The recent pullback in cryptocurrencies hasn’t spared Ethereum. As I write this, ETH has pulled back nearly 8% in just five days.
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The declines interrupted an impressive bull run. Indeed, Ethereum seemed on an easy path to clear all-time highs above $1,400 set some three years ago.
That path remains open. What we’re seeing now is a pause in a broader run, rather than a long-term reversal. 2021 is going to be a big year for Ethereum, both in terms of the network and the price.
Ethereum 2.0
One reason for optimism is what is colloquially known as “Ethereum 2.0.”
Ethereum already has real advantages. It’s open-source, meaning essentially anyone can contribute to its development. It’s decentralized: developers can create either “smart contracts” or their own apps to move money, manage agreements or provide myriad other functions.
All of those activities take place on the blockchain. And we know that major companies, in the financial industry and elsewhere, are looking to the blockchain for solutions to vexing problems.
These attributes are why Ethereum, by market capitalization, is the second-most valuable cryptocurrency in the world, behind only bitcoin. But what makes ETH particularly interesting at the moment is that the platform should get even better.
Ethereum 2.0 promises real improvements. The Beacon Chain, launched on Dec. 1, introduces “proof-of-stake” to the network. This is a major step forward in terms of security for an ecosystem that has had a few high-profile hacks. Most infamously, a hacker stole 3.6 million ETH back in 2016, which led to a “hard fork.”
The next step is “shard chains.” Without getting too technical, shard chains should dramatically increase the speed of the Ethereum network.
All told, what we have is a platform that already has real value — and is going to get even better.
Smart Contracts
What Ethereum 2.0 can do is make the blockchain part of the everyday economy. And that would be a huge plus for ETH.
Essentially, Ethereum can become the backbone of “decentralized finance.” It can digitize almost everything. As one bull pointed out, “[t]he digitization of the contract is the digitization of the global economy.”
That global economy has a total gross domestic product of roughly $142 trillion. At $1,219, Ethereum has a market capitalization of $139 billion.
To be sure, those numbers aren’t necessarily apples-to-apples. And it will be a long time before Ethereum digitizes even a small portion of the global economy.
But those figures show the potential here. Ethereum has applications in so many industries. Banks obviously are interested. So are law firms, given the potential for “smart contracts.”
The applications go far beyond that, however. Maritime shipping companies, for instance, are working toward blockchain-based solutions. Indeed, given the potential of decentralized finance, basically every company in every industry in the world could one day look toward Ethereum as an opportunity — if they haven’t done so already.
The Pullback
Now, just because the platform has potential doesn’t mean Ethereum is going to climb straight up. As we’re seeing at the moment, cryptocurrencies are not immune to volatility. Bitcoin provides another example: just in the first two weeks of 2021 it has moved from $29,000 to above $40,000 and now back below $40,000.
For ETH, we’ve been here before. Again, the cryptocurrency reached all-time highs back in 2018. That followed an absolutely staggering run from $8 at the end of 2016 to over $1,400. Within less than a year, those highs had turned into lows below $100.
Investors who believe in the long-term potential of Ethereum have good reason to do so. But they need to prepare for some short-term volatility along the way, as we’re seeing right now.
And there are risks. Other “altcoins” are trying to compete in the blockchain space. There’s no shortage of efforts from tech companies, large and small. Those companies may push for blockchain solutions that are more centrally managed.
After all, Ethereum is trying to revolutionize finance. It’s a noble effort, and one with a real chance of working. But revolutionary processes are slow, uncertain and often messy.
Still, I always counsel investors to take the long view. That applies to ETH as well. This is one of the most exciting cryptos out there. It might be the most exciting. That’s more than enough for a long-term case, and more than enough to see this short-term pullback as a buying opportunity.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.