The world’s second-biggest cryptocurrency is rallying more than bitcoin

Published Thu, Aug 5 20214:33 AM EDTUpdated Thu, Aug 5 20215:34 AM EDT

The price of ether , the world's second-biggest cryptocurrency, is surging this week. Analysts think they know why — and one says it could have more room to run. Ether, or ethereum as it's more popularly known, was up 9% in the last 24 hours Thursday, trading at a price of $2,715, according to Coin Metrics data. So far this year, it's climbed more than 260%. Those returns are far bigger than bitcoin's . The No. 1 digital coin is currently up about 35% since the beginning of 2021. Ether's outsized gains have been attributed to a number of factors, not least the fact that smaller cryptocurrencies tend to experience significant rallies after a big run up in the price of bitcoin. However, market insiders say there's another reason behind ether's rally, and it's pretty timely. On Thursday, the Ethereum blockchain, the network that underpins ether, is set to undergo a key upgrade. Called the "London fork," the upgrade will change the way Ethereum miners are paid. Right now, users must bid for how much they're willing to pay for their transaction to be validated by a miner. Under the new protocol, this process is automated with a set fee that changes based on how congested the network is. Another big change will see part of every transaction fee get "burnt," or destroyed, potentially making the cryptocurrency's supply more scarce. "Those changes could make Ethereum more useful and less abundant," said David Russell, vice president of market intelligence at online trading firm TradeStation. "More useful because fees will be lower and the network will be faster. Less abundant because of the one-two punch of fee burning and proof of stake." The upgrade forms part of a larger overhaul of Ethereum which aims to make the network faster and more secure. Called Ethereum 2.0, a crucial improvement from the reforms will be the transition to a so-called "proof of stake" protocol. Unlike the "proof of work" mechanism which Ethereum and bitcoin's blockchain currently use, proof of stake does away with the power-intensive computing operation known as mining for generating new units of a cryptocurrency and validating transactions. Instead, those with enough ether holdings — or a "stake" — can validate transactions on the network. "The bulls hope it [the London fork] will create a digital asset with surging demand and narrowing supply — a potentially powerful combination for prices," Russell added. The Ethereum Foundation estimates the blockchain will use as much as 99.9% less energy than before after the Ethereum 2.0 update. That could potentially make ether a more attractive bet for investors worried about bitcoin's impact on the environment . "ETH is considered more 'green' than bitcoin," Morgan Stanley analysts wrote in a June note . "Increasing worries about bitcoin's energy usage made ether relatively more attractive." Another thing boosting ether is the rapid rise of decentralized finance, or "DeFi," projects which aim to replicate traditional financial products such as loans and insurance without middlemen like the banks. A number of these DeFi protocols, including decentralized crypto exchange Uniswap and lending service Aave, are based on Ethereum. A key selling point of ether's network is the ability to build apps on top of it. The total value locked in decentralized applications currently stands at $104.8 billion, according to data from DappRadar. "If Ethereum were a company, it would be like Alphabet, with deep growth potential only now being unlocked," Russell said. "Bitcoin is more like Yahoo, circa 2005. It's not going away, but the story is much less exciting." Russell suggested ether could climb as high as $10,000 this year. "Say Bitcoin returns to this year's high of $64,895 and Ethereum returns to its old ratio of 0.156 (from June 2017). It would imply a price of about $10,000," he said. "Both of those scenarios may be possible, especially if fear diminishes after Congresses finalizes its infrastructure bill/crypto disclosure rules." Genesis, a digital currency lender that lent out $25 billion in the second quarter, said there has been a "significant rotation" out of bitcoin into ether lately. "At the end of 2020, bitcoin accounted for 54% of our loan book," the firm said in a report this week. "By the end of Q2, that percentage fell to just over 42%, with ETH and smaller assets picking up much of the difference." It's worth remembering, however, that digital currencies can be violently volatile — ether is still down 38% from its all-time high above $4,000, while bitcoin is off 39% from its April peak. Meanwhile, regulation poses a significant headwind for all digital assets. Some are worried a provision in the U.S. infrastructure bill could choke a vast portion of the crypto ecosystem, for example.

Bitcoin and ether are the two most prominent cryptocurrencies.

Jaap Arriens | NurPhoto | Getty Images

The price of ether, the world's second-biggest cryptocurrency, is surging this week. Analysts think they know why — and one says it could have more room to run.