Ethereum (ETH-USD) continues to tread water after coming off its lows in late January. ETH peaked on Nov. 7 around $4,812.09, but then drifted down to a low of $2,211.01 on Jan. 24.
Source: Filippo Ronca Cavalcanti / Shutterstock.com
Since then, Ethereum has been floating up and down. As of Feb. 12, it was trading below $3,000 at $2,963. Expect to see more of this volatility from Ethereum in the near future.
So far, ETH seems to trade in line with Bitcoin (BTC-USD), which itself is trading off recent highs of $45,661 on Feb. 10. Bitcoin was also off its lows on the same date Ethereum hit its trough, hitting $33,503 on Jan. 24.
At $896 billion, Bitcoin’s market capitalization is more than twice as large as Ethereum’s market cap of $355 billion. So one might argue Ethereum’s trading, at least recently, is highly correlated to Bitcoin.
What the Future Holds For Ethereum
That pattern will likely last, at least in the near term, until there’s bigger news about Ethereum. For example, sometime this year, the blockchain platform is supposed to transition to a proof-of-stake (PoS) system for transaction validation.
I have written about this extensively, including this recent article. I argue that Ethereum’s price could linger if it doesn’t follow through with the transition.
But as it stands, the only way to presently validate Ethereum transitions is by mining Ether tokens. This is just like Bitcoin. It is also one of the reasons why transactions in Ethereum take so long and are so incredibly costly.
For example, as of Feb. 12, Bitinfocharts showed the average transaction fee presently stands at 0.0062 ETH. That works out to about $18.43 based on its price that day.
Therefore, this implies most people should not do any transaction in Ethereum unless the amount of money involved is at least $1,843. That way, the “gas” fees won’t be more than 1% of the total transaction value. But if the investor decides to move, say, $300 in crypto involving an Ethereum platform, the transaction fees would be 6.14% (i.e., $18.43 divided by $300.)
This is one of the reasons Ethereum must move to a PoS system before ETH can really take off again. Otherwise, it will be stuck in a high correlation effect with Bitcoin.
Institutions Are Warming Up to Cryptos
Larger institutions are slowly warming up to both Bitcoin and Ethereum — at least, to capture some of these high fees. This is likely to continue over the coming year. The trend will slowly gain momentum despite the volatility in both of these digital assets, which has kept many institutions away in the past.
For example, KPMG in Canada announced this week it had added both Bitcoin and Ethereum to its corporate treasury as part of an allocation strategy that includes digital assets. This was the first time it had ever bought any cryptocurrencies.
I suspect more and more companies are going to do this. Barron’s magazine reported on Feb. 12 that banks are slowly moving into crypto trading:
“Large U.S. banks and financial institutions are also dipping into crypto, but are doing so more with institutional custody and trading services.”
The article refers to a JPMorgan report that 300 banks are planning to roll out Bitcoin trading on mobile apps in the first half of 2022. They are working with NYDIG, a Bitcoin financial services firm whose mission focus is “Bringing Bitcoin to Main Street.”
On Friday, Feb. 11, Uber’s (NASDAQ:UBER) CEO said in an interview the company is planning to accept cryptocurrency at some point in the future. A report by Seeking Alpha says this company will join a number of other large tech companies that already have direct and indirect exposure to cryptos.
Where This Leaves Ethereum Investors
Investors in ETH should take the long view. When it finally switches to a proof-of-stake protocol, which is scheduled for sometime this year, the crypto could take off. This will help it break free from its present high correlation with Bitcoin.
As a result, now might be a good time for long investors in Ethereum to average down into their positions. It’s always better to buy into an asset when investors are not pumping it higher and its value is less clear to others.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) 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.
Mark Hake writes about personal finance on mrhake.medium.com and Newsbreak.com and runs the Total Yield Value Guide which you can review here.