Are you knowledgeable about “middle-child syndrome”? Then you’ll know how ethereum (CCC: ETH) has felt all these years. Given that January 2020, ETH has trounced bitcoin (CCC: BTC) with an almost 750% return. Yet, the world’s # 2 cryptocurrency received less attention than its big sibling BTC or problem-child XRP (CCC: XRP).
Source: Shutterstock However don’t be deceived. Ethereum looks set to break out in 2021.
As its technological benefits gain steam, Ethereum financiers might see$1,500 in the near
Summary: Ethereum sits on an exceptional innovation.
ETH has higher room to grow. Volatility will stay high. Ethereum 2021: Better than Bitcoin The future of ethereum wasn’t constantly so intense. 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 appear like yet another glossy bauble in an enormous cryptocurrency soup.
But ethereum rapidly recovered. To deal with the DAO Hack, the ethereum neighborhood decided to efficiently roll back its blockchain to undo the damage. It restored its # 2 position by 2018.
Ethereum holds a number of technological advantages over its older bitcoin and altcoin brother or sisters. Firstly, the cryptocurrency acts more like an agreement than a coin. That makes it more like Alphabet’s (NASDAQ: GOOG, NASDAQ: GOOGL) Google Wallet or Apple’s (NASDAQ: AAPL) Apple Pay, instead of a $100 expense. For instance, an e-commerce purchaser may hold ETH in an escrow that automatically releases payment on receipt of items. Bitcoin, on the other hand, uses no such system.
Second of all, ethereum resolves the thorny issue of speed. While bitcoin takes about 15 minutes to finish a transaction, ETH will do the very same in under 15 seconds.
Lastly, it has an in theory unrestricted supply, unlike bitcoin’s 21-million-coin cap. That means ETH will not encounter a mining “wall” and lack coins to reward miners.
Up, Up and Away
That makes ethereum among my preferred 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 might rapidly reach its older bro.
But similar to bitcoin, there’s a wrinkle to the ethereum story. Unlike gold or bonds, ethereum is NOT a safe-haven possession. Instead, it’s a “risk-on” possession that tends to increase 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%, implying that stocks explain almost two-thirds of ethereum’s monthly returns.
Not encouraged? Think about March 2020, the month the stock market fell out of bed. As the stock exchange tumbled 30% on coronavirus worries, cryptocurrencies offered no cushion. In a matter of weeks, bitcoin, ethereum and other cryptocurrencies lost over half of their value. (The exact same pattern took place during the December 2018 market wobble.)
However there is a silver lining: Ethereum likewise tends to magnify stock market gains. With more fiscal stimulus en route, that also indicates greater stock assessments. Cryptocurrencies will naturally follow.
How High Can Ethereum Go?
Make no error: Ethereum is as unpredictable as a moody teenager. $10,000 invested in January 2018 would have melted to $830 in a year. But the exact same $10,000 purchased January 2020 would have soared to $85,000. Without a hidden tough possession, ethereum’s value has no basis in the real life.
That makes the cryptocurrency’s appraisal more of an appeal contest than a technical exercise, at least in the short term. The cryptocurrency could quickly double to $2,500 in 2021 if more users keep getting on board. However it might also crash to $500 if a significant hack shakes investor self-confidence. (Most likely, a 25% loss would trigger financiers to panic-sell, sparking a self-fulfilling downward cycle.)
Ethereum prices also tend to reverse course in the near term. Considering that 2015, ethereum returns have doubled-back practically 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 2 consecutive months of gains.
Do Not Miss the Forest for the Trees
However, like a developing middle-child, ethereum is beginning to discover its footing. Because April, Ethereum has just 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 struggling middle-children eventually ended up being stars. Warren Buffett and Bill Gates both overcame early stumbles. And ethereum, with its exceptional architecture, could one day become a staple of payments processing. Its ability to complete deals within seconds (versus bitcoin’s minutes) makes it a feasible option to Visa (NYSE:V) and other online payment processors.
In other words, don’t miss this boat. If the more comprehensive cryptocurrency market has an excellent 2021, you can be sure ethereum will have an even much better one.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities pointed out in this article.
Tom Yeung, CFA, is a registered financial investment advisor on an objective to bring simplicity to the world of investing.