Why is blockchain-of-choice Ethereum underperforming crypto rivals?
Ethereum, the open-sourced smart contract, has become the blockchain of choice for initial coin offerings, software developers and programmers.
Yet in spite of the growing popularity, Ether, the coin on the Ethereum network, significantly underperformed its counterparts during the latter part of a first-quarter selloff across all cryptocurrencies.
Of the top five cryptos, Ether was the best performer of the first quarter even as it lost 40.9%. However, in March alone the price fell 54.9%, the worst performer of the five. The price of Ether traded to $365.56 on Sunday to kick off the second quarter, its lowest level since November 2017.
Read: Here’s how brutal the first quarter was for bitcoin and other cryptocurrencies
The popularity of Ethereum lies with its flexibility (it allows both permissioned and permissionless transactions) and its efficiency (the average block time for Ethereum is around 14 seconds, compared to Bitcoin’s, which can be over 10 minutes).
So why can’t Ether itself — the second biggest cryptocurrency behind bitcoin
— capitalize on this reputation?
For one thing, investors in Ether got a scare on March 22 when creator Vitalik Buterin raised the idea of charging fees to those who store data on the Ethereum network. The success of the blockchain means that data stored on the network has surged. Per its protocol, all nodes are required to store such data.
Viral games like CryptoKitties is a prime example. The game, where players ‘collect’ virtual kittens and breed them into rarer kittens that are bought and sold, created havoc in late 2017. At one point, the game accounted for 11% of the volume transacted by miners and pushed transaction fees to record levels.
“The irony, of course, is that crypto is facing many of the same problems of many traditional start-ups. It’s a victim of its own success — you can grow at a loss for only so long. Someone has to pay the electric bill,” said Jeff Koyen president of 360 Blockchain USA.
“And anyway, what’s wrong with charging the CryptoKitties people a few extra bucks? I’ve got no problem with the kitties, but they’re not exactly burning down the global capitalist hegemony,” he said.
And while the platform deals with possible overloading concerns, regulators are circling, too.
As watchdogs look to rid the digital asset world of nefarious behavior, tokens look ripe for the picking. The ICO market, in particular, which is predominantly launched on the Ethereum blockchain, continues to come under regulatory fire.
“I want to go back to separating ICOs and cryptocurrencies. ICOs that are securities offerings, we should regulate them like we regulate securities offerings. End of story,” said Jay Clayton, Securities and Exchange Commission chairman, at a Feb. 6 hearing.
The SEC has taken action against a number of ICOs in the last three months, labeling many of them as scams.
Read: The ‘Wolf of Wall Street’ says ICOs are ‘the biggest scam ever’
Furthermore, the increasing number of failed ICOs has created uncertainty. A survey from news.Bitcoin.com found that 46% of 2017 ICOs either failed at the funding level or have gone out of business since launch.
“Tokens are vulnerable right now, and Ethereum is paying the price,” said Koyen.
“It’s the live companies that have the Ether, not the failed ones,” said Tim Enneking, founder and managing director of Crypto Asset Management.
“These companies have expenses in fiat and are having to sell Ether to pay for them. They aren’t great traders and selling it into an already falling market is exasperating the fall.”
Enneking added that some companies had tax obligations toward the end of the first quarter, forcing them to cash in.