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Don’t Bet Your Bottom Dollar on Ethereum, But Consider It a Buy

So far in October, Ethereum (CCC:ETH-USD) and its larger peer Bitcoin (CCC:BTC-USD) have seen solid rebounds in price. After sharp declines in late September, due to China’s crypto ban, investors “bought the dip” with both names.

Ethereum
Source: shutterstock

This, however, hasn’t been the case for alt-coins. For instance, Cardano (CCC:ADA-USD) is right now is trading sideways as traders who bought it ahead of its Alonzo upgrades seem to still be taking profit.

Why have the established coins been outperforming the alt-coins lately? It may have something to do with institutional inflows.

It’s debatable which of the two established coins is preferred right now by the so-called “smart money.” A few weeks back, it seemed as though Ether (what the coin itself is called) was becoming more popular at the expense of BTC. But more recent commentary suggests the opposite. Nevertheless, it may not matter which of the two is more popular in the immediate term. The key takeaway? Institutional investors, concerned about inflation and a still-pricey stock market, are looking to established coins as a solid alternative.

Putting it simply, this bodes well for both names. As the crypto asset class gains further legitimacy, and investment professionals pour in more capital? Keep in mind the uncertainty that still surrounds possible U.S. regulation. But consider any weakness as prime time to enter/add to a position.

Ethereum and the Smart Money’s Continued Pivot into Crypto

What’s driving further interest in established cryptos like BTC and ETH? In the case of Bitcoin, the main driver is likely the rationale I described above. Again, as an inflation hedge, and as an alternative to stocks.

But in the case of Ethereum, its increased usage catalyst is probably what’s fueling greater “smart money” interest. That is, with its hard-fork upgrades last month, and its plans to switch from running on proof-of-work (PoW) to running on proof-of-stake (PoS), Ethereum appears primed to remain the top dog in the world of decentralized finance (DeFi) In turn, this enables Ethereum to prevent up-and-coming names like Cardano from gaining that much ground.

And as it maintains its DeFi lead, and as DeFi becomes more widely used? Ethereum will cement its legitimacy. In time, this will attract more institutional inflows and the price of this token to gradually move higher. First, to prices above its past all-time high ($4,362.35). Then, possibly, to prices above $10,000.

Ethereum may have this trend on its side. However, there’s still the risk that more regulation in the U.S. will limit blockchain’s potential to “disrupt” the traditional financial system. In short, caution remains key.

Don’t Shrug Off the Risk of U.S. Regulation

It didn’t take long for Bitcoin and Ethereum to recover from last month’s sell-off caused by the China crypto ban. As it stands now, investors have basically shrugged it off, seeing it as a negative, but not something that means “game over” for cryptocurrencies. With this development, the market’s reaction may be on the mark.

However, there may be a similar development in play. Something that the market so far hasn’t taken too seriously. I’m talking about creeping regulation from U.S. Government agencies, such as the Securities and Exchange Commission (SEC). Sure, increased U.S. regulation of crypto can be seen as more of a good thing than a bad thing. In fact, many see it as something that could boost crypto rather than sink it. However, as I’ve said before, what if increased regulation does something else, like reduce its popularity?

Take, for example, the SEC’s assertion of its jurisdiction over DeFi products. Being forced to comply with SEC regulations, first written out nearly a century ago, could lower the appeal of DeFi’s appeal. In other words, if it’s offering benefits similar to that of traditional investment products, why bother with its greater complexity?

Having said that, the risk of a China-style “crypto crackdown” in America may be overblown. Case in point: the Fed’s latest remarks about it. Fed Chair Jerome Powell recently walked back a prior statement of his implying that a Fed-backed “digital dollar” would make crypto redundant. The central bank also appears on the fence about launching said “digital dollar.”

The Verdict on Ethereum: Still a Buy, Just Don’t Get Carried Away

It’s encouraging how quickly ETH has moved back in the right direction. While at first selling off in line with the market, it’s again moving in price like an alternative asset: with lower correlation with stocks.

The path to higher prices remains clear for Ethereum, thanks both to increased usage and increased institutional inflows. This points to buying it on any pullback. Just don’t go hog wild, and put too much of your portfolio into Ethereum and other cryptos. Despite the market’s shrugging off of regulation as a threat, it could still dampen crypto’s appeal.

On the date of publication, Thomas Niel held long positions in Bitcoin and Ethereum. He did not have (either directly or indirectly) any positions in any other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.


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