Tuesday US session. Source: ETHUSD on TradingView.com

Should a bearish correction start, the ETH/USD exchange rate risks crashing towards its 20-weekly exponential moving average — or fractal-wise, by 25-40 percent. While that does not necessarily take Ethereum out of its long-term bullish bias, an extended sell-off could raise the downside prospect.

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Yashu Gola

Yashu Gola is a Mumbai-based finance journalist. He is profoundly active in the bitcoin space since 2014 – and has contributed to several cryptocurrency media outlets, including CoinChapter, NewsBTC, FxDailyReport, Bitcoinist, and CCN. Academically, Yashu holds a bachelor's in information technology, with majors in data structures and C++ programming language. He has also won the 'Atulya Award' for his efforts towards raising $100,000 for an India-based farming project.

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