“Ethereum has bullish potential for the coming months”

The price of ether (ETH), a cryptocurrency on the Ethereum network, skyrocketed more than 12% in a few hours yesterday. Will this just be a momentary impulse or can it be expected to begin a rally sustained bullish over time for ETH?

A report from US exchange Coinbase shows that ETH “has bullish potential for the coming months.”

The company maintains that ether’s long-term position “remains strong and has key advantages” because the network is significantly differentiated from other cryptocurrencies.

Among those differentiating factors is the growth of layer 2 scalability solutions, which, according to Coinbase, have proven to be a “significant and growing source of liquidity” for ETH.

Layer 2 solutions, which are technologies built on top of the Ethereum network to make it faster and scalable, are “driving demand for ETH.” This is because these solutions allow more people to use ETH without having to deal with high transaction fees and mainnet congestion.

Currently, the exchange estimates that trading activities on Ethereum’s major Layer 2s, such as Arbitrum, Optimism, and Base, They constitute 17% of the total volume of decentralized exchangesin addition to the 33% that Ethereum covers.

The amount of ether sent to layers 2 has increased

The chart below shows that the amount of ETH sent to layers 2 has seen significant growth since the beginning of 2023. In fact, it has tripled in that period.

Besides, Coinbase sees it unlikely that another protocol could replace Ethereum as the main network for decentralized finance (DeFi). This is because it has a large community of developers and users, and a wide range of applications available.

ETH usage in DeFi is also increasing thanks to the growing popularity of real-world asset tokenization projects. These projects create digital tokens that represent assets such as stocks, real estate, or even works of art.

This is something that more traditional companies that “seek to expand their operations” on the Internet have been able to take advantage of. An example of this is the tokenized investment fund on the Ethereum network launched by the company BlackRock, specialized in financial asset management, last March, as reported by CriptoNoticias.

A report from asset manager Grayscale gives the Ethereum network the best position to boost this type of asset.

Overall, Coinbase notes that strong demand for ETH, its use in DeFi, and growing regulatory clarity give it upside potential in the coming months.

ETH: store of value and utility currency

Historically, the price of ether has closely followed the price of bitcoin (BTC) more than any other cryptocurrency. However, at some times, such as during market spikes or major ETH-specific events, the price of the cryptocurrency has separated from the price of BTC. This also happens with other cryptocurrencies, but to a lesser extent.

Coinbase believes this behavior is because people view ETH in two ways: “as a store of value or as a utility currency.”

In 2023, the relationship between the price of ETH and the price of BTC has changed. When the price of BTC increased, the relationship between the two prices weakened. This means that the price of ETH increased or decreased less than the price of BTC.

As seen in the image below, the blue line shows the overall correlation between ETH and BTC. The correlation has been generally high over the past year. This means that the two prices have moved in the same direction most of the time.

The correlation has been lower during the third and fourth BTC price cycles. However, this trend seems to have ended recently. That is, the exchange shows that the correlation between ETH and BTC has been high over the last year, but has decreased recently. Therefore, A rebound in the price of ether measured in bitcoin could be expected, after being down for several yearsas can be seen in the following TradingView chart:

Ethereum ETFs will be a bullish catalyst for the cryptocurrency

Another factor that adds to the equation for Ethereum has to do with ether spot ETFs in the United States.

“We believe the market may be underestimating the timing and probabilities of potential approval, leaving room for upside surprises,” the report states.

Coinbase estimated the probability of approval of the funds between 30% and 40%. It is worth clarifying that this report was published last week, before recent developments were known that would raise that level of probability.

Bloomberg Intelligence ETF specialists Eric Balchunas and James Seyffart noted yesterday that the SEC could be “doing a U-turn on this issue for political reasons.”

For that reason, ETF approval odds increased to 75%, when months ago they had estimated it at 25%. This is something that gives bullish potential for ether in the coming months.

Coinbase believes that financial products act as a bullish catalyst for ether, in addition to the factors mentioned above, such as layers 2.