Down nearly 30% in the past month and with an important upgrade recently completed, now looks to be an opportune time for investors to put money into Ethereum (CCC:ETH-USD).
After peaking at an all-time high over $4,800 in early November, the price of Ethereum has come down significantly. Right now, the altcoin trades for around $3,200, as ETH appears to have been dragged down with the broader cryptocurrency market.
This drop in the price of the world’s second-largest cryptocurrency has mirrored the pullback in other major digital coins and tokens, including Bitcoin (CCC:BTC-USD) and Litecoin (CCC:LTC-USD). However, rather than see the slip in Ethereum’s price as a sign of bigger issues, investors should view it as an opportunity to buy the dip.
Ethereum Gets a Major Upgrade
One of the main reasons to remain bullish on Ethereum is that, on Dec. 9, the digital token whose underlying blockchain technology is used to facilitate decentralized finance (DeFi) transactions, completed an important upgrade to its network. The upgrade, called “Arrow Glacier,” pushed back the so-called “difficulty bomb,” which could potentially slow mining on Ethereum, out to June. By that time, developers hope to have transitioned Ethereum from a “proof-of-work” model for mining to a “proof-of-stake” model that is less energy-intensive and better for the environment.
Currently, Ethereum operates on a proof-of-work model, where so-called “miners” solve complex puzzles to validate transactions. This model is criticized for its environmental impact, as it requires an extreme amount of computer power.
This year, Ethereum plans to shift to a proof-of-stake model, where users can only validate transactions according to how many coins they hold, rather than the energy-intensive mining rigs that are currently used. This transition is known as “Eth2” and is expected to be hugely impactful as it will ultimately do away with the need to mine for Ethereum.
Delaying the “difficulty bomb” has given developers more time to work on Eth2 before the shift occurs. Once implemented, Eth2 aims to make Ethereum more scalable, secure and sustainable. Proof-of-stake is expected to reduce the environmental impact of Ethereum by an impressive 99%, according to a blog post from the Ethereum Foundation.
Given that one of the biggest knocks on cryptocurrencies is that mining for them uses an exorbitant amount of power and exacerbates climate change, the shift to a proof-of-stake model is expected to remove a dark cloud that has hung over ETH and other cryptocurrencies, weighing on their value.
Bullish Forecasts
Following the Arrow Glacier upgrade, several cryptocurrency analysts ended last year with bold predictions for the price of ETH in 2022, with some forecasting it could top $5,000 per token in the coming months.
Many analysts blame the downturn in cryptocurrencies over the past few months on the unwinding of the U.S. Federal Reserve’s asset-buying program, concerns over higher interest rates and continued threats by the U.S. Securities and Exchange Commission (SEC) to regulate all cryptocurrencies, including Ethereum. This combination has led to negative sentiment and risk aversion among investors. But crypto bulls say it is likely to be temporary.
Fans of ETH are also quick to point out that Ethereum’s 160%-plus gain over the past 12 months has dwarfed the 7% increase in the price of Bitcoin, which remains the world’s biggest and most valuable cryptocurrency.
Those who champion Ethereum forecast it will again outpace Bitcoin this year as it completes its shift to a proof-of-stake model and cements its leadership position when it comes to decentralized finance transactions that can be completed without an intermediary such as a bank or other financial institution. Ethereum’s utility, say fans, continues to be what distinguishes it from the legions of other digital coins and tokens that serve no real function.
It’s worth noting that venture capital firm Electric Capital reported that Ethereum had an average of nearly 2,300 developers working on its network at the end of Q3, while Bitcoin had fewer than 400 developers. As The Motley Fool’s Jeremy Bowman notes, “In the tech world, developer interest is often a leading indicator of where technology is going.”
So, this is a good sign for Ethereum investors. When it comes to cryptocurrencies, Ethereum is where the sector is increasingly gravitating, especially as non-fungible tokens (NFTs), DeFi and the metaverse grow and mature.
Buy the Dip in Ethereum
Ethereum is down but far from out. The cryptocurrency arguably has more momentum behind it than any other digital coin or token. And the value that cryptocurrency miners, analysts and investors place on ETH is only growing due to the role it plays in decentralized finance, NFTs and other practical applications.
As Ethereum continues to evolve, investors wanting exposure to cryptocurrencies would be smart to buy the dip and place their bet on this digital asset.
On the date of publication, Joel Baglole did not hold (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.
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.
