Ethereum (CCC:ETH-USD) is up nearly 4,000% in 2021. Only the most bullish of crypto bulls would predict similar performance for ETH in 2022. But the general sentiment is that 2022 will be a good year for Ethereum.
The primary reason for that bullish sentiment is the much-anticipated launch of Ethereum 2.0. This upgrade (which is different from the Ethereum 2 cryptocurrency) will complete Ethereum’s transition to a proof-of-stake model. The update is scheduled to launch in the first half of 2022.
Ethereum is already the most widely used blockchain for smart contracts. It stands to reason that the upgrade may push those adoption numbers even higher. Particularly since the Ethereum 2.0 should allow the blockchain to lower its transaction fees and speed up transaction times.
But the launch of Ethereum 2.0 is not the only story that will impact Ethereum. It’s becoming clear that monetary policy will be tightening in 2022. If investors decide to move away from risk-on assets that could limit the upside in Ethereum.
Did the Federal Reserve Shake Out the Weak Hands?
In the immediate aftermath of the Federal Reserve’s decision, Ethereum dropped approximately 8%. However, ETH investors drove the cryptocurrency back to near its pre-announcement level and now it’s given almost all of that back again.
The question in my mind is why the second dip? And here’s why. If crypto investors are responding to the broader market selloff, that goes against the cryptocurrency narrative.
One reason to invest in cryptocurrency is as a hedge against whatever is happening with monetary policy relative to fiat currency. But we’ve never seen what will happen to cryptocurrency prices if the market makes a strong, sustained move lower.
We’ve had a small sample size, but it does appear that cryptocurrencies are moving lower along with the market. For example, in the last 30 days from the time of this writing, ETH is down over 11%, and that includes being down 7% in the last five trading days, and over 2% in mid-day trading the day I write this.
Competition Remains High
Another potential headwind working against Ethereum is that many competitors are nipping at its heels. One of the most notable of those is Cardano (CCC:ADA-USD). Cardano is taking a measured approach to releasing its full blockchain platform.
However, as Alex Sirois recently wrote, it wasted no time in reminding investors that the recent hack of DeFi platform, MonoX Finance would not have occurred on Cardano. That’s significant because the hackers made off with $18.2 million in Ethereum as part of its $31 million haul.
Other altcoins such as Shiba Inu (CCC:SHIB-USD) and Solana (CCC:SOL-USD) are also attempting to mount a challenge to Ethereum’s supremacy in the smart contract arena. At this point, many industry observers believe a successful launch of Ethereum 2.0 will blunt this competitive move. But that presumes that Ethereum 2.0 will launch on time.
Ethereum May Still be a Profitable Trade
Ethereum is presenting a tough call for investors as 2021 comes to an end. Despite a recent selloff, Ethererum remains within striking distance of its all-time high. That suggests that it might be better for investors to hold off. However, investors who look at technical indicators may point to a pattern known as a “falling wedge” that could imply the coin is ready for a break to the upside.
However, I would advise Ethereum investors to view the cryptocurrency through a wider (i.e. long-term) lens. Looked at that way, I agree with my InvestorPlace colleague David Moadel who recently wrote that buying any dip in ETH may be a very profitable trade.
In the end, I believe that Ethereum is one of the safer cryptocurrencies for investors to own. And as long as you don’t expect Ethereum to have another year of 4,000% growth, patient investors should be rewarded.
On the date of publication, Chris Markoch 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.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.
