The second-largest cryptocurrency in the world by market cap, Ethereum (CCC:ETH-USD) has taken investors on a wild ride this year. Indeed, Ethereum has been a near-three bagger for investors since the beginning of this year alone. Going further back in history, early investors have bagged absolutely ridiculous market-shattering returns. It makes sense why there’s a whole new class of investor that may choose to simply avoid stocks altogether.
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Indeed, if Ethereum can continue its incredible run, crypto investors may want to just keep their heads down and focus on trading these volatile assets.
And volatile, they’ve been.
In recent weeks, Chinese government intervention in the crypto space and concerns around the energy usage tied to Bitcoin (CCC:BTC-USD) and Ethereum mining, led to sharp selloffs in both leading cryptocurrencies. The price of Ethereum plummeted from its high of more than $4,000 per token, after various tweets from Elon Musk criticizing the energy usage of cryptocurrencies, and concerns that Ethereum co-founder Vitalik Buterin may be looking to cash out.
Calmer heads appear to be prevailing of late. Indeed, ETH has rebounded from a sharp drop to around $1,700 per token on May 23 to around $2,700 at the time of publication.
Here’s why I think investors should be careful with Ethereum right now.
Volatility Is Your Friend, Until It Isn’t
Any asset that can swing from $4,000 to $1,700 and back to $2,700 in the matter of a few days is one I won’t touch.
Sure, the returns cryptocurrencies like Ethereum have provided have blown my portfolio away. However, on a risk-adjusted basis, I just can’t justify putting my capital to work in something so volatile.
The probability of a given cryptocurrency going to zero is small. But it exists. A 2018 Yale study pegged that probability at around 0.4%, for Bitcoin specifically. That probability of a specific stock going to zero also exists. However, the wild swings in value crypto provides isn’t something I’m interested in.
Capital preservation ought to be a primary goal of long-term investors. Buying something with a high probability of losing a tremendous amount of value in a short amount of time simply isn’t aligned with capital preservation goals.
For younger investors with more time to make up for lost life savings, this is perhaps less of a concern. But for those saving for retirement, or their children’s or grandchildren’s future, crypto is a difficult asset class to justify.
Ethereum does provide value to users, and has the perception of being a currency. These factors may make this cryptocurrency a less-volatile investment in the future. But for now, it’s simply for one end of the risk-tolerance spectrum I don’t fall into.
Ethereum: The Bottom Line
Ethereum’s smart contracts and decentralized finance applications sure are appealing to the masses. I can understand the appeal of Ethereum in the crypto community.
However, Ethereum’s wild swings in recent days should be a lesson to investors.
Hard-core crypto enthusiasts who are going to live and die by crypto may have viewed this volatility as a great buying opportunity. And thus far, they seem to have been proved right.
That said, longer-term investors on the conservative end of the risk spectrum may want to steer clear of these digital tokens. The volatility that has arisen in the crypto world in recent days are meaningful reminders of the risks one takes with one’s capital in investing in Ethereum or any of its peers. Ethereum’s market capitalization of more than $320 billion makes another 1,000x move unlikely. Those hoping for similar returns as in years past would be advocating for a market cap in the 15 or 16-digit range. I just can’t fathom something like that happening.
Then again, I’ve been wrong all along with this whole cryptocurrency bull market. Anything seems to be possible these days.
On the date of publication, Chris MacDonald 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 MacDonald’s love for investing led him to pursue an MBA in Finance and take on a number of management roles in corporate finance and venture capital over the past 15 years. His experience as a financial analyst in the past, coupled with his fervor for finding undervalued growth opportunities, contribute to his conservative, long-term investing perspective.