Ethereum (ETH 0.91%) was the first blockchain network to introduce smart contracts, which are software programs that self-execute when two unrelated parties satisfy the necessary conditions of a transaction. It's an incredibly important innovation that has the potential to upend incumbents in a host of industries by eliminating the need for middlemen. And it's why Ethereum has been dubbed the world's decentralized computer.
Therefore, it's no wonder that the price of one ether (ETH), Ethereum's native token, is up 530% over the past five years. But it's down 50% this year (as of this writing), meaning now might be a good time to buy some.
After the cryptocurrency market peaked at a value of nearly $3 trillion in November last year, it has generally been on a downward trend. That's because the Federal Reserve, in an effort to fight inflation that central bankers incorrectly assumed was temporary, have adopted a strategy of hiking interest rates to bring down prices across the economy. The result has been a risk-off approach from investors, leading to a bear market in cryptocurrencies in particular.
And although the consumer price index, a key measure of inflation, slowed down in July, it was still up a whopping 8.5% year over year. This means higher interest rates in the near future and continued pressure on the crypto space.
Ethereum hasn't been spared in the market turmoil. It hit an all-time high price of almost $4,900 per token in mid-November of last year, but today one ETH is worth about 65% less, mimicking the drawdown of the overall cryptocurrency market.
Usually called a crypto winter, this period is characterized by depressed asset prices and waning interest from investors. But it could be one of the best times for buyers. Ethereum is one of the most promising blockchains out there, and it has more developers working on it than any other crypto, a positive indicator for its long-term viability.
Things have been trending upward recently, as the price of ETH has soared 38% in the past month, compared to just 12% for Bitcoin. The optimism surrounding Ethereum lately can probably be attributed to "The Merge." Planned for Sept. 15, this is the time when Ethereum's network converts to a proof-of-stake (PoS) consensus mechanism, which allows token owners to lock up, or stake, their holdings in order to validate transactions on the blockchain.
PoS is designed to be 99% more energy-efficient than the current proof-of-work system, a process that requires huge amounts of electricity and computing power to validate new blocks. It's what Bitcoin runs on, and it has attracted a lot of negative attention for its lack of speed and supposedly how bad it is for the environment.
PoS is just the first of five total upgrades, with the next four called The Surge, Verge, Purge, and Splurge. They are designed to help Ethereum scale better, which is needed given that today the network can only process 13 transactions per second. If Ethereum wants to continue its dominance in the world of decentralized applications, and reach more adoption across the world, then these updates are absolutely necessary.
The Ethereum community has been waiting a long time for The Merge to happen, and now that it is almost here, bullish sentiment could be taking over.
A small allocation
Owning cryptocurrencies, a volatile, nascent, and unproven asset class and technology, is extremely risky. This is why it's best to only invest money that you are willing to lose. I'd say no more than 5% of a well-diversified portfolio should be allocated to digital assets. A setup like this ensures investors can benefit from the potentially massive upside, while at the same time limiting any possible losses.
Even though it's the second most valuable cryptocurrency, with Ethereum it's no different. It's all about owning the right amount that lets investors sleep well at night. Ethereum's near-term catalyst, The Merge, has the chance to accelerate its adoption, and this is an important reason to buy in.