The driving force behind ethereum price volatility

ICOs fuelled cryptocurrency’s meteoric rise, as well as its subsequent decline

The driving force behind ethereum price volatility

The Ethereum price has seen some wild swings in recent weeks, after peaking to an all-time high of over $400 in mid-June. The cryptocurrency has made the headlines with its meteoric rise to prominence this year, which led to quadruple-digit percentage gains.

Since hitting its all-time high last month, however, bitcoin’s closest rival has seen a sharp decline, which culminated this week, when it lost 25 percent of its value over two sessions. But after falling below $200 for the first time since May, the ethereum price has rebounded and is currently trading at around $205. So what is causing such high volatility?

According to some experts, including the CEO of Chinese bitcoin exchange BTCC Bobby Lee, the price gyrations on ethereum and other cryptocurrencies are just a sign that people have yet to discover the true value of these new classes. Others, such as eToro analyst Mati Greenspan think that the recent drop is just a correction after the rapid advance that preceded it. And the biggest sceptics express concerns that the current state of the cryptocurrency market is reminiscent of a bubble.

But there is one more factor that might just be the biggest contributor to ethereum’s extreme price volatility: ICOs (initial coin offerings).

In a recent article on the subject, Bloomberg Businessweek’s Shuli Ren and Tim Culpan point out that ICOs were the driving force behind the massive rally that allowed ethereum become the second most prominent cryptocurrency, behind bitcoin. These offerings allow startups to raise funding for projects running on the ethereum blockchain, by pre-selling their own cryptocoins for ethereum.

Startups like Bancor, Tezos and Asia-based Block One raised hundreds of millions of dollars worth of ethereum in their respective ICOs. In this way ICOs have helped the cryptocurrency to take off, but that also makes them responsible for its subsequent decline.

In order to fund their projects these startups have to convert some of the ethereum they’ve received into fiat currency. And with hundreds of ICOs launched in the past few months there is an abundance of cryptocurrency that need to be sold.

Ren and Culpan note that the four large ICOs alone raised more than $500 million in a matter of weeks, while daily trading of ethereum averages less than $350 million this year. This puts the nascent market under immense selling pressure.

Still, there are signs that the ICO trend isn't over yet, including talk of an impending mega-offering from publishing enterprise Press.One. This is helping ethereum and could explain its most recent rebound. This situation is also attracting speculators, who buy ahead of the expected uptick in demand, consequently driving prices up.

But the end of the next fundraising cycle will create a similar problem, where large amounts of ethereum will once again need to be sold, further fuelling price volatility.

The demand for ICOs will eventually cool down, which could potentially lead to a drop in volatility. Such normalisation of the market will actually be good news to all, who believe that ethereum could one day become a legitimate currency. Because an asset that experiences such wild price swings is probably not the best medium of exchange for everyday purchases.

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