There have certainly been better days for Ether (ETH 0.51%). The cryptocurrency is down more than 40% from its peak in November.
Some investors might be rattled by the sharp downturn we've seen over the past couple of months. But don't make any rash decisions. Here's the worst mistake Ether investors can make right now.
Timing isn't on your side
My view is that the worst thing you can do with Ether right now is to try to time the market. That would be a poor strategy whether you're considering selling your position in the digital token or buying it like crazy with expectations of getting rich quickly.
Let's first look at the idea of selling to cut your losses. Based on Ether's performance over just the past three years, doing that during any of its previous declines would have been a big mistake.
As the above chart shows, Ether's price has plunged by at least 40% four times since early 2019 (including the current downturn). But investors who held onto their tokens instead of selling still wound up with big gains.
So should you go all-in on Ether now to make a quick fortune? Alas, history doesn't necessarily smile on this approach either. If we go back five years instead of three years, you'll see why.
Ether's price plunged more than 60% in early 2018. It rebounded sharply. However, the bounce was only a temporary one. Maybe some investors were lucky enough to buy at the bottom and sell before another downturn ensued. But it's also likely that many ended up seeing their positions sink throughout the year and sold at a big loss.
... but time likely is
Although trying to time the market in buying and selling Ether almost certainly isn't on your side, time (i.e., holding for the long term) likely is. Consider that despite the huge downswings over the past five years, Ether still delivered a gain of more than 25,000%.
An initial investment of $1,000 would have turned into over $251,000. But only investors who held on instead of selling are sitting on this jaw-dropping return.
Of course, history doesn't necessarily repeat itself. Maybe Ether won't come back from its current decline. Perhaps other cryptocurrencies could dethrone it. My best guess, though, is that investors who buy and hold Ether will profit handsomely.
Why am I optimistic? The Ethereum blockchain is the most widely adopted blockchain that supports smart contracts. More than 40 of the top 100 cryptocurrencies by market cap are built on it. That's an advantage that will be hard to overtake.
I think that Ether is more likely to gain momentum instead of losing it to rivals. The major upgrade to its blockchain (which was referred to as the Ethereum 2.0 upgrade in the past) should address several of its current weaknesses.
The first phase of this upgrade -- implementation of the Beacon chain -- has already been completed. Phase 2, scheduled for later this year, will merge the Beacon chain with the Ethereum mainnet. Phase 3 is expected in 2023. It will introduce shard chains that greatly improve Ethereum's capacity. The end result of this upgrade will be an Ethereum blockchain that's faster, more scalable, and with much lower transaction fees.
Make no mistake about it
Like any cryptocurrency, Ether is going to be highly volatile. It will sometimes go through steep downturns as we've seen in recent months. But the long-term potential for Ethereum's blockchain with smart contracts could make the wild ride worth it for patient investors. Make no mistake about it.