Crypto Update

How to Develop a Strategy for Ethereum

How to Develop a Strategy for Ethereum

Ethereum (ETH) is killing it. That’s the only way to describe this current run that the second-largest cryptocurrency is on.

On Wednesday, its price hit an all-time high of $4358.30 at 10:30 a.m. ET according to CoinMarketCap. A year ago, ethereum was trading for $197.59. That’s 2106% gain in the last 12 months. Ethereum’s 2021 performance is impressive as well — it’s up 483% year-to-date.

Bitcoin (BTC), for comparison, is up 445% in the last 12 months and 72% year-to-date.

If you’ve been following me here at First Stage Investor, over at Crypto Asset Strategies (click here to sign up) or even on Twitter, you know I’m an ethereum bull

That’s why as I write this piece in the middle of a sharp crypto selloff (triggered by Tesla deciding to stop accepting bitcoin as payment), I’m not worried about ethereum’s short-term price action. But I am pondering what a smart ethereum strategy looks like over a range of timeframes. 

First, let’s start with why ethereum has been performing so well over the last 12 months.

A Programming Ecosystem

Ethereum is the most popular crypto platform for building things. For lack of a better term, it’s the software platform most blockchain programmers use to build new tools and applications.

You might have heard that non-fungible tokens (NFTs) have exploded recently. NFTs essentially guarantee that a collectible — physical or digital — is indeed authentic and unique. In fact, one of the startups in our First Stage Investor portfolio, Yahyn, is starting to use NFTs to authenticate the uniqueness and provenance of wine. The Verge has a great NFT explainer if you’re interested.

But the most important thing you need to know is NFTs are built using Ethereum’s network. Ethereum is also the backbone for much of the two most important developments in crypto — decentralized finance (DeFI) and yield farming.  

DeFi is looking to disrupt traditional financial services like savings, loans, insurance and much more. Yield farming focuses on the lending side. People lend crypto to others. In return, they get even more crypto. Both the loan and rewards payments are managed using smart contracts. And the Ethereum network is the “software” used to make much of this happen.

There are plenty of crypto networks trying to compete with Ethereum. Just this week, the Internet Computer (ICP) launched. Its goal is to become the decentralized internet. And in three days, ICP reached a market cap of $35.8 billion. As of this writing, ICP’s market cap is $37.7 billion, and it’s the ninth largest crypto (by market cap) on CoinMarketCap. And much like ETH, ICP uses smart contracts to facilitate the building of apps and services.

Institutional Investors Have Discovered Ethereum

Institutional investors helped fuel bitcoin’s most recent bull run. As they’ve grown more comfortable with crypto, they’ve started to look for other assets to invest in. And ethereum has emerged as the “next” institutional crypto.

The institutional infrastructure for trading ETH isn’t as developed as BTC’s institutional grade solutions. But it’s getting there.

The nascent CME futures market saw record volume levels on May 4 with 6,491 contracts (the equivalent of $324,500 in ETH) traded. And in April, Rothschild Investment Corporation disclosed it owned more than 265,000 shares of Grayscale Ethereum Trust. At the time of the disclosure, those shares were worth $4.75 million.

In many ways, the institutional investor move into ETH was inevitable. It doesn’t make sense for investors to put all of their eggs in the BTC basket. There’s too much risk there. But institutional investors needed to get comfortable with bitcoin before moving on to other cryptocoins. And ETH is one of the few coins out there big enough to handle the influx of institutional cash moving into the space.

I believe the amount of institutional money in ethereum will continue to grow, much like it did in bitcoin. And that’s a strong long-term bullish signal.

Bitcoin Dominance Falling

Bitcoin is the most well-known crypto in the market. As a result, its overall market is significantly larger than most other cryptos. Bitcoin is so big that it often represents more than 60% of the overall crypto market. But during crypto bull runs, investors start looking for other coins to invest in. And “bitcoin dominance” falls as a result.

Bitcoin Dominance Over TIme

Around the beginning of May, bitcoin dominance fell below 50%. And as of this writing, bitcoin represents about 42% of the overall crypto market.

Ethereum has definitely been a beneficiary of bitcoin’s dominance falling below 50%. And that’s a good short-term signal.

Developing an Ethereum Strategy

The decline in bitcoin dominance signals the early stages of this crypto bull run are over. I believe we’re past the midpoint of the bull run. I’m not sure how much longer the bull run will go. But I think it still has some legs.

That said, timing the crypto markets is a fool’s errand. So as you develop your ethereum strategy, time frame and risk should be the guiding forces.

How long are you willing to hold onto ETH? And how comfortable are you with the risk surrounding ETH? And to be fair, the risk surrounding ethereum is real. There are numerous competitors. And there’s significant technological risk as the community building the Ethereum network tries to improve it and make it more efficient

Investors that are looking to hold ETH for less than two years should probably avoid buying at or near the top of this market. The risk isn’t worth the reward.

Investors that are willing to hold ETH for more than two-to-four years might want to consider buying big dips (more than 10%-to-12%). It could take that long for the market to go down (and it will at some point) and come back and exceed similar levels.

Investors that are in ETH for the long haul shouldn’t feel any buying constraints right now. The bet here is that ETH will far surpass these prices in the future. The ride to that future will likely be bumpy and filled with risk. But the returns could make the journey worth it.

Risk and timeframe. Let those be your guides. And never apologize for taking profits.

Top Posts on Early Investing