It wasn't just stocks taking a hit on Wednesday. Cryptocurrencies also corrected sharply as the market swooned, and Ethereum (ETH 4.87%) wasn't immune to the drawdown. The world's second-most-valuable digital currency tumbled 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 get blown in? Given Ethereum's stellar returns through its six-year trading history, the easy answer is to buy the dip. Reality is more complicated than that.

Person checking trading charts on a smartphone, laptop, and tablet.

Image source: Getty Images.

Buying the dip

History is on the side of the bulls this time of year. As I pointed out earlier this week, Ethereum has a strong track record of dominating 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 has soared by at least 35% or better in all but one January. Ethereum is trading lower five days into the new month, and that only means even more upside if it has another double-digit gain for all 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-anticipated migration to proof-of-stake protocols. The move will help rectify many of its platforms, making it more energy efficient to produce and more cost-effective to use. Ethereum is already rolling as the blockchain technology of choice fueling thousands of decentralized apps. Just wait until it gets even better in a few months.

Selling the dip

Ethereum is at the heart of smart contracts and other blockchain-propelled use cases. There are more than 3,000 apps for marketplaces, exchanges, games, and other decentralized finance platforms leaning on the crypto. It doesn't mean it's the best. Mickey D's may sell the most burgers, but that doesn't make it the best.

A big problem with Ethereum is how much users have to spend in gas fees just to move it around. If you love Ethereum, just wait until you try to buy or sell a non-fungible token on an Ethereum trading platform. Even after it completes its proof-of-stake makeover, there will be smaller digital currencies that excel in areas where Ethereum will be lacking. 

There's also the broader case for the crypto market itself. If digital currencies fall out of favor, it's not as if Ethereum or any single denomination will buck the trend and move higher. A bullish talking point for crypto in general is that it protects against inflation. It doesn't just depreciate the way cash assets do as everyday prices move higher. The problem is that this inflationary hedge has been more of an inflationary ledge. Ethereum has fallen by nearly 30% since peaking two months ago as inflation headlines dominate the market narrative. 

The bullish case for Etherum is strong, but it doesn't mean that there won't be steep corrections and outright crashes along the way. The 30% drawdown in the last two months may seem like a lot, but that's child's play when pitted against the crypto crash of 2018. Buying the dip is tempting, but it's not like sizing up traditional stocks where earnings multiples and fundamental growth rates are easy to break down. Buying Ethereum on the dip now is based solely on the premise that it will be more popular later. 

I own Ethereum, so there's no denying my long-term opinion on the widely traded crypto. Figuring out where it will bottom out in the near term is far more challenging.