Ethereum (ETH 0.86%), the second-largest cryptocurrency by market cap, is now down by nearly 70% year to date and down more 75% from the all-time high that it set last November. The magnitude and velocity of the decline in the crypto market have been alarming -- during this time, Ethereum tokens have lost an astounding $415 billion in value, a figure about the same as the market cap of ExxonMobil (XOM 1.78%).
The primary drivers of the crypto market sell-off have been the same inflation and interest rate concerns that have roiled the stock market. At the same time, the concerns around Ethereum have been exacerbated by the situation at crypto lender Celsius, which allows investors to deposit Ethereum in exchange for interest payments and then lends out the tokens. On Sunday, Celsius halted all transfers and withdrawals from its platform due to an apparent liquidity crisis, a move that has further spooked crypto traders. There is concern that this could lead to even more selling pressure on Ethereum (and other cryptos) if Celsius is forced to liquidate its holdings.
Ethereum is now trading at prices not seen since early 2021, so investors who felt that they missed the boat last time have another chance to open a position at those levels.
Image source: Getty Images
Get ready for the Merge
Some of the most pointed criticisms leveled at Ethereum over the years have concerned the blockchain's slow transaction times and high fees. But its long-awaited transition to a proof-of-stake consensus -- known as 'The Merge' -- should help to remedy these issues. Ethereum completed the switch to proof-of-stake on the Ropsten testnet in June and should be ready for the full transition soon.
The move to a proof-of-stake model should improve transaction times and lower gas, or user, fees. As an added benefit, proof of stake is much less energy-intensive than proof of work, which requires miners to solve complex math puzzles using enormous computing power to create new token. So Ethereum will have new appeal to investors who previously did not like its carbon footprint as a proof-of-work cryptocurrency like Bitcoin (BTC 0.86%).
Moving to proof-of-stake will also allow users to earn rewards from the network, as holders can use their Ethereum to validate transactions and create new tokens. All of this makes the Merge one of the best reasons to be optimistic about Ethereum.
CRYPTO: ETH
Key Data Points
Chain of chains
Ethereum also has value as the blockchain that many other top cryptocurrencies are built upon. For example, Chainlink (LINK 0.95%), an oracle chain that allows smart contracts to obtain data from the outside world, is an ERC-20 token built on the Ethereum platform. ERC-20 is essentially a standard that enables developers to build tokens on top of the Ethereum network. Uniswap (UNI 0.97%), one of the largest decentralized exchanges, is also an ERC-20 token. Even major stablecoins like USD Coin (USDC 0.01%) and popular meme coins like Shiba Inu (SHIB 1.06%) are ERC-20 tokens.
Army of developers
Ethereum has over 4,000 developers working on its network -- more than any other cryptocurrency, even Bitcoin. This is beneficial to Ethereum because developers launch new applications (dApps) that attract users and add more value.
NFTs show signs of life
Ethereum is the dominant blockchain for NFTs (non-fungible tokens). While NFT sales have slowed and prices have generally fallen during this crypto winter, there are still some reasons for optimism. The Goblintown NFT collection came out of nowhere in May and gave a much-needed boost to the NFT scene. These Goblins were minted for free, but have brought in more than $75 million in secondary sales over the past 30 days as Goblintown elbowed its way into the top three NFT collections, according to NFT tracker and data aggregator Cryptoslam. Three of the garish-looking Goblins have sold for over $100,000, indicating that despite the slowdown, the market for high-ticket NFTs is still alive.
Is this a buying opportunity?
In summary, a major transition is coming that will improve Ethereum's performance across many metrics. That, combined with its active ecosystem, means that this could be a good time for risk-tolerant investors to open a position in the crypto, or add to one. Those who regret missing Ethereum's rise over the last few years have a chance to get in at the level where it was trading in January 2021.
That said, Ethereum is still a speculative investment and one where there will be considerable volatility ahead, so investors would be well advised to only allocate a small percentage of their portfolio to it, and to take a long-term approach.
