The cryptocurrency market recovered from mid-June lows as the rally coincided with the overall stock market rebound. Cryptos have been rising at a higher rate over the past six weeks as volatile assets continue to swing rapidly.
How do major cryptos work?
Interestingly, Bitcoin (BTC) has not seen the same recovery as Ethereum (ETH) and other crypto platforms have experienced. Ethereum itself is up almost 70% from its recent lows hovering around $1,000 in mid-June, while Bitcoin is “only” up about 25% during this time. Part of this is that Ethereum fell to a large extent from early April to mid-June, as both are down around 50% from their early April level.
However, there are a few important reasons why Ethereum is recovering at a faster rate than Bitcoin. Some of them even have to do with the technology itself to change.
The Ethereum merger
Ethereum 2.0 is coming soon as it prepares to complete its transition from a proof-of-work (PoW) network to a proof of stake (PoS). The merge to version 2.0 has been a long wait with many delays, but, it seems, there are only a few more tests left before it’s finally complete. Merge for Ethereum’s final test network environment, Goerli, is occurring next week between August 6 and 12. Next, the Ethereum mainnet merger should take place in September if the test goes as planned.
Using a PoS consensus mechanism will allow Ethereum investors to earn rewards for staking their ether. PoS systems also require much less power than their PoW counterparts which tend to be extremely power-hungry, which has led to many environmental concerns about the impact of proof-of-work crypto platforms. One of the other major benefits of staking systems is that only investors who are financially committed to the success of the coin can earn rewards through staking.
The imminent merger of Etherum with a PoS system and the fact that it is the most used platform for the development of other cryptocurrencies has led more crypto investors to bet on its recovery.
The fall of Bitcoin
Alternatively, Bitcoin uses a PoW model and, more importantly, has failed in its task of acting as an inflation hedge or an asset that trades similarly to gold. Many investors believed Bitcoin could act as a hedge against inflation as a currency with no central authority meant to mimic gold in some ways, such as a limited supply that becomes increasingly difficult to exploit as there is less gold left. supply.
Bitcoin has fallen significantly from highs reached in November 2021 and has been more correlated to broader markets, especially tech stocks, than many expected. The cryptocurrency has suffered along with the stock market in 2022, with Federal Reserve policy decisions and international affairs such as the Russian invasion of Ukraine having huge impacts on its value.
Bitcoin has reached a point where it trades much more like another tech stock than a completely uncorrelated asset class. This relationship has only grown stronger as more companies invest in cryptos. In fact, overall retail speculative activity is extremely correlated to the price of Bitcoin when comparing total call option contracts to bitcoin price chart.
Cryptos have had a nice rally over the last month and a half, but there is still a long way to go to reach where they were earlier in the year, let alone the highs set in November of last year. The total cryptocurrency market capitalization sits at just under $1.1 trillion, almost half of what it was in early April, when it hovered around 2.15. trillions of dollars. The biggest tech coin, Bitcoin, is struggling to recover from lows as quickly while Ethereum remains a favorite to rebound as it prepares to finally complete its meltdown towards 2.0.