When to Buy Ethereum? The Best Time to Invest in ETH
(7 min read)
(7 min read)
[Updated 6 September 2022]
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 65% since November highs and trading at around $1,650.
However, crypto markets have been rallying throughout July and into August, with smart contract platforms like ethereum taking centre stage. Also, ethereum’s upcoming transition from proof-of-work to proof-of-stake (called ‘the merge’) is contributing to positive sentiment. The date of the ethereum merge is 19 September 2022, and we expect further gains leading up to this period.
Longer term, however, 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 bullish. Overall, we are neutral to bullish on ETH in the short term. Therefore, if you have a two-to-four-week horizon, now may be a good time to buy ethereum.
Investors are piling into ETH because of bullish sentiment around the upcoming merge.
The latest expectation is for it to commence around 15 September. Given the prospect of yield on staked ETH and a huge drop in energy consumption, the transition to proof-of-stake positions itself well for a bullish narrative.
The merge has already 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). Since then, ethereum has increased a whopping 56%. Chart 2 shows the ETH price.
Big investors accumulating ethereum has also bolstered sentiment. The total supply held by addresses with a balance of at least 100,000 coins has been increasing 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:
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 65% since its November high of $4,799 ($1,650 is the current ETH price, Chart 2). And there is likely more to come.
The main reason for the fall is the Federal Reserve’s response to inflation. It hiked 75bp at both the June and July FOMC meeting. And we expect additional aggressive hikes in September and beyond, following a very hawkish Jackson Hole Symposium. The Fed could ultimately push interest rates up to 5% or more, which is more than the market is currently pricing. This would negatively impact risk markets, especially the ETH price.
Indeed, 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 70%, and we expect the Fed to hike more than markets are pricing in. We get August CPI data on 13 September, and the Fed meets on 20-21 September for their next policy decision. Both dates will be important for risk markets (of which crypto is increasingly a part) and broader risk sentiment in general.
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:
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. 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.
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. For ETH specifically, near-term support comes from bullish sentiment around the merge. 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.
Crypto and US equities had decoupled. Now, however, they are moving in tandem, with the correlation between bitcoin and the NASDAQ and the S&P 500 increasing towards 75%.
As for our various indices, they are mostly in the red. Our Bitcoin, Metaverse, and Privacy indices are all down over 7%. Meanwhile, our Smart Contract and DeFi indices are up. This is because they still contain Terra Luna Classic (the original token of the Terra blockchain), which has rocketed 105% over the past seven days. However, all other constituents in each of those two indices are down.
Our Smart Contract and Metaverse indices are most correlated to bitcoin at around 90% each (Chart 3). Our DeFi and Privacy indices are least correlated to bitcoin at around 86% each. On macro markets, bitcoin’s correlation to tech increases while the correlation with 10Y yields (negative) and Gold (positive) has jumped (Chart 4).
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 investing, 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.
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.
Each currency has different underlying protocols and technology. That impacts how they trade, their volatility, and how you can value them. Some are more like stocks, others commodities, and others currencies. And each crypto token has a unique structure of supply.
We think crypto markets are a worthwhile long-term investment. The technology can capture market share on some existing markets like payments and stock trading while creating new markets like valuable scarce digital assets.
Your exposure to ethereum needs to be appropriately sized so that you can survive 50% to 80% drawdowns. Drawdowns provide good entry levels for exposure, but we would not go max long in an environment of rising central bank rates and falling global growth momentum.
To buy ethereum (ETH) or any other cryptocurrency, you need access to a crypto exchange. A crypto exchange is where buyers and sellers meet to exchange money for coins, coins for other coins, and coins for money. Many options are available such as Coinbase, Binance.com, or eToro – each come with various fee structures, so research which is best for your needs.
You also need access to a crypto wallet to store ethereum and other cryptocurrencies. Many exchanges provide these, but not all do. You can also buy ethereum on platforms like Paypal and Robinhood.
Cryptocurrencies can be extremely volatile. One way to cope with the volatility is to use dollar-cost averaging. Dollar-cost averaging is a strategy where you divide the total amount you want to invest across periodic purchases of the target asset. It simply means that you would invest the same number of dollars each month or quarter, regardless of market trends.
The idea is that when prices are high, you can afford less of the asset. But when prices are low, you can afford more. When the market recovers, you benefit from having bought more shares at the lower price. Please note that using this strategy will not always result in a profit or necessarily protect you from falling prices.
With the crypto landscape so volatile and diverse, managing risk in a portfolio is critical. That essentially means position sizing and diversification – as with any other kind of investment.
One of the best pieces of investment advice we have heard recently comes from Ari Paul, co-founder and CIO of Blocktower Capital, a crypto and blockchain investment firm. As Paul says,
“Risk is only sizing. So, if you think bitcoin is too risky, you could size it at 0.1% of your portfolio or 0.001%. Too risky is never a reason not to own an asset. If something is positive expected value, risk adjusted, and relatively low correlation, you have to own it. That’s peak portfolio management 101.”
For trading ethereum over the next two to four weeks, we are bullish. That means we expect rising prices. However, for 2022-3 in general, we think recession risks pose a risk to ETH and so now might not be the best time to buy ethereum if you have a medium-term outlook. 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.
Ethereum was the lowest in October 2016, when its price was $0.41. Since then, Ethereum has experienced several major bull runs. The first was in 2017/8 when it peaked at $1,400. It subsequently dropped to around $300-400 until the start of 2021. From January that year, bullish sentiment took the coin to over $4,000. It was not until the closing moments of 2021 that ETH breached this threshold, continuing its rise to $4,780 in November 2021. Since then, ETH price has been volatile and generally gone downwards. It is currently around $1,650.
As with all investments, the value of ethereum can rise as well as fall. While it is unlikely that ethereum will suffer a complete loss of value, investors must be prepared to suffer drawdowns of between 50% and 80%. We recommend small allocations and diversification of your portfolio. Never invest what you cannot afford to lose.
Traditional wisdom says you should buy low and sell high. But whether you should sell ethereum depends on your investment horizon, risk appetite and financial goals. Although some website speculate that certain days of the week are better or worse then others for selling ethereum, we believe that any decision to buy or sell should be based on analysis of crypto fundamentals.
Ethereum and bitcoin have historically been touted as a hedge for inflation. When inflation expectations rise, you would want the relationship between the cryptocurrency and inflation expectations to be at least positive. This, historically, has held. However, since February, the relationship has broken down. Inflation expectations remained anchored while ETH prices have fallen. A more hawkish Federal Reserve could weigh on ETH going forward.
Ethereum has been running on two different blockchains since April 2022. One operates using proof-of-work, like bitcoin. The other is a test chain what uses proof-of-stake. The merge is an upcoming event where these two blockchains will combine, ending proof-of-work. It is expected to happen in Q3/Q4 2022, and it will eliminate the energy-intensive mining required in proof-of-work. Guest author Nikhil Shamapant explains more about the ethereum merge and what it could mean for ETH price in 2023 in his recent article.