Could Ether's Crypto Value Drop To Zero?

Even as cryptocurrency markets continued their prolonged plunge from the beginning of this year, Eethereum’s ether mostly avoided the double-digit single-day losses of other cryptocurrencies. Its smart contract features generated positive press and the ICO boom helped it avoid the caustic commentary, regulatory or otherwise, reserved for bitcoin. (See also: What Is Ether? Is It The Same As Ethereum?)

But the recent downturn in cryptocurrencies has brought out the ether bears. They claim that the cryptocurrency’s price will eventually drop to zero. 

A Speculative Price Increase

There are two strikes against ether, as outlined by its critics. 

The first one relates to the increase in its price. BitMex co-founder Arthur Hayes contends that ether is a “shxxcoin”. According to Hayes, the story started back in 2017 when the number of crypto hedge funds multiplied. “The seed capital for many of the venerated crypto hedge funds emanated from outsized returns on holdings of ether and token projects,” Hayes wrote in his newsletter. 

It might be pertinent to recall that initial coin offerings, an overwhelming majority of which were based on Eethereum’s blockchain, skyrocketed in 2017. Per statistics from Autonomous Research, ICOs raised $228 million in May 2017. By the end of that year, that number had risen to $2.2 billion. Ether itself produced returns of 600 percent last year. Investors in cryptocurrencies and ICOs quickly turned their gains into crypto hedge funds for accredited investors. But Hayes writes that cryptocurrency hedge fund managers and investors lack the discipline of their equity counterparts. They have brought a venture capitalist’s mindset to cryptocurrency markets. 

In this mindset, paper valuations are based on the perceptions and opinions of a small group of people instead of the wider market. “Due to the illiquidity of their investments, they (VC investors) can market to fantasy, show amazing returns on paper, and get paid. The only secondary market validation of their investments is the next round of fundraising, which can easily go up if you get your boys to go in with you,” he writes.  

Hayes writes that the trough in ether’s price recently was caused by investors who are dumping the coin after realizing that it has passed its peak. He says ether could very well have a 2-digit valuation in the future. As of this writing, the cryptocurrency is trading at $211.32 per pop and has a market valuation of $21.5 billion. 

Ether’s (Non) Utility

The other criticism of ether comes from the founder of MIT’s cryptocurrency project. In a Techcrunch post, Jeremy Rubin takes aim at ether’s utility within Ethereum’s ecosystem and argues that ether's collapse is inevitable. He writes that Ethereum does not really need ether to power transactions within its network. (The cryptocurrency is gas for transactions within Ethereum’s blockchain. In simple words, this means that each transaction on Ethereum’s blockchain costs a certain amount of ether. If enough ether is not reserved for the transaction, it may not be conducted at all.) 

There are various problems associated with using ether on Ethereum’s blockchain. For example, startups face problems setting an exchange rate for their token’s value with respect to ether due to the volatility in cryptocurrency markets and the economics of smart contracts. In the latter case, setting value at parity may result in high gas fees while a depreciated value may make their internal token worthless. According to Rubin, Ethereum’s blockchain can also function without ether. Startups can eliminate ether use by using token incentives to draw investors and users or using the tokens themselves as gas for transactions in Eethereum’s blockchain. The exchange rate for tokens in the latter case could be determined using a weighting system on Ethereum’s blockchain, writes Rubin. 

Are The Arguments True? 

Several arguments raised by these critics can be applied as a whole to cryptocurrency markets. For example, prices for several cryptocurrencies in the last year have been driven by speculation rather than the fundamentals of their platforms. Thanks to smart contracts and cryptokitties, ether, in fact, is among the select cases of cryptocurrencies actually being implemented in a real-world case scenario. (See also: Cryptokitties Are Still A Thing. Here's Why). Consider the case of Tron, whose valuation jumped on the basis of a test platform. 

But a cryptocurrency is only as useful as its network effects. Just like their fiat counterparts, coins are worthless unless they have a velocity and are used for practical considerations. It is here that ether seems to be on slippery ground. If Rubin’s argument for ether’s non-utility comes to pass, then the cryptocurrency’s value could very well plummet to zero. There are dissenters, however.  

“In essence, I think there is some natural base level of reservation demand that will always be there for a unit of exchange that makes a powerful blockchain tick. And it's hard not to imagine that this level of demand increases if and when Ethereum moves to a proof-of-stake consensus mechanism,” writes Michael Casey, senior advisor for blockchain research at the MIT Digital Currency Initiative. 

Investing in cryptocurrencies and other Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or other ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. 

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