In early 2018, the crypto market peaked near $830 billion; then everything fell apart. In less than 12 months, the market lost 88% of its value, and it didn't recover until early 2021. That type of prolonged downturn became known as a crypto winter, and we may be headed for another one.
The crypto market has dropped 69% since peaking last November, erasing $2 trillion in value. Unfortunately, those losses serve as a painful reminder that crypto assets are extremely volatile, and you should never invest money that you might need in the near future. But there is a more subtle lesson, too. Despite the severity of the current downturn, investors who bought Ethereum (ETH -2.74%) during the last crypto winter have still made money.
Here's what you should know.
Ethereum investors are better off
Ethereum bottomed out at around $85 in late 2018. Let's assume you were incredibly lucky, and you happened to invest $1,000 in Ethereum at its low point during the last crypto winter. Well, its price currently sits at $1,125, which means your original investment would have grown 13-fold to $13,000 since then. In fact, if you had invested any time between February 2018 and December 2020, your position would be profitable right now.
Does that mean the current downturn is a buying opportunity?
Ethereum is backed by a logical investment thesis
Ethereum is a programmable blockchain powered by the ETH coin (ether). It was designed as a decentralized alternative to traditional computing infrastructure, such as cloud services offered by tech titans like Amazon or Microsoft, so it is not controlled by any corporate or government entity. Instead, Ethereum is controlled by its community of stakeholders, and the platform is immune to censorship and data mining.
Additionally, the Ethereum blockchain is secured by cryptography, a broad term that means a distributed network of miners (or validators) must verify transactions using mathematical proofs. To that end, the blockchain makes it possible to spend, lend, invest, and borrow money without involving banks or other financial institutions. And by eliminating those intermediaries, blockchain technology makes financial services more efficient. For instance, the Compound protocol currently pays 2.8% APY on Tether deposits, a fiat-backed stablecoin that tracks the U.S. dollar. That's much higher than the interest rate on the average savings account.
Those qualities have turned Ethereum into a thriving ecosystem of decentralized applications (dApps) and decentralized finance (DeFi) services. In fact, thanks to its first-mover status, Ethereum is the market leader in dApps and DeFi services. Specifically, 73% of all dApps run on Ethereum, and 59% of all DeFi investments are invested on the platform.
More importantly, there is good reason to believe Ethereum will maintain its dominance. Its popularity with users forms the foundation of a powerful network effect that serves to bring more developers to the platform over time. In fact, Ethereum currently boasts 2.8 times as many developers as the next-closest blockchain, according to a report from Electric Capital.
That makes the investment thesis crystal clear: Ethereum allows investors and consumers to access efficient financial services and censorship-resistant software. As the market leader in both cases, Ethereum should naturally attract more developers, bringing a greater variety of software and services to the platform. In turn, that should incentivize more investors and consumers to adopt products on Ethereum.
Ultimately, demand for the underlying ETH coin -- the cryptocurrency used to pay transaction fees on the platform -- should rise, pushing its price higher over time. Of course, there is no guarantee that chain of events will come to pass. But given Ethereum's potential to disrupt the financial services industry, I think it's worth allocating a small percentage of your portfolio to this cryptocurrency, and now looks like a good time to buy.
