It wasn’t just stocks that took a hit on Wednesday. Cryptocurrencies were also sharply corrected as the market deteriorated, and Ethereum (CRYPTO: ETH) She was not immune to backtracking. The world’s second most expensive digital currency slipped on Wednesday, down 9% by the time the East Coast hit midnight.
Where do we go from here? Is this opportunity knocking or is the door about to collapse? Given the excellent returns of Ethereum over its six-year trading history, the easy answer is to buy the dip. The reality is more complicated than that.
The date is on the side of the bulls at this time of year. As I noted earlier this week, Ethereum has a strong track record of dominance in January. The crypto has responded well at the start of nearly every year since its launch in the summer of 2015.
- January 2016: 148%
- January 2017: 35%
- January 2018: 48%
- January 2019: (20%)
- January 2020: 39%
- January 2021: 78%
It’s up at least 35% or better in all but January. Ethereum is trading less than five days into the new month, which only means more upside if it has another double-digit gain in the entire month of January.
You don’t want to own Ethereum just for January, of course. The biggest catalyst awaits later this year when it completes the long-awaited migration to Proof of Stake protocols. This move will help patch many of their platforms, making them more energy efficient to produce and more cost effective to use. Ethereum is already operating as the preferred blockchain technology that fuels thousands of decentralized applications. Just wait until you get better in a few months.
Ethereum is at the heart of smart contracts and other use cases that rely on the blockchain. There are more than 3,000 applications for markets, exchanges, games, and other decentralized finance platforms that rely on cryptocurrency. This does not mean that it is the best. Mickey D’s may sell most of the burgers, but that doesn’t make them the best.
The big problem with Ethereum is how much users have to spend in gas fees just to move it. If you love Ethereum, just wait until you try to buy or sell a non-fungible token on the Ethereum trading platform. Even after you complete the proof-of-stake renewal, there will be smaller cryptocurrencies that excel in areas that are lacking in Ethereum.
There is also a broader case for the crypto market itself. If the cryptocurrency loses a favourite, it will not be as if Ethereum or any one denomination will buck the trend and move higher. The bullish talking point for cryptocurrencies in general is that they protect against inflation. It not only reduces the way cash assets function as daily rates rise. The problem is that this inflationary hedge was more of an inflationary brink. Ethereum is down about 30% since its peak two months ago as inflation headlines dominate the market story.
The bullish case for Ethereum is strong, but that does not mean that there will be no sharp corrections and outright crashes along the way. A 30% drop in the past two months may seem like a lot, but it’s child’s play when it faces the crypto crash of 2018. Buying on the dip is tempting, but it’s not like a traditional stock surge where earnings multiply and underlying growth rates are easy to collapse. Buying Ethereum on the dip now is based solely on the assumption that it will become more popular later.
I own Ethereum, so there is no denying my long-term opinion on the widely traded cryptocurrency. Knowing where you will end up in the short term is a much bigger challenge.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.