Is Ethereum a Good Investment?

Ethereum is a Layer-1 solution, meaning that it has its own blockchain. Furthermore, several other projects have been built on top of it, from decentralized finance applications to nonfungible token projects. Because so many ecosystems are built on top of Ethereum, the demand for ETH, the native token, is typically quite high. ERC-20 tokens, or ones built on the Ethereum blockchain, are quite common in cryptocurrency. 

While many of the original competitors to Bitcoin are worthless today, Ethereum has consistently been the second most valuable cryptocurrency in the world. This guide aims to walk you through the reasons why Ethereum is a good investment, how you can invest in Ethereum, make profits on short-term fluctuations, explain all the pros and cons of Ethereum investing, and more. 

Ethereum Investing: What Is It?

Ethereum investment is investing in the future finance, as Ethereum is a smart contract platform with lofty goals. One of its lofty goals includes replacing Wall Street and has already started to see company shares and bonds tokenized on the network as part of some business transactions. 

Ethereum’s potential is much more remarkable than even Bitcoin’s. This is because it acts as a platform for developers to build and innovate through continuing research. The recent decentralized finance, or DeFi, trend is one area worth watching as it allows for a new way to approach banking. 

DeFi will allow permissionless lending and borrowing instead of dealing with a traditional bank. The smart contract allows various agreements without counterparty risk, unlike the traditional banking system. This also allows the ability to lend and borrow without third-party costs or interference. 

The NFT explosion, or non fungible tokens, is also an essential part of the Ethereum price growth as most of them are built on some type of Ethereum smart contract standard. ETH is used to pay gas fees for Ethereum and other Layer-2 solutions. This has been a primary driver of Ethereum’s price, having it outperformed Bitcoin and most other cryptocurrencies in 2021.

Is Ethereum A Good Investment? How It Performed In 2021

2021 was a strong year for Ethereum, as it hit its all-time high of $4735 in November. The foundation laid in 2020 significantly contributed to the run higher, as the markets had jumped out of a “Crypto Winter” earlier that year. The DeFi explosion continued, with more than $100 million in total value being locked up. 

NFT marketplaces also saw exponential growth as the bubble in NFTs hit full stride. The Ethereum 2.0 update continued to be rolled out but has been slow in its implementation. The update should help scalability and gas fees, allowing for longer-term success.

Investing In Ethereum In 2022? Is It A Good Idea?

2022 has been brutal on most crypto markets. Ethereum has been volatile due to many issues, not the least of which include the overall financial condition of markets. Risk appetite has been eviscerated, and hence crypto has suffered. 

However, it should be noted that massive selloffs are nothing new in crypto. In 2021, the total value locked in the Ethereum network had achieved more than $90 billion, and demand should only rise over the longer term. Nearly 25% of all ETH in circulation is locked up in smart contracts, with a significant share of that relegated to the ETH 2.0 staking address. 

An update dubbed EIP 1559 should theoretically cause ETH supply to be much scarcer over time. The ability for Ethereum to be so many things over the long term has Wall Street taking notice, thereby bringing institutional money into the market. That being said, Ethereum, and the rest of crypto, have shown themselves to have a high correlation with risk appetite assets such as stocks and some futures markets.

Ethereum Fundamental Analysis

Decentralized finance is a trend that has helped Ethereum continue to strengthen its use case. The Ethereum ecosystem has been growing for some time, as the ability to work with smart contracts has a lot of investors excited about the future of the network.

Most metrics of the Ethereum network have grown, especially the number of Ethereum wallet addresses. The Ethereum 2.0 upgrade is being implemented to fight network congestion, one of the biggest complaints about Ethereum. This should drive down gas fees and expand the use case scenario. The amount of ETH held on exchanges has fallen, suggesting many are willing to hold onto Ethereum.

Ethereum Technical Analysis

Crypto markets, and by extension Ethereum, are highly influenced by technical analysis. The picture for Ethereum and the rest of the cryptocurrency world took a massive nosedive in early 2022. However, this is nothing new for Ethereum, and it has seen a willingness to continue grinding higher, even after a couple of “crypto winters.” This is when the price of crypto seemingly goes nowhere after a significant fall. 

This is a new investment area that should be kept in mind when you look at charts. There are going to be a few growing pains along the way. Therefore, you need to decide whether you will trade or invest. Many of the more successful crypto enthusiasts can do both. They will hold some in a wallet and trade other coins, perhaps on a CFD platform like AMSTERDAX. This allows for pure price speculation without taking custody. 

The recent selloff is best looked at through the prism of the longer-term charts. The market fell precipitously from late 2021 to mid-2022. However, it is worth noting that this has happened before, only to see the market make even higher levels once the dust settles.

Ethereum Sentiment Analysis

With the explosion of DeFi and NFT markets, Ethereum sentiment took off in 2021. However, Ethereum will also be susceptible to external issues, including monetary policy and inflation. While crypto is still an area that should continue to expand over the long term, the reality is that in 2021 a lot of institutional money came into the market. Because of this, sentiment analysis is a bit different than it used to be. 

The Federal Reserve has been entering a tightening cycle due to inflationary concerns. This has highlighted the switch of drivers for the market, as institutions are much more likely to invest in bonds or even US dollars when there is uncertainty. In a sense, part of “growing up” for crypto has been that the behavior of the market has switched to a much more traditional correlation. As risk appetite increases, so will the price of Ethereum, and vice versa.

One way to measure sentiment analysis in the future will be a combination of watching interest rates, currency markets, and stock markets. In general, the approach has been: 

• Interest rates: As interest rates rise in the US and other major economies, it drives money into yield-bearing instruments such as bonds.
• Currency markets: FX rates correlate with risk appetite. The most important currency to watch is the US dollar. If the US dollar is falling, it typically means that people are willing to invest in “riskier markets.”
• Stock markets: Stock markets such as the S&P 500 can also be an excellent sentiment tool. After all, the institutions that push the market around will decide whether they are willing to step into other markets. The higher the S&P 500 is going, the more likely it is.

Expert Expectations and Ethereum Price Predictions

It is generally expected that Ethereum will have a promising future. However, predicting the future price of Ethereum is challenging, as multiple internal and external factors come into play. For example, even though Ethereum 2.0 will address a lot of the growing pains of Ethereum, it has been somewhat slow to roll out. 

Global markets have struggled in 2022 and have been felt throughout the crypto industry. There have been several stablecoins and DeFi lenders collapsing, which has a certain “knock-on effect” on the price of Ethereum, as it does all cryptocurrencies. In this environment, estimates are all over the place. However, it is generally accepted that prices will rise over the long term. 

Bloomberg intelligence analyst Mike McGlone has it ending the year between $4,000-$4,500 and rising into 2023. This would be a complete recovery of all losses experienced by Ethereum during the early part of the year. 

Coinpedia, a popular website dedicated to cryptocurrencies, has several analysts that believe Ethereum could see a massive surge in price if the Ethereum 2.0 rollout goes smoothly and is done quickly. Some higher-end predictions include a $12,000 price target by early 2023. 

Tyler and Cameron Winkelvoss, founders behind the crypto exchange Gemini and co-creators of Facebook, have predicted a “Crypto Winter” for the near term. The twins cite macroeconomic uncertainty as the main culprit. 

Ethereum co-creator Vitalik Buterin, the face of Ethereum, has warned the stock-to-flow Bitcoin price prediction model “is really not looking good now.” While he was speaking of Bitcoin, the price of Bitcoin influences the price of almost all other coins. If his observations are correct, it further props up the idea of trading derivatives like CFDs to take advantage of the uncertainty and volatility.

Read more Ethereum Price Predictions

Ways To Invest In Ethereum

Most traders did not have the chance to buy Ethereum during its token sale, as that is long gone. The enormous return on investment is something that most can only dream about. However, that does not mean that Ethereum can’t still be an excellent investment. It was challenging to get Ethereum when the initial offering happened, but today it can be bought quite easily with just a few clicks. Here are some of the more common ways to invest in Ethereum:

Buy and Hold

Buy-and-hold is a sound and simple trading strategy, but it is also somewhat risky due to the volatility in the crypto markets. The explosive price action in crypto can work for and against the holder. For example, Ethereum was worth close to $4800 and then fell to the $1000 region in just eight months. This is the type of volatility that you are forced to sit through. 

Ethereum has seen massive growth over the last several years, but the pullbacks have been brutal. If you can sit through the type of volatility seen from time to time and add to your overall holdings, this has proven extraordinarily profitable so far.

Trading

Instead of holding Ethereum through huge downtrends, spot traders can sell their Ethereum holdings for cash and avoid losses. However, there is no way to profit from a downtrend on a spot platform. For example, traders who bought at the 2020 low and sold at the high of roughly $4800 would have made approximately $4,200. However, as they held past that point, they gave up massive gains. 

Derivatives allow traders to profit from both uptrends and downtrends, as traders can “go long” (buy) or “short” (bet on falling prices) in a market. In a derivative market, such as the CFD markets offered by AMSTERDAX, traders can leverage their positions. The example mentioned above could have been a gain of $420,000 instead of $4,200. While it is obvious that CFD markets offer more significant gains, this risk is something that you should approach with strict risk management. 

Even more importantly, traders who saw the Ethereum markets fall could have also profited from the price drop. In the CFD market or contract for difference, you are speculating on the market’s price, not worrying about taking custody of the asset itself. Because of this, it only takes a few clicks on the AMSTERDAX platform to benefit from price moves, be it up or down.

Pros And Cons of Ethereum

Remember that Ethereum is a highly volatile asset and a new technology. The market is constantly threatened by what is to be the next “Ethereum killer,” but no other project has been able to come close to Ethereum in usage or utility. 

Pros

• Brand name recognition: Ethereum has a significant brand name effect behind it, as it is one of the original altcoins. It is the hottest token in the crypto market due to both NFT and DeFi uses.
• Smart contract platform: Ethereum is a smart contract platform that is well tested and has the ability for permissionless transactions, which could be the future of finance.
• Ethereum 2.0: Ethereum 2.0 is being rolled out, which should increase transaction speed and use case scenarios.

Cons

• Previous scaling issues: Ethereum has had trouble with scaling due to the strong demand for DeFi use.
• ICO Treasuries: There is still a significant amount of Ethereum held by ICO Treasuries that could dump their tokens one day.
• Competition: Competition exists, with multiple networks vying to become the next “Ethereum killer.” Ultimately, only time will tell if someone succeeds.
• Fees: Fees have been extraordinarily high at times, discouraging investors from transacting on the network and with the token. However, Ethereum 2.0 is supposed to address this issue.

How Much To Invest In Ethereum?

Ethereum is much like many other cryptocurrencies, which is extraordinarily volatile. The market for Ethereum is unique to traditional assets because you can buy small amounts. Because of this, there’s no solid floor in terms of Ethereum investing. It’s important never to invest more than you can afford to lose.