A man uses the Ethereum ATM in Hong Kong, Friday, May 11, 2018.
Ether was the star cryptocurrency last year, way outperforming its predecessor bitcoin. But 2018 has been a different story.
The world's second largest digital asset is down 76 percent this year and can't seem to catch a break. Investor patience is wearing thin — mainstream adoption isn't here yet, folks can now short the market, and blockchain competitors are gunning to be the top platform for developers.
Ether is the name of the cryptocurrency but it's closely associated to the popular Ethereum blockchain. Unlike bitcoin, which gives access to a global financial network, ether gives you access to a computer network. Its use has been compared to gasoline for a car. Developers can use ether tokens as fuel for certain functions on that blockchain.
Tons of initial coin offerings, or ICOs, built their applications on the Ethereum blockchain late last year. Investors saw that as an opportunity.
"When people saw the trends in ICOs as they kept going up, it's easy to understand why people think this could be a long-term store of value," said Kyle Chapman, an analyst at venture capital firm Cosimo Ventures. "That was the appeal for it, and that's why you saw the extreme growth last year."
Initial coin offerings raised more than $7 billion last year alone, according to data from Autonomous Next. In an ICO, coins or tokens are put up for sale as a form of crowdfunding but instead of voting rights or dividends that come with shares of a company, "utility tokens" promise access to a network, platform or service.
But many of those crypto projects have gone belly up, or been outed by regulators as frauds. Even if some projects on Ethereum's blockchain are successful, they haven't been perfected or widely adopted as fast as some investors hoped.
Kyle Samani, managing partner at crypto hedge fund Multicoin Capital said the price drop in ether this year is a reflection of that.
"People started building apps and software but the market got ahead of itself," Samani said. "They are realizing you have to be in it for the long haul and some investors don't have the patience."
Competition
Ethereum certainly has a first-mover advantage, but with that comes the target on its back.
Cayman Islands-based start-up EOS for example has been billed as the "ethereum killer," and raised $4 billion in its ICO before the product even went live in June. While it had a rocky launch, the project is spending part of that treasure chest to incentivize developers to build applications on its platform, instead of Ethereum.
"Ethereum is facing a massive crisis in investor confidence over its inability to rapidly scale in the face of competition," said Eiland Glover, CEO of Kowala, a stable cryptocurrency pegged to the U.S. dollar. "The murkiness of Ethereum's path forward and the lack of DApp mainstream adoption are both hurting ER20 token prices and the market as a whole."
EOS isn't the only contender — NEO, Cardano, QTUM, Tezos, Ethereum Classic are among the others looking to dethrone the platform.
Critics of Ethereum also tend to gripe about its ability to scale, and its speed. Current blockchains like Bitcoin and Ethereum, can process between three and 15 transactions per second. Payment process systems like Visa or Mastercard, in comparison, process tens of thousands of transactions in a second.
FUD — "Fear, Uncertainty, and Doubt"
It's an acronym crypto enthusiasts know well, and according to some pundits is taking its toll on the price of ether.
Whether or not Ethereum is ahead of the pack when it comes to technology, in cryptocurrency prices, perception can be just as important as reality. Buzz around flaws in Ethereum is picking up, according to Matthew Newton, market analyst at eToro, which he said is partially to blame in ether's price drop.
"There is also a lot of FUD being spread around about the death of ether, which may contributing to an emotional sell off," Newton said.
He added that many ICOs hold a ethereum and "have watched a fortune dwindle in the last year." In order to manage their cash flow and expenses, many have had to sell parts, if not all of their holdings.
Angel Versetti, CEO and Co-Founder of blockchain-powered network Ambrosus said despite any shortcomings, Ethereum has been proven to work well compared to other, newer blockchains. The negative narrative might be driven by its competitors.
"There are more stakeholders with concentrated power (or large stake of holdings of coins) among other altcoins, who are promoting a narrative that Ethereum's competitors are better and stronger," Versetti said. " It's important to bear in mind, however, that these predictions are not based on fact, and are merely speculative in nature."
Shorting the market
In addition to competitors entering the marketplace, Ethereum is also dealing with short-sellers. Earlier this year, peer-to-peer trading platform BitMEX came up with a swap product that allows investors to bet against ether, which former Goldman Sachs analyst Timothy Tam said has dampened prices.
"The reality is it is a lot easier to short ether now and that contributes to the downward movement," said Tam, who is now CEO of crypto market intelligence platform CoinFi. "Ether has underperformed but its use case hasn't changed,"
Tam, who has also worked at two Hong Kong-based hedge funds, said market manipulation that regulators have cited as a key concern for bitcoin, is also an issue for ethereum.
"We do spot abnormal price movements, and it does seem odd," Tam said.
Relative value
Although bitcoin climbed to almost $20,000 last year, ether would have been the better bet.
Bitcoin rose 1,318 percent from January 1 to the end of 2017, according to CoinMarketCap.com. Ethereum in comparison, rose 9,162 percent to more than $756 after starting the year around $8.
Both cryptocurrencies have struggled to find footing since. Bitcoin is down 54 percent this year, and has lost $1,000 in the past 48 hours. But ethereum has fared much worse — it's down 76 percent this year, and was trading near $220 Thursday.
While some investors have moved on in search of the next ethereum, Tam said these dips could still be a buying opportunity for more patient investors.
"It's a more stable technology — I think we'll look back on the $200 price and say 'wow,' that's crazy cheap," Tam said.
