In the Short-Term, Expect Things to Stay Touch-and-Go for Ethereum

Under pressure since November, many are waiting for Ethereum (CCC:ETH-USD) to bottom out. With its latest uptick in price, some may believe the proverbial dust has started to settle.

A concept image of a virtual coin based on the Ethereum logo.
Source: Filippo Ronca Cavalcanti / Shutterstock.com

However, I wouldn’t jump to that conclusion. My long-term view on Ether (what the coin itself is named) still stands. If cryptocurrencies are truly the “next big thing,” and not just a fad, this is one of the best vehicles out there for exposure. Those with a shorter time horizon though may want to be careful.

The U.S. Federal Reserve’s plan to raise interest rates are still putting pressure on it. Another upcoming move from the Fed (not interest rate related) could weigh on it too. To top things off, there’s more token specific concern/risk that could affect its performance.

As a result, it may make more dramatic price moves than its main “established coin” peer, Bitcoin (CCC:BTC-USD). For instance, make a trip back to prices well below $3000 (it’s at around $3,350 today).

Those looking to hold it for years may still find now a worthwhile time to enter/add to a position. But if you’re looking to get in at its near-term bottom? You may want to take your time before dabbling in it again.

The Fed Could Affect Ethereum in More Ways Than One

As is the case with all cryptocurrencies, there’s one factor that’s going to determine whether it moves higher or lower. That’s the Fed, due to its plans to raise interest rates several times this year.

Yes, Ethereum, like its peers, has already seen a big slide, since the Fed made it known late last year that it planned to tighten monetary policy, to fight inflation. Alas, a more hawkish Fed may yet to be fully priced into cryptocurrencies. Analysts at several investment banks now believe there will be four interest rate hikes instead of three. The central bank’s reversal of its accommodative policies could be more sweeping than first expected.

As higher rates will likely sustain the move from “risk-on” to “risk-off,” ETH, BTC, and the rest could again head lower. Along with this, like I hinted above, there’s something else coming from the Fed that may also impact digital asset prices.

Per the central bank’s chairman, Jerome Powell, within a few weeks the Fed could finally release its report on central bank digital currencies (CBDCs). Admittedly, the establishment of a Fed-backed crypto would have a greater impact on privately-controlled “stable coins” than on more general cryptos like this one. Still, this could have a negative impact on crypto prices across the board. More news on this topic may help to re-heighten concerns that the traditional financial system will make other moves to fold blockchain finance into it.

A Token-Related Risk That’s on The Table

Even with my view that Ethereum is one of the better cryptos to own, I will concede that the perception that it’s “DeFi dominant,” or “unsinkable,” may be starting to crack.

As my InvestorPlace colleague Alex Sirois recently argued, rival platforms, like the so-called “Ethereum killers” such as Cardano (CCC:ADA-USD), Polkadot (CCC:DOT-USD), Solana (CCC:SOL-USD) are quickly catching up. As each one implements enhancements/upgrades, they could continue to eat away at its lead. Yes, the “2.0” upgrades could help to counter this rising competition.

Yet as Sirois also noted, a recent report from J.P. Morgan suggests that with the time its taking to fully implement its upgrades, it may be too little, too late. So, am I saying, that the term “Ethereum killer” may be literal? I wouldn’t go that far. I’m doubtful that the ETH token’s blockchain is a dinosaur in the making.

I will say, however, that growing concern about its “DeFi dominance” could move it lower. At the very least, prevent it from climbing back toward past highs. Assuming there are no more delays with putting in place the upgrades, this may be temporary. But if the next phase (The Merge) gets delayed once again? Even if the above-mentioned Fed-related issues get fully absorbed, this more token-related risk could push it down to lower prices.

Bottom Line

It’s not set in stone that Ethereum’s so-called “killers” will fully grab the DeFi crown from it. The above-mentioned pessimism about the upgrades could prove to be overblown. This year, and next year, the developers of this token’s blockchain could successfully put them online, enabling it to maintain its lead.

Still, while the long-term may remain promising, expect near-term price movements for Ethereum to stay unpredictable. Tread carefully if you are approaching this as a trade rather than as a long-term investment.

On the date of publication, Thomas Niel held LONG positions in Bitcoin and Ethereum. He did not hold any of the 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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