Crypto has enjoyed an excellent month with the presidential election victory of Donald Trump fueling the market to new highs. Bitcoin (BTC +1.17%), the world's largest cryptocurrency, has surpassed $100,000 and the altcoins have also risen. Ethereum (ETH +2.58%), the world's second-largest cryptocurrency, is now up close to 60% since election night, more than Bitcoin's 49% gain (as of Dec. 12).
On the year, Bitcoin has widely outperformed Ethereum, up 128% compared to Ethereum's 68% gain. With a pro-crypto administration and potentially more rate cuts, the rally may have legs. Should you buy Ethereum while it trades for less than $4,500? Let's take a look.
A favorable regulatory backdrop
Ethereum is looking at a favorable crypto environment under the incoming Trump administration. Gary Gensler, chairman of the Securities and Exchange Commission (SEC), said he will step down once Trump takes office. Whether Gensler has been a significant roadblock to crypto is probably debatable, but it's clear that most crypto proponents have not been fans. Gensler led the SEC when the agency instituted Staff Accounting Bulletin 121, which discourages many financial institutions from offering crypto custodial services, and the agency sued Ripple and its founders in what appeared to be an attempt to get the SEC more regulatory jurisdiction over cryptocurrencies.
Trump plans to nominate several pro-crypto cabinet members including Paul Atkins to run the SEC, who previously worked at a crypto advocacy organization, and the venture capitalist David Sacks as his "A.I. & Crypto Czar." Sacks has invested in several crypto firms.
Many believe the Trump administration will seek to pass legislation clarifying crypto gray areas and promoting the use of stablecoins, digital assets pegged to a commodity or currency. Stablecoins seek to take advantage of crypto's technological innovation with less volatility. They are also useful for transferring in and out of different tokens on different networks.
Media reports have also suggested that Trump could push for the Commodity Futures Trading Commission (CFTC) to regulate the Bitcoin and Ethereum spot markets, something crypto proponents have long pushed for. There will also likely be more spot-crypto exchange-traded funds (ETFs) and more tokens being sold through traditional brokerages. How much of this recent rally investors have already priced in is difficult to decipher.
Trying to understand what Ethereum can be
Ethereum has rallied with the broader market but Bitcoin has rallied all year. The token is a bellwether for the sector but also broke away as more people, experts, and financial institutions began to hail Bitcoin as an inflation hedge. Bitcoin's latest endorsement came from Fed Chairman Jerome Powell.
Ethereum is a little more complicated than Bitcoin. There's no denying the utility of Ethereum's network, primarily as the main network developers seek to build decentralized applications and take advantage of smart-contract functionality. However, unlike Bitcoin, Ethereum does not have a supply ceiling and therefore does not offer that same scarcity value, at least not yet.
Ethereum adopted a new governing system over the network for validating transactions called proof-of-stake (POS), which transitioned the network away from the energy-intensive mining system that Bitcoin still uses. Staking requires network participants to essentially post some of their tokens as collateral and lock them up to get a chance to validate transactions and earn rewards. That, coupled with the burning of coins and taking them out of circulation, has stopped the supply from increasing and could one day lead to a decline in Ethereum's supply.
Ethereum Supply data by YCharts
In a white paper, Cathie Wood's firm Ark Invest recently argued that Ethereum has begun to develop characteristics similar to U.S. Treasury bills, primarily due to its ability to generate yield and its frequent use as collateral in crypto transactions. That's the kind of idea that could be a serious catalyst for Ethereum if it garnered widespread acceptance, similar to what's happening with Bitcoin and inflation.
Should you buy Ethereum under $4,500
Ethereum is one of the few cryptocurrencies I own, and I think it will be a good long-term asset. In the near term, I think it can continue to close the gap with Bitcoin. The Ethereum-Bitcoin ratio is roughly 0.378 (as of Dec. 11) and has averaged 0.0538 since 2020. Obviously, after such a nice run, crypto could be susceptible to near-term pullbacks, so if you are concerned about buying too high you may want to consider dollar-cost averaging.
