Here’s why the price of ether has been so volatile in 2022
It’s been a tough year for cryptocurrencies, with many coins losing half their value over the course of a few months. While a lot of the crypto attention is focused on bitcoin, the most popular digital currency, ether, the second largest cryptocurrency by market cap, has had its fair share of ups and downs too. In 2022, it fell by 54% between January 1 and September 15, but it’s also climbed by 64% from mid-July to mid-September, according to Coindesk, sending investors on quite the roller-coaster ride.
Given how new ether is compared with other kinds of investments, such as stocks or bonds, investors may be struggling to figure out why the currency has experienced so much volatility. Some may even be wondering if ether and other cryptocurrencies are now passé. The answer, as with most things financial-related, isn’t black and white, and has as much to do with the current state of the markets more broadly as it does with the crypto industry itself.
Avoiding risky assets.
Ether’s price, which, at the time of writing, is hovering around $2,000 Canadian for one coin, has fallen victim to many of the same economic and market forces that have caused stock markets to decline this year. The S&P 500 has lost about 17% of its value since January, according to S&P Capital IQ. Mainly, high inflation and rising interest rates have caused risk assets, including crypto, to fall in value.
This aversion to risk has also caused ether’s price to drop. Instead of investing in assets that don’t have a clear path to growth – and in ether’s case, there aren’t any traditional company fundamentals that can help people get an idea of where the price may go – people are moving money into sectors with more predictable earning streams, such as consumer staples and health care.
It’s also important to remember that crypto assets have experienced outsized returns in the years leading up to 2022. Ether itself has climbed by nearly 21,000% since 2016, according to Coindesk, so it’s reasonable to expect some kind of correction as economic winds change direction.
Adding to all of that, the cryptocurrency space was hit by a series of negative headlines in the second quarter of 2022. The collapse of the Terra blockchain in May, following the failure of its algorithmic stablecoin, and the freeze on withdrawals and eventual bankruptcy filing of crypto lender Celsius in June and July, caused many investors to panic and sell their investments. However, the problems at these CeFi companies are related to their risk management practices, while the value proposition of blockchain arguably remains intact.
More ups and downs ahead.
Generally, volatility and investing go hand in hand: stocks can fall, and have fallen, by large amounts, too, and often what goes up must come down – and vice versa. As a novel and relatively niche asset class, crypto is more volatile than other assets, although that could change should it gain more adherents. Until then, it’s likely to suffer growing pains.
The more recent rebound in ether’s price can be partly attributed to the anticipation of the Merge, an upgrade to the Ethereum blockchain that occurred on September 15, 2022. Until then, Ethereum had used a consensus mechanism called proof of work, similar to Bitcoin. While this method is more battle-tested in terms of security, the process is resource-intensive in terms of computing power and has negative consequences for the environment. Ethereum has now moved to a proof-of-stake process, which is expected to provide similar security, while reducing its energy usage by about 99%.
In any case, if ether’s slide has caused you to lose sleep, now could be a good time to ensure your portfolio positioning lines up with your risk tolerance and investment objectives. Those feelings of panic may be a sign that you’re not as comfortable with your allocation to ether as you thought you were. Talk to an advisor to get your portfolio to a more comfortable place.
If you continue to believe in the future of crypto and blockchains, which many people still do, the pullback could represent an opportunity to acquire assets at a more reasonable price than was available a year ago. Although this slide coincided with a sell-off in stocks and bonds, as the category grows it could act more and more as a diversifier within your portfolio.
Ethereum expands on what Bitcoin can do. It allows users to build what’s called decentralized applications, or dApps, on it. For example, some applications can be used to provide financial services to users without the involvement of fee-taking intermediaries such as banks and brokers. Others allow users to exchange non-fungible tokens (NFTs), which are unique digital items that can represent ownership of artwork, music or other assets. These characteristics may give Ethereum the potential to revolutionize sectors including electronic gaming, advertising, community organizations and supply chain management.
Anybody investing in cryptocurrency should understand the risks, of course. Talk to your advisor to better understand your risk tolerance, and whether investing in cryptocurrency aligns with your financial goals. So far, ether has shown it can provide impressive returns in surprisingly short periods of time. The more people who catch on to the advantages of the blockchain, the brighter the future for Ethereum.