With the cryptocurrency market, there seems to be no end to the rush of blood. On May 12, Ethereum (CCC:ETH-USD) traded at highs of $4,362. As I write, Ethereum has slumped to $2,667.
A 39% correction within one week seems significant. However, it’s worth reminding that Ethereum was trading at $735 at the beginning of the year. The cryptocurrency is still higher by 264% for the year.
At the onset, there are two reasons that triggered the recent correction in the crypto space. First and foremost, Elon Musk raised questions about the environmental impact of Bitcoin (CCC:BTC-USD). Musk indicated that research from Cambridge University shows that Bitcoin’s electricity usage has spiked this year. A flurry of tweets from Musk triggered the first leg of corrections in the crypto space.
Furthermore, China announced that it has banned “financial institutions and payment companies from providing services related to cryptocurrency transactions.” However, it’s worth noting that the country has not barred investors from holding cryptocurrencies.
I believe that the current meltdown is a good opportunity to accumulate Ethereum, among other cryptocurrencies.
I must also mention that if I had to choose between Bitcoin and Ethereum, I would prefer to go with the latter.
Let’s discuss the factors to remain bullish on Ethereum, despite the current gloom.
The Rise of Decentralized Finance
In very simple words, Decentralized Finance can be defined as the “peer to peer system that is not controlled by any centralized institution, like a bank,” according to Harvard Law School Forum on Corporate Governance.
With the rise of cryptocurrencies and the decentralized space, deposits in DeFi applications have surged. According to an article from Harvard Business Review, “DeFi applications grew from about $1 billion in June to just under $40 billion by late January 2021.”
With artificially low interest rates globally, it seems very likely that strong growth in decentralized finance will sustain. The DeFi world gives investors attractive investment opportunities that can comfortably beat inflation.
Investors might wonder what Ethereum has to do with decentralized finance?
The answer can be found in an SSRN research publication on the future of decentralized finance. According to the publication:
“Ethereum and other smart contract platforms specifically gave rise to the decentralized application or dApp. The drive toward financial dApps became a movement in its own right known as decentralized finance or DeFi.”
To make things simpler, peer-to-peer financial transaction can be facilitated through blockchain. In the case of decentralized finance, Ethereum acts as a main facilitator. Therefore, as the demand for decentralized finance increases, Ethereum will be increasingly relevant “for smart contracts – which are code that lives on a blockchain, can control assets and data.”
My view is underscored by the fact that Ethereum currently has more blockchain users as compared to Bitcoin. Furthermore, Ethereum also has significantly higher transactions on blockchain per day as compared to Bitcoin.
According to billionaire investor Mark Cuban, “the number of transactions and the diversity of transaction types along with the development efforts in Ethereum dwarf bitcoin.” Cuban points out that the utilization of Ethereum is much higher on a relative basis.
Concluding Views On Ethereum
Cuban pointed out that development efforts are higher for Ethereum. It’s worth mentioning here that Ethereum 2.0 is on the cards. It is likely to make transactions more efficient and will have a proof-of-stake system.
Overall, Ethereum seems like a good long-term investment. Investors should ignore the near-term volatility and gradually accumulate.
It’s worth noting that Bitcoin had touched near $20,000 levels in the first bull-run before trending lower towards $5,000. It’s very likely that the renewed surge in Ethereum will take the cryptocurrency well beyond recent highs of $4,362.
For now, it makes sense to hold some liquidity and navigate the cryptocurrency bloodbath by gradually accumulating quality coins.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
