Ethereum 2.0 is coming. What effect will it have on the price?

- 7 minute read

Kevin van der Linden
Digital Marketeer
Kevin van der Linden

With Ethereum 2.0 just around the corner, exciting times are ahead for the second largest crypto. In the crypto world, upgrades like these will have a huge impact on the technology and the value of the currency. In this blog, we discuss the possible effects on the price of Ethereum that the upgrades may trigger.

Ethereum 2.0 impact on price

Ethereum’s 2.0 upgrades

For those who don't know, Ethereum 2.0 (ETH2.0) is an upgrade to the present Ethereum. These upgrades consist of several ''smaller’’ updates that will be published during the course of 2020 to 2022 (some already have been implemented). ETH2.0 will improve the scalability, security and sustainability of Ethereum. A detailed explanation of everything about Ethereum 2.0 can be found here.

Upgrades affect the value of Ethereum

The price of Ethereum is determined by several factors. For example, Ethereum's price tends to rise and fall at the same time or just after Bitcoin has done so. But Ethereum is far from completely dependent on Bitcoin. Upcoming upgrades tend to have a positive effect on the price of ETH. Again, with the upcoming ETH2.0 (and EIP-1559 upgrade), Ethereum has been hitting a new all-time-high ($3,483). Ethereum has risen from $1950 since 17 April '21 to above three thousand dollars on 3 May '21. That is a rise of more than 60% in percent in just three weeks. There are two possible reasons for this tremendous price increase. The first reason is that Ethereum's founder Vitalik Buterin gave a presentation on Ethereum's development roadmap. This mentioned several new updates that should be published in the coming years.

The second reason for the price increase is that an Eth 2.0 upgrade is Currently in the pipelines. This upgrade will see the Ethereum blockchain switch from the current proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus mechanism.

Proof of Stake VS. Proof of Work

For Ethereum, it is important to validate transactions on its blockchain in a decentralized way. Validation is supported by a consensus mechanism, which in the case of Ethereum is currently the Proof of Work consensus.

In this system, miners use the computing power of super computers to solve complex mathematical puzzles and verify new transactions. The first miner to solve the puzzle adds a new transaction to the register of transactions that make up the blockchain. The miner then receives a reward in the form of, for example, ETH (Ethereum's currency). A major disadvantage of the Proof of Work process is that it can be hugely energy-consuming, which is harmful to the environment.

With Proof of Stake, the role of validator is shaped differently. Users of the cryptocurrency have the chance to become validators of the network. By investing enough of the currency, they have the power to verify the transactions. Because the validators are heavily invested in the currency, the chance that they approve fraudulent transactions is minimal.

The most important advantage of Proof of Stake is that it is many times more energy-efficient than Proof of Work. This is because it does not require the energy of a powerful computer. As a result, it does not require much computing power to secure the blockchain.

The Beacon Chain upgrades

Another example from the recent past showing that upgrades have a positive effect on the price of Ethereum is the launch of the Ethereum 2.0 Beacon Chain. According to the ETH2.0 roadmap, three major updates are planned, called "the Beacon Chain", "Shard chain" and "The docking". Of these, The Beacon Chain was released in early December 2020. As can be seen on the graph, the price skyrocketed after the launch of the upgrade. From December 1 to January 10, the price had increased by 125%. If you extend it to the next peak on 20 February, you are talking about an increase of more than 230% in just under three months.

Scalability and security get huge upgrade

The upgrades of Ethereum 2.0 should ensure that Ethereum will be able to catch up with competitors who are already much more advanced in terms of scalability and security.

Ethereum 2.0 scalability improvements

Currently, Ethereum's network can only support about 30 transactions per second. An additional disadvantage is that due to the slow transaction speeds, the network "overheats" and consequently people have to pay huge gas fees (transaction costs). Ethereum 2.0 promises to reach speeds of 100,000 transactions per second in the future. This increase will be achieved through the implementation of shard chains.

Ethereum 2.0 security improvements

Security is an important feature of Ethereum 2.0. Most PoS networks have a small set of validators, which makes for a more centralized system and reduced network security. Ethereum 2.0 requires a minimum of 16,384 validators, making it much more decentralized - and therefore more secure.

Security checks of Ethereum 2.0 code are performed by organizations including blockchain security firm Least Authority and Quantstamp. The Ethereum Foundation is also setting up a dedicated security team for Ethereum 2.0 to investigate potential cyber security issues in the cryptocurrency.

Update: Staking on ETH2.0 test network is ''hot''

The launch of Ethereum 2.0 is still some time away, but some Ethereum holders can already stake their ETH on the test network of ETH2.0. Staking means that you, as an investor, purchase crypto coins and hold them in a wallet for a certain period of time. Over this amount, you will receive a fixed interest, in that respect it works almost the same as having money in a bank.

To be allowed to stake on the test network, you need to invest a minimum of 32 ETH. These investments are fixed until Ethereum 2.0 is officially released. Staking in ETH 2.0 involves some risk as it is not clear when Ethereum 2.0 will be fully released. It is expected to be released in 2022. When you invest on the testnet, you become a so-called 'validator'.

Last month in July, ETH staking hit a milestone of 200,000 validators. According to ETH2 Launchpad, these validators have currently staked over 6.8 million, with an APR (interest rate) of 6%. Converted to the value of Ethereum at the moment ($3,230), this equates to a total value of over $22 billion dollars in stakings.

ETH 2.0 can create a shock effect

Ethereum's flagship is its decentralized financial ecosystem, also known as DeFi. Unfortunately, at the moment a majority of DeFi is almost inoperable due to Ethereum's network being too slow and overloaded.

This overloading means that transactions on the network may take a long time or fail to take place. It also results in expensive transaction fees. For example, on Uniswap, a decentralized exchange and liquidity provider on Ethereum's network, you have to pay around $84 to complete a single transaction, regardless of size.

ETH 2.0 will use sharding to ensure that Ethereum moves from 30 transactions per second to a potential 100,000 transactions per second.

Ethereum 2.0 price forecasts

With many large and small updates still to come, chances are that the price of Ethereum could be affected by this. Therefore, it is very interesting what crypto experts think about the effect ETH2.0 will have on the price of Ethereum.

In the graph shown below, several price predictions have been made, including the year the prediction takes place. As you can see, some of the predictions are already outdated. Such as Crispus Nyaga's ($2500) and Simon Dedich's ($3000), less than a year after making the prediction. PrevisioniBitcoin has its forecast somewhere in the middle at a price of $4740 in 2022. From this point, the price predictions are a lot higher, with Coinpedia ,Coinpriceforecast and Longforecast predicting an price over $8000 as of 2022. From this perspective, DigitalCoinPrice is still conservative with a price forecast of $9400 in the year 2028.

One prediction didn’t fit the chart, namely the price prediction of Brian Shuster. Chairman, President, and CEO of several private and public companies. Shuster predicts an average Ethereum price of $100.000,- per coin, meaning Shuster predicts a total Ethereum market cap of approximately 10 trillion dollar. Almost the current market cap of gold. Whether Shuster’s crazy prediction will come true, remains to be seen.

eth chart

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The above mentioned strategies are for educational purposes only. Anycoin Direct never gives financial advice. You should always do your own research before investing!