Is Ethereum Worth Buying
Importantly, ethereum is also escaping the bearish sentiment affecting the stock market. Risk assets like stocks are struggling 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, and inflation slowed only slightly to 6.4% in January of 2023 from 6.5% in December, less than market forecasts of 6.2%.
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.
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.
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:
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.
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.
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.
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.
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.
For trading ethereum over the next two to four weeks, we are neutral to bearish. That means we expect stable to falling prices. 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 e