Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD) posted their largest one-day fall since March 2020 on May 19, with losses in the market capitalization for the entire cryptocurrency sector nearing $1 trillion.
Bitcoin dropped to $30,066 and Ethereum fell to as low as $1,850. The reason? China outlawed financial and payment institutions from providing cryptocurrency services.
Cryptocurrency trading is illegal in China since 2019, part of President Xi Jinping’s administration’s efforts to check money laundering. But investors can still use platforms online to trade cryptocurrency, much to the dismay of Beijing.
The National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China said the wild fluctuations in cryptocurrency prices “seriously violate people’s asset safety” and disrupt the “normal economic and financial order.”
Musk’s Crypto Hesitancy
However, it’s important to note that not all the blame rests with China for this extraordinary drop in prices.
In a series of tweets, Elon Musk raised concerns regarding the environmental impact of Bitcoin, citing research from the University of Cambridge, which shows that Bitcoin uses more electricity annually than Argentina.
As a result, Musk now believes Bitcoin is bad for the environment and Tesla (NASDAQ:TSLA) will not accept Bitcoin payments for its cars after all. These were monumental market-moving tweets and highlighted the perils of investing in a very news-sensitive space.
After all, Musk had previously helped push Bitcoin by backing the digital currency along with others in the crypto space.
But should markets react this way?
Digital currencies like Ethereum are transforming the way we do business. Yes, there are risks. However, in my opinion, the advantages outweigh the disadvantages. That is why I advise buying Ethereum on every dip.
What Sets Ethereum Apart?
The first rule for investing in crypto is that you must understand that you are putting your capital in a very volatile space. But once you realize and accept this harsh reality, you stand to make substantial gains.
In the past year, every digital asset has had its share of wild swings. But throughout all of it, one thing has stayed true. After every price correction, Bitcoin and other digital or virtual currencies have continued their upward ascent.
The main reason? Smart money is now investing heavily in space.
Smart money is the capital under the control of institutional investors, central banks, hedge funds, and other financial individuals and entities. Essentially, it is invested or withdrawn from the market by knowledgeable financial professionals.
These entities are less likely to make a move based on an Elon Musk or Mark Cuban tweet.
Ethereum had an outstanding first quarter, doubling in market capitalization and attaining a new all-time high price. For me, though, the institutional interest Ethereum managed to generate in the quarter is the real story warranting your attention.
Institutional Investors Pile in
On Feb. 8, the world’s largest financial derivatives exchange, CME Group (NASDAQ:CME), launched ether futures, opening the door for institutional and accredited investors in the U.S. to take leveraged directional bets on ETH and hedge against the spot market positions.
It’s a landmark move, enabling institutional and accredited investors in the U.S. to place leveraged directional bets on ETH and hedge against spot market positions.
That’s not all. In the first quarter, digital asset merchant bank Galaxy Digital (OTCMKTS:BRPHF) kickstarted an Ethereum fund for institutional investors and businesses that want to invest in ether but do not want to buy or hold the underlying asset.
In previous articles, I have already highlighted how companies like Visa (NYSE:V), PayPal (NASDAQ:PYPL), and Square (NYSE:SQ) are capitalizing on the crypto momentum by allowing their users to transact with digital currencies. This is a trend that will not stop anytime soon.
The bottom line, though, is that this positive momentum will push ether higher.
Not Seeing the Forest for the Trees
When investing in crypto, the most important thing you need to understand is the novelty and usefulness of a particular coin. Unfortunately, Ethereum did not have the revolutionary effect that Bitcoin did. However, its co-founder Vitalik Buterin essentially learned from the mistakes and shortcomings of Bitcoin and tried to alleviate the issues that plagued BTC.
That is the concept behind the second-most-valuable cryptocurrency on the market right now.
For example, let’s take block time. An Ether transaction is generally confirmed in seconds compared to hours for Bitcoin. And although BTC and ETH are both digital currencies, the aims of these two coins are different.
Bitcoin aspires to be an alternative to national currencies — a medium of exchange and a store of value. On the other hand, ether wants to facilitate programmatic contracts and applications through its local currency.
There is an inherent utility to the Ether that’s driving its price higher. And that has nothing to do with the external elements affecting the broader crypto space.
Hold the Fort With Ethereum
If you got burned badly due to the crypto crash and want to sell your holdings, don’t. The long-term growth story is intact. And although there will be highs and lows in between, the trajectory for ether is onwards and upwards.
So don’t sell your ether holdings just yet. You don’t want to regret the decision once the digital coin touches new highs.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.
