When Should I Buy Ethereum? Is ETH a Good Investment?

Summary

• We look at the latest ethereum trends, including macro risks and on-chain/flow metrics, to reveal the best time to buy ethereum and the risks of buying ETH.
• For trading ethereum over the next two to four weeks, we are neutral to bearish. That means we expect prices to either stay the same or fall, with less chance they will fall.
• Also, we think ethereum is a good long-term investment for the next one to three years and are bullish overall. That means we expect prices to rise in the long term.

Is Now a Good Time to Buy Ethereum?

Rising inflation, central bank hiking, and the high likelihood of a global recession are causing stocks and crypto markets to tumble this year. Ethereum is currently amid a cumulative drawdown of around 80% since the November 2021 all-time high of $4,891 and is trading at around $1,000.

The last six months have been particularly brutal, with ethereum falling 47%. The fall comes in response to persistently high inflation in the US and the worrying news that price rises have become embedded in the broader economy. For example, the wage-price spiral is now in effect.

High inflation means the Federal Reserve must continue hiking interest rates. This is a contractionary monetary policy that increases the cost of borrowing, reduces demand, and is generally negative for risk assets such as stocks and crypto. It also increases the risk of recession.

Ethereum’s transition from proof-of-work to proof-of-stake (called ‘the merge’) happened on 15 September 2022. The network upgrade proceeded successfully. And, although many observers expected the event to boost ETH prices, it was unable to buck the broader decline in crypto sentiment that has prevailed this year. The disastrous collapse of the crypto exchange FTX in November only compounded ethereum’s troubles.

Longer term, we think the Fed is not done with an aggressive hiking cycle, and recession risks are increasing. This means macro is weighing on crypto. The question for 2022-3, then, is how low could crypto go? Are we at extreme undervaluation levels, or is more meaningful downside possible?

The macro backdrop for ethereum is bearish. We analyse various on-chain/flow metrics for ethereum, which are neutral. Overall, we are neutral to bearish on ETH in the short term. Therefore, if you have a two-to-four-week horizon, now may not be a good time to buy ethereum.

Why Has the ETH Price Risen Recently?

Reasons for the Current ETH Price (Short-Term View)

Between July and September, investors were piling into ETH because of bullish sentiment around the scheduled merge. Given the prospect of yield on staked ETH and a huge drop in energy consumption, the transition to proof-of-stake had positioned itself well for a bullish narrative. The merge had been the source of an impressive rally since ethereum developers first hinted at a tentative timeline back on 14 July (at the time, the merge was expected to occur around 19 September).

The chart below shows the latest ETH price.

Big investors accumulating ethereum had also bolstered sentiment. The total supply held by addresses with a balance of at least 100,000 coins had increased in line with price action ever since that developer call.

In a previous ethereum update, we discussed the implications of the merge. The punchline was it would be bullish for these reasons:

• Validators can earn yield on staked ETH post merge.
• Faster transactions.
• Net issuance is projected to drop considerably post merge, constraining supply.
• Ethereum may become deflationary.
• Increased scalability and security.
• Better for the environment thanks to proof of stake not work.

However, ethereum and the broader crypto space have been unable to escape the longer-term bearish macro backdrop. We discuss that next.

Why Has the ETH Price Dropped?

Macro Reasons for the Current Ethereum Price (Long-Term View)

Crypto markets almost looked like they had partial immunity from the tech sell-off and growing risk aversion. But recent price action has put paid to that notion. The relative stability of ethereum between mid-January and mid-April, when it choppily trended up with higher highs and higher lows, was simply the calm before the storm. Ethereum is down almost 80% since its November high of $4,891 ($1,080 is the current ETH price, as the above chart shows). And there is likely more to come.

Why is ethereum dropping? The main reason for the fall is the Federal Reserve’s response to inflation. It hiked interest rates 75bp at the June, July and September FOMC meetings. And we expect additional aggressive hikes in December and beyond, following a higher-than-expected US employment report for September. It implies the economy is still running too hot and that the Fed will act aggressively to tame it. The Fed could ultimately push interest rates up to 8%, which is more than the market is currently pricing. This would negatively impact risk markets, especially the ETH price.

Years of low interest rates since the global financial crisis in 2008 had seen markets reach extreme valuations by the end of 2021. Who cares if tech companies are loss-making if the companies can borrow easily? And if companies cannot borrow money, they can attract capital from investors, who themselves have likely borrowed money.

Crypto markets have not been immune to the support from cheap leverage in the fiat markets. After all, crypto offers the tech dream of scalability and regulatory arbitrage. And if there was any doubt that crypto was not benefiting from low interest rates, the recent declines in crypto as US rates have risen should remove it.

Furthermore, the correlation of ethereum to NASDAQ started to increase sharply just as US interest rates started to rise. This is a common occurrence throughout history. When the liquidity tap turns off, usually by central banks raising rates, the correlation between diverse assets shoots up. This time appears no different.

The bottom line is that the macro backdrop for crypto remains bearish on rate hikes and inflation. The probability of recession remains high at 80%, and we expect the Fed to hike more than markets are pricing in. The Fed hiked interest rates 75bp in November, and we expect another hike in December. The event will be important for risk markets (of which crypto is increasingly a part) and broader risk sentiment in general.

How Low Can Ethereum Prices Go?

One exercise is to see how low prices could get were the NASDAQ to suffer a 2000-style crash. After all, the ethereum and NASDAQ correlation was around 80% until recently. So where the NASDAQ goes, ethereum follows.

Back in 2000, the NASDAQ suffered a 78% drawdown. Currently, the NASDAQ is in a 30% drawdown. A repeat of the 2000-style drawdown would put the NASDAQ at 3,500. So where would crypto be if NASDAQ were trading at this level? We estimate a regression between ethereum/bitcoin returns and NASDAQ returns from 2020 onwards. Based on this relationship, we find:

• Bitcoin prices would reach $8,254 if the NASDAQ fell to 3,500. This implies a 72% decline from current levels.
• Ethereum prices would reach $143 if the NASDAQ fell to 3,500. This implies a 92% decline from current levels.

How High Can Ethereum Go?

Should the currently restrictive environment of rising interest rates and recession risks subside, we could see ethereum return to its all-time high of $4,379 or even beyond. However, we caution that this scenario is unlikely in the short term and, like with any investment, it is impossible to say with certainty how high ethereum will go.

What Else Is Happening in Crypto?

The FTX fallout has increased volatility in ethereum and bitcoin after it hit multi-year lows last month. Bitcoins annualised 30-day volatility has jumped from 26% at the start of the month to 70%, while that of ethereum has jumped from 43% to 102%. We expect volatility to remain high as the FTX fallout continues to unfold.

Alongside investors, miners are feeling the crypto crunch. As prices drop, they are re-evaluating whether it is still profitable to operate their expensive mining rigs. And soaring energy prices exacerbate this effect as the margins for mining profitability tighten. Hash rates and miner revenues have come down significantly since the start of June.

Regulation also is becoming more of a theme throughout 2022, with various executive orders signed already. Increased regulation should mean less uncertainty around crypto markets for investors, which would be bullish.

On the flip side, overregulation could stifle innovation by increasing censorship. The ongoing regulatory backdrop will be key to monitor. Lastly, on ethereum specifically, there is the much-anticipated merge. We previously covered its potential implications. The punchline was that it should be bullish for ethereum.

Crypto News Impacting the ETH Price

• Rising yields have mechanically increased the probability of a recession within the next 12 months to over 80%.
• Inflation remains at the forefront of investors’ minds.
• Censorship is rising after the US Treasury’s Office of Foreign Assets Control (OFAC) sanctioned Tornado Cash for money laundering allegations. It has prompted other players to start censoring transactions to avoid similar sanctioning.
• Crypto exchange FTX collapsed spectacularly in November. A class action law suit has been filed against SBF and several athletes and celebrities who helped promote FTX.
• Crypto lender BlockFi prepares for bankruptcy.
• Crypto lender Salt halts withdrawals.
• Liquid Global (a crypto exchange owned by FTX) halts withdrawals.
• Bitcoin dropped below $20,000 as software company MicroStrategy’s CEO, Michael Saylor, is sued for tax fraud.
• Chinese tech giant Tencent has halted NFT sales on its Huanhe platform due to regulatory scrutiny.
• Bitcoin miner PrimeBlock has cancelled its listing plans and terminated a $1.25bn merger with 10X Capital.
• Crypto hacking is on the rise with around $1.9bn stolen already according to Chainanalysis.

Summary of ETH Analysis

The bottom line is that crypto, including ethereum, will remain under pressure. For ethereum, this means a breach of $1,000 is possible. The main near-term support would be Fed dovishness rather than any crypto-specific dynamics. We do not see this happening anytime soon. And for long-term investors, we still think some allocation to crypto makes sense – just like an allocation to equities also makes sense. But be prepared for weakness in 2022-3.

For all our latest analysis on crypto markets, click here.

Ethereum and Crypto Price Trackers

Updated 18 November 2022

As for our various indices, they are all in the red. Our Metaverse Index (-13% WoW) is down the most, whilst all other indices are down between 5% and 12% each (Charts 1 and 2).

Our Metaverse (97%), Smart Contract (96%), and Privacy (96%) indices are correlated most to bitcoin, while our and DeFi (93%) index is correlated least to bitcoin (Chart 3).

On macro markets, bitcoin’s correlation to the S&P 500 (-20%) and the NASDAQ (-31%) flipped to negative. It turned negative on 10 November after Binance pulled out of a potential acquisition of FTX which sent bitcoin to multi-year lows. Meanwhile, its correlation to gold (-47%) also turned negative while its correlation to 10Y yields jumps to 42%.

• Smart Contract Platform Index: Solana (SOL) is down the most (-24% WoW) and Eos (EOS) is down the least (-4% WoW). Ethereum (ETH) is down 8% WoW.
• DeFi Index: Maker (MKR) is down the most (-26% WoW) while Uniswap (UNI) is flat on the week.
• Metaverse Index: Decentraland (MANA) is down the most (-21% WoW) and Axie Infinity (AXS) is down the least (-3% WoW).
• Privacy Index: Keep Network (KEEP) is down the most (-14% WoW) and Secret (SCRT) is up the most (+14% WoW).
• Bitcoin: this is down 5% WoW.

Should I Invest in Ethereum? (A Beginner’s Guide)

Ethereum and the crypto revolution are no longer nascent. With the length of the blockchain continuing to grow and decentralised finance (DeFi) gaining ground over traditional finance, this new asset class is reshaping the investment landscape.

We think ethereum is a worthwhile long-term investment. However, we also note that ethereum is extremely volatile. That means it experiences large price movements over short periods. Before you invest in ETH, you must understand the risks involved: you could lose all or a large portion of your investment. Never invest money that you cannot afford to lose.

How to Make Money Investing in Ethereum

It is easy to get carried away with the fear of missing out. You are probably aware of Cameron and Tyler Winklevoss, who are reputed to be the world’s first bitcoin billionaires with over 100,000 coins. Or what about Barry Silbert, the owner of Grayscale Ethereum Trust, Coinbase and Coinbase? Success stories like these often give people FOMO – or the fear of missing out – if they do not invest immediately.

However, to invest in cryptocurrency, we must first understand it. Crypto tokens are unlike any traditional asset class. And they are all different. Just because you understand bitcoin, does not mean you know how ethereum works. Our video on bitcoin and ethereum fundamentals can help you understand how ethereum prices fluctuate and how to assess trends in important ethereum metrics. And the video below explains other cryptocurrencies that might put ethereum at risk.