Product in the Spotlight: Ethereum-US Dollar (ETH/USD)
The ETH/USD pair started 2018 on a good note, trading at $1,412, two weeks into January, with a market capitalisation of $1.3 billion. In a matter of a few weeks, however, the price declined, with a decrease in market capitalisation, just like other cryptocurrencies. By February 6, 2018, the pair was trading at $651. By the end of April, however, the volatile asset class started surging again.
Market sentiment picked up as a result of high profile investors deciding to trade in cryptocurrencies. A lot of it also had to do with the reduced tax-selling pressure in the United States, following the tax-day deadline of April 17, 2018. Around this time, Ethereum recorded a month-to-date gain of over 70%, crossing the $700 mark on April 25, 2018. It maintained its second position in terms of market capitalisation, at $65.1 billion.
A month later, as of May 25, 2018, the pair is dangerously close to the $600 mark, at $596, with a market capitalisation of $59 billion.
The underlying capacity of Ethereum to provide decentralised processing power as well as bandwidth makes it different from other crypto coins, which are mostly investment tokens. The more the platform is used, the higher the price will rise. Given that the actual utilisation of the platform is just still in its nascent stages, there are high expectations that the coin will touch the $2,000 mark by the end of 2018. The coin is also increasingly being listed on exchanges, making the purchase of Ether no longer a big deal.
With the price increasing, there are chances of corrections in a shorter time period, but for the longer term, the asset holds promise. A lot will also depend on how the world’s reserve currency performs, which makes it important that traders follow the factors driving it.
Factors that Drive the US Dollar and therefore the Ethereum/Dollar pair
- Trade Deficit: If US exports rise, demand for the dollar will also rise, as consumer countries have to pay for US products and services in USD. The US government and large American corporations issue bonds to raise capital, which are paid for in dollars by foreign investors, again increasing the dollar value. The dollar is considered a safe haven during times of global economic uncertainties. Therefore, demand for the dollar persists despite fluctuating economic performance.
- Unemployment Rate: If the NFP (Non-Farm Payroll) reports show higher unemployment levels, it implies a slowing economy, with declining consumption. The government will then have to resort to selling off their bonds and stocks, which will be bought by foreign investors in their own local currencies. The dollar value will diminish in this case. The NFP reports are, therefore, a key economic indicator for the USA.
- Inflation and Interest Rates: The decisions taken by the Federal Reserve regarding US monetary policies determine the performance of the USD. A higher interest rate usually signals a stable and growing economy. Traders look for announcements by the Fed to make informed decisions.
- Recession: Interest rates could fall if the country experiences recession, similar to 2008. This will decrease the chances of attracting foreign capital and result in the weakening of the dollar, compared to other currencies.
- Government Debt: In case of a trade deficit, foreign investors sell their bonds in the open market, predicting government debt. This brings down the value of the home currency in relation to others, bringing down its exchange rate.
- Terrorist Attacks and War: The US has seen quite a lot of both. They damage consumer confidence and business growth, hampering economic growth. Wars result in budget deficits, due to the associated spending, which in turn can increase the national debt. In short, both these factors lead to a decline in the currency value.
- Government Expansion: The creation of new departments cost money, which reduces the dollar value due to the associated opportunity costs.
- Money Supply: Increased circulation of the dollar leads to inflation. As the supply increases in comparison to demand, the value of the currency decreases. The Federal Reserve publishes the M2 and M3 data reports periodically to give an idea of the US money supply.
- Growth in Manufacturing: Growth levels of the manufacturing sector are important indicators of US economic health. Slow growth indicates a slower economy, causing investors to sell the dollar. Conversely, strong manufacturing growth indicates a growing economy, and a stronger dollar.
The United States’ stance on cryptocurrency regulation will also affect the future prices of Ethereum. If the SEC continues to view ICOs as security offerings in disguise, a lot of them will get into trouble, which will affect the ETH/USD trading pair.