Are you familiar with “middle-child syndrome”? Then you’ll know how ethereum (CCC:ETH) has felt all these years. Since January 2020, ETH has trounced bitcoin (CCC:BTC) with a nearly 750% return. Yet, the world’s #2 cryptocurrency received less attention than its big brother BTC or problem-child XRP (CCC:XRP).
But don’t be fooled. Ethereum looks set to break out in 2021. As its technological advantages gain steam, Ethereum investors could see $1,500 in the near term and $2,500 sometime by the end of 2021. But strap on your seatbelt and hold on tight; it’s going to be a wild ride.
Ethereum sits on a superior technology.
ETH has greater room to grow.
Volatility will remain high.
Ethereum 2021: Better than Bitcoin
The future of ethereum wasn’t always so bright. In June 2016, the infamous DAO Hack sent $55 million of ether into hacker’s hands. And a rash of bitcoin clones like bitcoin cash and dogecoin made ethereum look like yet another shiny bauble in a massive cryptocurrency soup.
Source: Data courtesy of Yahoo Finance
But ethereum quickly recovered. To handle the DAO Hack, the ethereum community decided to effectively roll back its blockchain to undo the damage. It regained its #2 position by 2018.
Ethereum holds several technological advantages over its older bitcoin and altcoin siblings. Firstly, the cryptocurrency acts more like a contract than a coin. That makes it more like Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Wallet or Apple’s (NASDAQ:AAPL) Apple Pay, rather than a $100 bill. For instance, an e-commerce buyer might hold ETH in an escrow that automatically releases payment on receipt of goods. Bitcoin, on the other hand, offers no such mechanism.
Secondly, ethereum solves the thorny problem of speed. While bitcoin takes about 15 minutes to complete a transaction, ETH will do the same in under 15 seconds.
Finally, it has a theoretically unlimited supply, unlike bitcoin’s 21-million-coin cap. That means ETH won’t run into a mining “wall” and run out of coins to reward miners.
Up, Up and Away
That makes ethereum one of my favorite cryptocurrency plays of 2021. With a $132.5 billion market capitalization, the cryptocurrency is still only one-fifth the size of bitcoin. And as adoption spreads on PayPal (NASDAQ:PYPL) and other payment processors, the forgotten middle child could quickly catch up to its older brother.
But just like bitcoin, there’s a wrinkle to the ethereum story. Unlike gold or bonds, ethereum is NOT a safe-haven asset. Instead, it’s a “risk-on” asset that tends to rise when times are good and fall otherwise.
The data backs this up. The correlation between ethereum and the S&P 500 now sits at 64%, meaning that stocks explain almost two-thirds of ethereum’s monthly returns.
Not convinced? Consider March 2020, the month the stock market fell out of bed. As the stock market tumbled 30% on coronavirus fears, cryptocurrencies provided no cushion. In a matter of weeks, bitcoin, ethereum and other cryptocurrencies lost over half of their value. (The same pattern happened during the December 2018 market wobble.)
But there is a silver lining: Ethereum also tends to magnify stock market gains. With more fiscal stimulus on the way, that also means higher stock valuations. Cryptocurrencies will naturally follow.
How High Can Ethereum Go?
Make no mistake: Ethereum is as volatile as a moody teenager. $10,000 invested in January 2018 would have melted to $830 in a year. But the same $10,000 invested in January 2020 would have rocketed to $85,000. Without an underlying hard asset, ethereum’s value has no basis in the real world.
That makes the cryptocurrency’s valuation more of a popularity contest than a technical exercise, at least in the short term. The cryptocurrency could easily double to $2,500 in 2021 if more users keep jumping on board. But it could also crash to $500 if a major hack shakes investor confidence. (More likely, a 25% loss would cause investors to panic-sell, sparking a self-fulfilling downward cycle.)
Ethereum prices also tend to reverse course in the near term. Since 2015, ethereum returns have doubled-back almost 60% of the time, when a winning month gets followed by a losing one and vice versa. Even in its 2018 peak, the coin never notched more than two consecutive months of gains.
Don’t Miss the Forest for the Trees
However, like a maturing middle-child, ethereum is starting to find its footing. Since April, Ethereum has only notched one losing month. And despite its huge 2020 run, the cryptocurrency still trades 16% below its all-time peak in 2018. (Bitcoin, meanwhile, is up about 110%.)
Plenty of troubled middle-children eventually became stars. Warren Buffett and Bill Gates both overcame early stumbles. And ethereum, with its superior architecture, could one day become a staple of payments processing. Its ability to complete transactions within seconds (versus bitcoin’s minutes) makes it a viable alternative to Visa (NYSE:V) and other online payment processors.
In short, don’t miss this boat. If the broader cryptocurrency market has a good 2021, you can be sure ethereum will have an even better one.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.
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