Whatever happened to the big post-Merge rally for Ethereum (ETH 1.84%)? The second-largest cryptocurrency in the world is down 25% during the past 30 days. Given the general malaise afflicting both crypto and equity markets, this downturn perhaps shouldn't be that concerning, but investors were expecting so much more from Ethereum after it just completed the single-greatest feat in crypto history.

The good news, though, is that Ethereum is likely undervalued right now at its current price of $1,309. Ethereum is down more than 60% for the year and is down nearly 75% from its all-time-high of $4,891.70. That said, there are a number of different reasons to consider buying Ethereum on the dip.

Ethereum's performance upgrade is not over

A common misperception about Ethereum is that The Merge is a "one and done" event. That's not exactly the case. As Ethereum co-founder Vitalik Buterin pointed out in mid-July, even after The Merge, new performance enhancements coming to Ethereum will continue over a longer rollout period. Right now, the upgrade is only 55% done, says Buterin. So if you've been disappointed by slower-than-expected transaction speeds or higher-than-expected transaction fees coming out of The Merge, relax.

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Moreover, focusing only on what's happening with Ethereum ignores the fact that there is a tremendous amount of activity happening with Layer 2 blockchains built on top of Ethereum. These Layer 2 blockchains help the Ethereum ecosystem run faster and more efficiently.

The Layer 2 blockchain that gets most of the attention is Polygon, which has emerged as an exciting play on the future of non-fungible tokens (NFTs) and Web3. But there are plenty of other Layer 2 solutions out there, and Buterin has hinted that new Layer 3 solutions may be on the way. If you are considering the overall health of the Ethereum ecosystem, you have to take into account these Layer 2 scaling solutions.

Investors are too focused on exogenous factors

In a best of all possible worlds, investors would focus only on the factors within Ethereum's control. For example, they would focus on Ethereum's dominant market-share position within nearly every sector of the blockchain and crypto world, ranging from NFTs to metaverse gaming. They would check out metrics like total value locked (TVL), which is a measure of how much activity is happening on a blockchain, and realize that Ethereum is far and away the world's dominant blockchain. 

Unfortunately, investors are choosing to focus on exogenous factors. These are factors not within Ethereum's control and include things like Federal Reserve interest rate hikes and macroeconomic indicators such as the latest employment figures. While some technical analysts point out that all signs are there for Ethereum to break out to the $1,500 level soon, all of these exogenous factors appear to be holding down the price of Ethereum. 

Big ideas coming for 2023

Finally, Ethereum has long been an innovation leader within the blockchain and crypto market. Ethereum pioneered the idea of smart contracts, laid the foundation for the decentralized finance (DeFi) industry, developed the concept of NFTs, and pulled off The Merge.  Buterin has hinted that there is more innovation coming over the next 12 months. In a recent interview, he suggested that Ethereum may be getting more involved with "sharding," "decentralized autonomous organizations," and "blockchain-based social media." These might sound like arcane concepts, but just remember that today's NFT started out life as the arcane-sounding "ERC-721 token."

The innovation coming in 2023 is exciting if you're an Ethereum investor. It means Ethereum won't be resting on its laurels anytime soon. Twelve months from now, you may look back at Ethereum's current price of $1,309 and wonder why you didn't accumulate Ethereum at such a beaten-down price. Yes, it's time to buy Ethereum on the dip.