To say that last year was a difficult one for the cryptocurrency industry would be an understatement, as the entire market lost roughly 64% of its value in 2022. Things were little different for Ethereum (ETH 0.43%), and the popular digital asset dropped 68% during the year. Investors are wondering if things will turn around in 2023.
Based on Ethereum's recent price of about $1,265, a $2,500 price target implies roughly a 100% gain for the world's second-most valuable cryptocurrency by year's end. Let's consider if this is even a likely scenario.
Updating the system
Last year saw a major upgrade to Ethereum's network. Known as The Merge, Ethereum transitioned from the energy-intensive proof-of-work system, something naysayers hate about Bitcoin, to a proof-of-stake (PoS) mechanism. Supporters have long waited for this event because the result is a blockchain network that is much more sustainable and energy efficient.
The Merge sets Ethereum up to introduce a new feature, called sharding. Sharding basically splits up the entire Ethereum network load into different portions that can have their own smart contracts. According to the official Ethereum website, sharding is set to be added sometime in 2023. But I wouldn't be surprised if, like The Merge, sharding gets delayed several times before it is fully implemented.
Upgrading to a PoS system, coupled with the possibility of sharding, paves the way for Ethereum to set itself up for broader adoption. That's because the hope is that after these two updates, fees will drop, and network throughput will rise.
And these two positive outcomes will eliminate two of the biggest criticisms of Ethereum: that it's slow and expensive. According to bitinfocharts.com, Ethereum can only process 13 transactions per second today, not nearly enough to achieve greater adoption.
To be fair, there are still a lot of unknowns as we look ahead. This is an entirely new technology, and I believe that it's more likely than not that unexpected speed bumps will pop up. Plus, there's all the uncertainty surrounding new regulation that might come into play after the negative events that transpired in the industry in 2022.
However, Ethereum bulls now have some concrete progress that they can point to for confidence as the network sets itself up to reach its long-term potential.
Don't bet on $2,500
Since its launch in July 2015, Ethereum has generated a monster return of nearly 42,000%, which crushes the S&P 500 and Nasdaq Composite Index during the same time period. To dig a bit deeper, there have been four different calendar years when Ethereum's price rose at least 100%. So, it's not out of the question for it to produce this type of performance in 2023, particularly as it tackles technical updates to the network.
But hoping for such a huge price run-up in such a short period of time, no matter how speculative the asset class, is the wrong mentality to have. What Ethereum's price will be at the end of 2023 is anyone's guess. In effect, close your eyes and pick a number.
Making matters a bit more complicated are the Federal Reserve's plans to raise interest rates to curb soaring inflation and, in effect, slam the brakes on the economy. Other major central banks around the world are following a similar path. And this has resulted in investors souring on riskier assets, including Ethereum.
I believe the right way to approach this is to simply invest a small amount in Ethereum and plan to hold it for many years -- that is, if you believe in its disruptive potential. Don't buy expecting a short-term price pop. That's speculating, not real investing.
