Is Ethereum (CCC:ETH) the new Bitcoin (CCC:BTC)? It certainly looks like that might be the case. The digital token of the Ethereum blockchain and the second-biggest cryptocurrency after Bitcoin, has been running through one all-time high after another in recent trading sessions.
As of Jan. 25, Ethereum was worth nearly $1,500, up more than 20% in one day. Since Dec. 25, the cryptocurrency’s price has appreciated 135%, putting it on the fast track and attracting investors who have been priced out of Bitcoin as it approached 34,000 each.
All the hype has many investors trying to discern if the current froth around Ethereum is warranted or if it is part of a larger cryptocurrency bubble that is about to pop. Let’s try to unpack fact from fiction and determine the true value of ETH.
Ethereum Narrative Poses Altcoins vs. Bitcoin
While Ethereum is part of the cryptocurrency universe, it is known as an “alternative cryptocurrency” or “altcoin” and is not the same as Bitcoin. Altcoins such tend to move up and down in tandem with Bitcoin but trade at much lower levels. The lower cost to purchase altcoins makes them increasingly attractive to retail investors who want to get in on the cryptocurrency action but find themselves unable to afford Bitcoin as it has climbed north of $30,000 for a single digital coin.
ETH has also benefitted from the fact that Ethereum blockchain has undergone an upgrade known as “Ethereum 2.0” that will make the cryptocurrency significantly faster and more secure to mine, trade and store.
Institutional investors are also taking an interest in cryptocurrencies, which is helping to both legitimize the digital coins and raise their prices. Several sizable hedge funds have taken positions in Bitcoin and other altcoins in recent months, helping to fuel the current rally. And ETH’s momentum has been building for nearly a year now.
While largely overshadowed by Bitcoin, ETH’s price has increased nearly 1,300% since last spring. In March 2020, Ethereum was trading at $106.09 per coin. But, like Bitcoin, Ethereum’s rise has not been smooth. There were several pullbacks in price on the way to $1,500.00 per coin. Further pullbacks in ETH should be expected.
Complications and Hype Cloud Understanding
Cryptocurrencies can be difficult to understand for retail investors. The blockchain technology that the digital currencies are based on, the way they are mined using mathematics, and how they are held by investors can seem complicated and be hard to comprehend. Cryptocurrency has been heavily hyped and criticized since Bitcoin made its debut in 2009. Digital currency bulls claim that Bitcoin could eventually replace gold as a reserve currency and prove to be a hedge against inflation. Bears see a speculative bubble fueled by young and inexperienced investors who don’t understand what they’re putting their money into.
What is clear is that cryptocurrencies are gaining more mainstream acceptance. Not only are experienced hedge fund managers taking positions, but fintech payment companies such as PayPal (NASDAQ:PYPL) and Square (NYSE:SQ) are allowing customers to hold cryptocurrencies on their platforms. According to PayPal, more than 25 million merchants using its network now accept cryptocurrencies. Financial services firms such as Fidelity Investments and Ark Investment Management have created funds that enable investors to hold cryptocurrencies in their portfolios. In short, cryptocurrencies are entering the mainstream.
Be Careful With ETH
When people talk about cryptocurrencies, they are usually speaking about Bitcoin. At this point, Bitcoin is a recognized brand if not a household name. And Bitcoin continues to run higher as cryptocurrencies gain more acceptance. While altcoins benefitting from Bitcoin’s rise and the broader acceptance of cryptocurrencies, ETH and other lesser-known cryptocurrencies have a long way to go to achieve sustainable growth. At this point, Ethereum remains a volatile speculative investment. The sharp rise in price comes with considerable risk.
If there’s a silver lining here it’s that investors wanting exposure to cryptocurrencies have multiple options. In addition to investing in stocks such as PayPal and Square, investors can also invest in companies such as Riot Blockchain (NASDAQ:RIOT) that builds and operates blockchain technologies on which cryptocurrencies are based. Plus, there are numerous exchange-traded funds (ETFs) focused on blockchain and cryptocurrencies. There are even ETFs focused on Ethereum.
Any of these options will allow investors to benefit from the growth of Bitcoin, Ethereum and other cryptocurrencies. And you can do it at less cost and with less volatility than buying the actual cryptocurrencies.
While the cryptocurrency market evolves and matures, investors would be well-advised to avoid purchasing cryptocurrencies such as ETH. The safer bet would be to buy exposure to the growth of cryptocurrencies through blockchain stocks and ETFs that are focused on blockchain and cryptocurrencies.
There may come a time when it is safe and affordable to buy cryptocurrencies directly, but not at current prices and not with the current level of volatility.
On the date of publication, Joel Baglole did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.