Cryptocurrencies have not been immune to the market correction that's occurred over the past few months. In fact, many of the leading crypto investments are down considerably since late last year.
The second-largest cryptocurrency, Ethereum (ETH -4.29%), saw a single Ether token reach a price of more than $4,800 in mid-November. By Jan. 24, it fell all the way down to about $2,200 -- a drop of about 55%. Since then, it has slowly climbed back up to just over $3,000 per token, as of March 22.
Several factors have impacted its volatility. Let's take a look at them and explore whether now is the time to invest in Ethereum.
Image source: Getty Images.
Ethereum exploded in 2021
As mentioned, Ethereum is the second-largest cryptocurrency, with a market cap of about $360 billion. Ethereum is a blockchain technology network for decentralized applications (dApps) that can be accessed using the Ether token. Smart contracts, non-fungible tokens (NFTs), and decentralized finance (DeFi) applications are among the items traded or used on this digital platform. It is the largest blockchain network for smart contracts and dApps.
Ethereum has enjoyed a first-mover advantage over its competition since launching in 2015. It exploded in 2021, starting the year at about $775 and ending the year at about $3,700.
A few different factors caused the drop, not the least of which is an overall market decline among cryptocurrencies. As more retail investors piled in, cryptocurrency concerns largely mirrored those of investors in growth stocks -- spooked by the effects of rising inflation and COVID-19 variants on the economy. Ethereum, along with other cryptocurrency investments, dropped sharply in late January after the Federal Reserve indicated interest rate hikes were imminent.
Also, in January, President Joe Biden announced that his administration would be developing a governmentwide strategy for digital assets. That was followed with an executive order signed by Biden on March 9 that outlined the government's approach to addressing the risks and harnessing the benefits of digital assets. The strategy will focus on protecting investors and consumers, financial stability, promoting U.S. leadership, and exploring a central bank digital currency.
Certainly, Russiaʻs invasion of Ukraine added to the turmoil that affected most markets, spurring concerns about a protracted conflict and its impact on the economy and inflation.
In addition, Ethereum specifically may have been impacted by growing competition in the market, particularly among networks that handle transactions cheaper and faster.
Is Ethereum a good buy?
If you look these developments, many of them are being felt across markets and not just on cryptocurrencies or Ethereum specifically.
In fact, Ethereum is up about 20% since the Fed raised interest rates on March 16, reflecting a larger market rally. Typically, rising interest rates hurt growth stocks, but in this case, the declines had already been priced in since January and the market saw rising rates as a good thing for the economy to reduce inflation.
However, the threat from faster, more efficient competitors eating into its market share is real. Ethereum is working on addressing that with the development of Ethereum 2.0. This new platform will replace the current proof-of-work consensus mechanism with a proof-of-stake mechanism.
This will make the network faster, increase transactions capacity, lower costs, bolster security, and cut energy use. It will help close the gap between some of its chief rivals, like Avalanche and Solana, to name a couple.
This upgrade will begin later this year and conclude in 2023. It should provide a boost for Ethereum when it launches and help the cryptocurrency maintain its dominance in dApps. Ethereum, given its reduced price, impending technology upgrades, brand, and market dominance, looks to be a good long-term investment.
But there is certainly a lot happening right now, from potential regulations to uncertainty surrounding world events and the economy. Markets are indeed volatile, so investors should be cautious, do their research, have a long-term view, and not invest more than they can reasonably stand to lose.
