Are you aware of “middle-child syndrome”? Then you definately’ll know the way ethereum (CCC:ETH) has felt all these years. Since January 2020, ETH has trounced bitcoin (CCC:BTC) with a virtually 750% return. But, the world’s #2 cryptocurrency acquired much less consideration than its huge brother BTC or problem-child XRP (CCC:XRP).
However don’t be fooled. Ethereum appears to be like set to interrupt out in 2021. As its technological benefits acquire steam, Ethereum traders may see $1,500 within the close to time period and $2,500 someday by the tip of 2021. However strap in your seatbelt and maintain on tight; it’s going to be a wild journey.
- Ethereum sits on a superior know-how.
- ETH has better room to develop.
- Volatility will stay excessive.
Ethereum 2021: Higher than Bitcoin
The way forward for ethereum wasn’t at all times so vivid. In June 2016, the infamous DAO Hack despatched $55 million of ether into hacker’s arms. And a rash of bitcoin clones like bitcoin money and dogecoin made ethereum seem like one more shiny bauble in an enormous cryptocurrency soup.
However ethereum rapidly recovered. To deal with the DAO Hack, the ethereum group determined to successfully roll back its blockchain to undo the injury. It regained its #2 place by 2018.
Ethereum holds a number of technological benefits over its older bitcoin and altcoin siblings. Firstly, the cryptocurrency acts extra like a contract than a coin. That makes it extra like Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Pockets or Apple’s (NASDAQ:AAPL) Apple Pay, slightly than a $100 invoice. As an illustration, an e-commerce purchaser would possibly maintain ETH in an escrow that routinely releases fee on receipt of products. Bitcoin, however, provides no such mechanism.
Lastly, it has a theoretically limitless provide, not like bitcoin’s 21-million-coin cap. Meaning ETH gained’t run right into a mining “wall” and run out of cash to reward miners.
Up, Up and Away
That makes ethereum certainly one of my favourite cryptocurrency performs of 2021. With a $132.5 billion market capitalization, the cryptocurrency continues to be solely one-fifth the dimensions of bitcoin. And as adoption spreads on PayPal (NASDAQ:PYPL) and different fee processors, the forgotten center youngster may rapidly catch as much as its older brother.
However identical to bitcoin, there’s a wrinkle to the ethereum story. Not like gold or bonds, ethereum is NOT a safe-haven asset. As a substitute, it’s a “risk-on” asset that tends to rise when occasions are good and fall in any other case.
The information backs this up. The correlation between ethereum and the S&P 500 now sits at 64%, which means that shares clarify virtually two-thirds of ethereum’s month-to-month returns.
Not satisfied? Think about March 2020, the month the inventory market fell away from bed. Because the inventory market tumbled 30% on coronavirus fears, cryptocurrencies supplied no cushion. In a matter of weeks, bitcoin, ethereum and different cryptocurrencies misplaced over half of their worth. (The identical sample occurred throughout the December 2018 market wobble.)
However there is a silver lining: Ethereum additionally tends to amplify inventory market good points. With more fiscal stimulus on the way, that additionally means increased inventory valuations. Cryptocurrencies will naturally observe.
How Excessive Can Ethereum Go?
Make no mistake: Ethereum is as unstable as a moody teenager. $10,000 invested in January 2018 would have melted to $830 in a yr. However the identical $10,000 invested in January 2020 would have rocketed to $85,000. With out an underlying laborious asset, ethereum’s worth has no foundation in the true world.
That makes the cryptocurrency’s valuation extra of a reputation contest than a technical train, at the very least within the brief time period. The cryptocurrency may simply double to $2,500 in 2021 if extra customers hold leaping on board. But it surely may additionally crash to $500 if a significant hack shakes investor confidence. (Extra seemingly, a 25% loss would trigger traders to panic-sell, sparking a self-fulfilling downward cycle.)
Ethereum costs additionally are likely to reverse course within the close to time period. Since 2015, ethereum returns have doubled-back virtually 60% of the time, when a profitable month will get adopted by a shedding one and vice versa. Even in its 2018 peak, the coin by no means notched greater than two consecutive months of good points.
Don’t Miss the Forest for the Timber
Nonetheless, like a maturing middle-child, ethereum is beginning to discover its footing. Since April, Ethereum has solely notched one shedding month. And regardless of its large 2020 run, the cryptocurrency nonetheless trades 16% beneath its all-time peak in 2018. (Bitcoin, in the meantime, is up about 110%.)
Loads of troubled middle-children ultimately turned stars. Warren Buffett and Invoice Gates each overcame early stumbles. And ethereum, with its superior structure, may at some point change into a staple of funds processing. Its capacity to finish transactions inside seconds (versus bitcoin’s minutes) makes it a viable different to Visa (NYSE:V) and different on-line fee processors.
Briefly, don’t miss this boat. If the broader cryptocurrency market has a superb 2021, you may be certain ethereum could have a fair higher one.
On the date of publication, Tom Yeung didn’t have (both straight or not directly) any positions within the securities talked about on this article.
Tom Yeung, CFA, is a registered funding advisor on a mission to carry simplicity to the world of investing.