The first half of 2024 has been a whirlwind for Ethereum. The successful Dencun Upgrade in May fueled a surge in price, followed by a period of volatility as investors adjusted to the new landscape. However, these hot events can often cloud judgment and distract from the core factors that truly drive Ethereum's price. This article will delve into two key factors that remain crucial for Ethereum's long-term success: liquidity and narrative.

 

Liquidity - The Lifeblood of Ethereum Price

Liquidity, simply put, refers to the ease with which an asset can be bought and sold. In the world of cryptocurrencies, liquidity plays a crucial role in determining price movements. When there's a large influx of money entering the market (hot money), it pushes prices upwards. This is why many investors keep a close eye on the Federal Reserve's monetary policy, particularly interest rate decisions. Traditionally, a rate cut by the Fed injects liquidity into the system, potentially leading to a rise in asset prices, including cryptocurrencies.

 

However, the Federal Reserve isn't the only actor that influences liquidity. In the first half of 2024, for example, both Bitcoin and Ethereum experienced significant price increases despite no interest rate cuts. This is because the US government has other tools at its disposal, such as the Bank Term Funding Program (BTFP). When the BFTP funds were depleted in the first half of the year, the upward momentum for Bitcoin and Ethereum stalled.

 

Looking ahead to the second half, a fresh round of liquidity injection is highly likely. With the US presidential election looming, the US will likely implement economic stimulus measures. One possible approach involves allowing countries holding US debt to pledge it to the International Monetary Fund (IMF) at 0% interest in exchange for US dollars. In essence, this allows for the direct conversion of US debt into liquid funds, essentially functioning as a global BFTP. This strategy is particularly attractive given the current decline in the appeal of US debt among various countries. By enabling quicker conversion to liquid funds, the US can incentivize continued purchases of its debt. Ultimately, this influx of liquidity can positively impact the cryptocurrency market, potentially including Ethereum. According to the current U.S. Treasury bond issuance plan from July to September, this round of liquidity release may eventually push the Ethereum price to a high of $10,000 before the end of 2024.

 

Narrative - Ethereum's Power of DeFi

Beyond liquidity lies the core narrative driving Ethereum's value: its role as the financial bank of the cryptocurrency space, powered by Decentralized Finance (DeFi). As long as this narrative remains strong, investor demand for Ethereum will persist. Therefore, when evaluating market news, the key question becomes: how will this news impact Ethereum's DeFi narrative?

 

For example, the recent discussions by the US Securities and Exchange Commission (SEC) regarding Ethereum's "staking" function raise concerns. The SEC considers this function to potentially violate security regulations, pushing Ethereum away from its classification as a pure commodity like Bitcoin. While technically changing Ethereum's staking mechanism might be difficult, such news can still negatively impact the DeFi narrative in the short term, causing price volatility.

 

However, the narrative can also be bolstered by positive developments. The continued growth and innovation within the DeFi ecosystem on Ethereum is a strong positive. As more users and developers flock to Ethereum for its decentralized financial applications, the narrative surrounding its utility and future potential is reinforced. This, in turn, can attract more investors and drive up the price.

 

Conclusion

Ethereum's price is influenced by a complex interplay of factors. While liquidity injections like the potential global BFTP can create favorable conditions, it's the core narratives that define Ethereum's long-term value. As the leader in DeFi, Ethereum's future hinges on maintaining its position as the go-to platform for decentralized financial applications. Investors who understand these fundamental drivers will be better equipped to navigate the ever-changing cryptocurrency landscape and make informed decisions about Ethereum's potential.

 

If you are also interested in the factors determining bitcoin price, you can refer to the article "Bitcoin price prediction".