When to Buy Ethereum? The Best Time to Invest in ETH
By Bilal Hafeez and Dalvir Mandara
(7 min read)
[Updated 28 June 2022]
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 bearish. That means we expect falling prices.
- However, 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?
Hotter-than-expected inflation data has sent stocks and crypto tumbling. May CPI for the US came in at +8.6% vs +8.3% expected. Ethereum is currently amid a cumulative drawdown of around 75% since November highs and trading at around $1,200 – its lowest level since January 2021. Optimistically, this could mean we are at the lows and could see moves higher. But another downward leg is more likely.
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, then, is how low could crypto go? Are we at extreme undervaluation levels, or is more meaningful downside possible?
Overall, the macro backdrop for ethereum is bearish. We analyse various on-chain/flow metrics for ethereum, which are also bearish. Therefore, if you have a two-to-four-week horizon, now may not be the best time to buy ethereum.
Why Has the ETH Price Dropped?
Macro Reasons for the Current Ethereum Price
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 75% since its November high of $4,799 ($1,200 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 June’s FOMC meeting, and we expect another 75bp in July. 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. Investors are currently avoiding ethereum, and the number of active addresses on the ETH blockchain is trending down (Chart 2).
The crux of the matter is that US interest rates are rising. Years of low interest rates since the global financial crisis in 2008 have seen markets reach extreme valuations. 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 then 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.
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.
Interestingly, though, the relationship between tech stocks and cryptocurrencies is being tested. Correlations with equities have reduced significantly following the TerraUSD/Luna collapse (see our latest update on stablecoins). But the correlation of ETH and currencies like GBP and EUR are rising towards 40%. A continued rise in ETH/GBP correlation may leave ETH vulnerable to any return in USD strength.
What Else Is Happening in Crypto?
Regulation 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.
Crypto News Impacting the ETH Price
- Rising yields have mechanically increased the probability of a recession within the next 12 months to over 50%.
- Inflation remains at the forefront of investors’ minds, with PPI and retail sales data also due this week.
- Celsius, one of the biggest crypto lending platforms, has stopped all transactions and withdrawals due to ‘extreme market conditions’. Crypto is currently facing a credit crunch with lenders like Celcius in a liquidity crisis.
- Goldman Sachs is reportedly looking to raise $2bn to buy Celsius assets if they go bankrupt.
- Voyager Digital has issued a notice of default to one of the most active crypto hedge funds, Three Arrows Capital (3AC). This comes after crypto lenders BlockFi and Genesis liquidated some of 3AC’s positions after a margin call.
- Harmony is the latest blockchain to be hacked. Hackers stole $100mn worth of crypto and exchanged it for ethereum.
- MicroStrategy Inc, a large investor in bitcoin that has accumulated over 129,000 bitcoins over the past two years, faces a margin call if bitcoin falls below $21,000. It is currently trading around $22,000. The investor would be obligated to sell some of its bitcoin holdings should such an event happen, though CFO Phong Le has said that adding more collateral to its loan could avoid that situation.
- Binance, one of the largest crypto exchanges, temporarily halted withdrawals amid the crash.
- Coinbase exchange announced it is cutting over 1,000 employees. CEO Brian Armstrong cited changing economic conditions, recession risks, and growth problems as some of the reasons for the changes.
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. 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 near-term weakness.
For all our latest analysis on crypto markets, click here.
Ethereum and Crypto Price Trackers
Crypto markets have stabilised somewhat after bottoming out on 18 June. Bitcoin has reclaimed $20,000 and has been trading in a range between $19,700 and $21,500 for most of this week. US stocks also closed higher on Thursday after Fed Chair Jerome Powell said the Fed is ‘strongly committed to bringing inflation back down’ during the congressional testimony.
As for the performance of our various indexes, they are all in the green (Charts 1 and 2). Our DeFi Index leads gains at 24% followed by our Smart Contract and Privacy Indexes at around 10% each. Our Metaverse and Bitcoin Indexes are up the least at 8% and 3%, respectively.
Correlation between our Bitcoin Index and the others are down compared to last month except for our DeFi Index (Chart 3). On macro markets, bitcoin’s correlation to tech stocks drops compared to that of last month. Meanwhile, its correlation to Oil has increases (Chart 4).
- Smart Contract Platform Index: Solana (SOL) is up the most at 27%, followed by Fantom (FTM) at 23%. Terra (LUNA) is flat on the week. Ethereum is up 7%.
- DeFi Index: Uniswap (UNI) is up the most at 47%. Notably, Aave (AAVE), 1inch (1INCH), Thorchain (RUNE), Maker (MKR), and Compound (COMP) are all up over 20%. Terra (LUNA) is flat on the week.
- Metaverse Index: Enjin Coin (ENJ) is up the most at 22%, followed by The Sandbox (SAND) at 21%. RedFOX Labs (RFOX) is down the most at 3%.
- Privacy Index: All coins are up in this index. Dash (DASH) is up the most at 16% and Keep Network (KEEP) is up the least at 5%.
- Bitcoin: this is up 3%.
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 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.
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.
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.
Buying the Dip
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.
Top 3 Tips You Need to Know Before Investing in Ethereum
Where to Buy Ethereum
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.
ETH Dollar-Cost Averaging
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.
Diversify Your Crypto Portfolio
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.”
FAQs
→ Is now a good time to buy ethereum?
For trading ethereum over the next two to four weeks, we are bearish. That means we expect falling prices. However, 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.
→ When was ethereum at its lowest?
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 hitting lows of $1,900.
→ Can you lose your money buying ETH now?
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.
→ When to sell ethereum?
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.
Appendix
Ethereum as a Good Inflation Hedge
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.
The Ethereum Merge (or ETH 2.0)
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.