[Updated 16 May 2023]
- We look at the latest ethereum trends, including macro risks and on-chain/flow metrics, to reveal the best time to buy ethereum and the risks of buying ETH.
- For trading ethereum over the next two to four weeks, we are slightly bearish. That means we expect prices to either stay the same or fall, with more chance they will fall.
- However, we think ethereum is a good long-term investment for the next one to three years and are bullish overall. That means we expect prices to rise in the long term.
Ethereum is currently amid a cumulative drawdown of around 62% since the November 2021 all-time high of $4,891 and is trading at around $1,820. However, the last six months have been more positive, with ethereum up 49%.
One of the main drivers of ethereum price rises is the market’s hope that the Federal Reserve has finished hiking interest rates. However, we think the Fed is not done with its aggressive hiking cycle, and recession risks are increasing.
Consequently, 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.
Crypto markets surged this year after the FDIC announced it would back all deposits at Silicon Valley Bank. This move follows the Silvergate Capital collapse and has calmed fears of a potential bank run across the US. As a result, ethereum and the wider crypto market are rallying.
Also helping the ethereum price is the market’s hope that the Federal Reserve has finished hiking interest rates. After one of the most aggressive hiking campaigns in decades, the Fed seems to have finally got inflation under control. After peaking at 9.1% in June 2022, headline inflation has fallen steadily to 4.9%.
Hiking interest rates is a contractionary monetary policy that increases the cost of borrowing, reduces demand, and is generally negative for risk assets such as stocks and crypto. It also increases the risk of recession. However, if the Fed starts easing rates, as markets currently expect for 2023, risk assets like ethereum may benefit.
The chart below shows the latest ETH price.
Previous reasons for bullishness towards ethereum included the merge, ETH’s upgrade to proof-of-stake. In a previous ethereum update, we discussed the implications of the merge. The punchline was it would be bullish for these reasons:
- Validators can earn yield on staked ETH post merge.
- Faster transactions.
- Net issuance is projected to drop considerably post merge, constraining supply.
- Ethereum may become deflationary.
- Increased scalability and security.
- Better for the environment thanks to proof of stake not work.
However, ethereum and the broader crypto space have been unable to escape the longer-term bearish macro backdrop. We discuss that next.
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Why is ethereum dropping? The main reason for the fall going into 2023 was the Federal Reserve’s response to inflation. It has hiked interest rates an aggressive 500 basis points in this cycle, and this contractionary monetary policy tends to impact risk assets such as crypto negatively.
Markets seem to think the Fed is done hiking and has conquered inflation. However, April CPI showed no incremental progress on disinflation. Here are some of our main takeaways:
- A large increase in used car prices offset slower inflation in other categories.
- The ongoing recovery in rental indices suggests that progress on shelter cost inflation may be transitory.
- April core goods inflation rose to 0.6% due to a 4.4% increase in used car prices, which is converging to Manheim used car auction results, indicating further upside.
Markets continue to under-price the Fed. The labour market remains very tight, inflation is well above target, and ‘the process of getting inflation back down to 2 percent has a long way to go.’ Markets are currently assigning just a 5% chance of a 25bp June FOMC hike. In our view, markets are under-pricing the risk of a hike and if current inflation and growth dynamics continue, a 25bp hike in June is likely (barring a debt ceiling crisis), which would be bearish for crypto.
Years of low interest rates since the global financial crisis in 2008 had seen markets reach extreme valuations by the end of 2021. Who cares if tech companies are loss-making if the companies can borrow easily? And if companies cannot borrow money, they can attract capital from investors, who themselves have likely borrowed money.
Crypto markets have not been immune to the support from cheap leverage in the fiat markets. After all, crypto offers the tech dream of scalability and regulatory arbitrage. And if there was any doubt that crypto was not benefiting from low interest rates, the recent declines in crypto as US rates have risen should remove it.
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.
The bottom line is that the macro backdrop for crypto remains bearish on rate hikes and inflation. The probability of recession remains high at 80%, and we expect the Fed to hike more than markets are pricing in.
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:
- Bitcoin prices would reach $8,254 if the NASDAQ fell to 3,500. This implies a 72% decline from current levels.
- Ethereum prices would reach $143 if the NASDAQ fell to 3,500. This implies a 92% decline from current levels.
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.
Regulation also is becoming more of a theme throughout 2023, with various executive orders signed already. Increased regulation should mean less uncertainty around crypto markets for investors, which would be bullish.
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.
- Rising yields have mechanically increased the probability of a recession within the next 12 months to over 80%.
- Inflation remains at the forefront of investors’ minds.
- The Shapella Upgrade was completed. It significantly changes both the execution layer and consensus layer of ethereum. Overall, the completion of the Shapella upgrade saw staking rewards withdrawn, but with little direct impact on ethereum prices. Our original estimate of a limited impact on prices in the short to medium term seems to have played out.
- US DOJ to crackdown on crypto exchanges, NCET director says. The Department of Justice (DOJ) is targeting crypto companies that engage in crimes themselves or allow crimes like money laundering to happen.
The bottom line is that crypto, including ethereum, will remain under pressure. The main near-term support would be Fed dovishness rather than any crypto-specific dynamics. While this is possible, persistent inflation and a roaring economy make it unlikely. And for long-term investors, we still think some allocation to crypto makes sense – just like an allocation to equities also makes sense. But be prepared for weakness in 2022-3.
For all our latest analysis on crypto markets, click here.
Updated 12 May 2023
This week, all our indices are in the red, with our Bitcoin Index (-6.3% WoW) down the least and our Metaverse Index (-15.6% WoW) down the most (Chart 2).
Our Smart Contract Index remains most correlated to our Bitcoin Index (+87%). Meanwhile, our DeFi and Privacy indices are correlated +83% and +81% to our Bitcoin Index, respectively. Our Metaverse Index is correlated the least (+75%; Chart 3).
Correlation between our Bitcoin Index and all macro markets we track in this report remains positive (Chart 4). Our Bitcoin Index is +41% correlated to the NASDAQ and +44% correlated to the S&P 500, from +46% and +36% last month.Meanwhile, its correlation to gold (+7%, last month: +25%) decreased, while its correlation to 10Y yields (+34%, last month: +4%) increased. Lastly, its correlation to oil (+19%, last month: -33%) flipped positive.
All cryptocurrencies in each of our indices are down this week:
- Smart Contract Platform Index: Terra Luna Classic (LUNC) is down the most (-16.9% WoW) and Ethereum (ETH) is down the least (-4.2% WoW).
- DeFi Index: PancakeSwap (CAKE) is down the most (-26.4% WoW) and Uniswap (UNI) is down the least (-3.5% WoW).
- Metaverse Index: Ultra (UOS) is down the most (-21.4% WoW) and Axie Infinity (AXS) is down the least (-10.9% WoW).
- Privacy Index: Beam (BEAM) is down the most (-28.9% WoW) and Monero (XMR) is down the least (-1.9% WoW).
- Bitcoin Index: is down -6.3% WoW.
Ethereum and the crypto revolution are no longer nascent. With the length of the blockchain continuing to grow and decentralised finance (DeFi) gaining ground over traditional finance, this new asset class is reshaping the investment landscape.
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.
It is easy to get carried away with the fear of missing out. You are probably aware of Cameron and Tyler Winklevoss, who are reputed to be the world’s first bitcoin billionaires with over 100,000 coins. Or what about Barry Silbert, the owner of Grayscale Ethereum Trust, Coinbase and Coinbase? Success stories like these often give people FOMO – or the fear of missing out – if they do not invest immediately.
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.
Each currency has different underlying protocols and technology. That impacts how they trade, their volatility, and how you can value them. Some are more like stocks, others commodities, and others currencies. And each crypto token has a unique structure of supply.
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.
To buy ethereum (ETH) or any other cryptocurrency, you need access to a crypto exchange. A crypto exchange is where buyers and sellers meet to exchange money for coins, coins for other coins, and coins for money. Many options are available such as Coinbase, Binance.com, or eToro – each come with various fee structures, so research which is best for your needs.
You also need access to a crypto wallet to store ethereum and other cryptocurrencies. Many exchanges provide these, but not all do. You can also buy ethereum on platforms like Paypal and Robinhood.
Cryptocurrencies can be extremely volatile. One way to cope with the volatility is to use dollar-cost averaging. Dollar-cost averaging is a strategy where you divide the total amount you want to invest across periodic purchases of the target asset. It simply means that you would invest the same number of dollars each month or quarter, regardless of market trends.
The idea is that when prices are high, you can afford less of the asset. But when prices are low, you can afford more. When the market recovers, you benefit from having bought more shares at the lower price. Please note that using this strategy will not always result in a profit or necessarily protect you from falling prices.
With the crypto landscape so volatile and diverse, managing risk in a portfolio is critical. That essentially means position sizing and diversification – as with any other kind of investment.
One of the best pieces of investment advice we have heard recently comes from Ari Paul, co-founder and CIO of Blocktower Capital, a crypto and blockchain investment firm. As Paul says,
“Risk is only sizing. So, if you think bitcoin is too risky, you could size it at 0.1% of your portfolio or 0.001%. Too risky is never a reason not to own an asset. If something is positive expected value, risk adjusted, and relatively low correlation, you have to own it. That’s peak portfolio management 101.”
One way to diversify your portfolio is with stablecoins, although these have also been very high-risk following the Terra debacle. Our recent analysis has explored how safe is tether and which stablecoins could fall next. We advise only a very small allocation to crypto and prefer diversification with more traditional asset classes.
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 expect prices to rise in the long term.
Ethereum was the lowest in October 2016, when its price was $0.41. Since then, Ethereum has experienced several major bull runs. The first was in 2017/8 when it peaked at $1,400. It subsequently dropped to around $300-400 until the start of 2021. From January that year, bullish sentiment took the coin to over $4,000. It was not until the closing moments of 2021 that ETH breached this threshold, continuing its rise to $4,780 in November 2021. Since then, ETH price has been volatile and generally gone downwards. It is currently around $1,500.
As with all investments, the value of ethereum can rise as well as fall. While it is unlikely that ethereum will suffer a complete loss of value, investors must be prepared to suffer drawdowns of between 50% and 80%. We recommend small allocations and diversification of your portfolio. Never invest what you cannot afford to lose.
Traditional wisdom says you should buy low and sell high. But whether you should sell ethereum depends on your investment horizon, risk appetite and financial goals. Although some website speculate that certain days of the week are better or worse then others for selling ethereum, we believe that any decision to buy or sell should be based on analysis of crypto fundamentals.
We think a small allocation to ETH makes sense in the long term. However, we caution against investing in ethereum too heavily as cryptocurrencies are extremely volatile and often subject to large downturns.
Ethereum and bitcoin have historically been touted as a hedge for inflation. When inflation expectations rise, you would want the relationship between the cryptocurrency and inflation expectations to be at least positive. This, historically, has held. However, since February, the relationship has broken down. Inflation expectations remained anchored while ETH prices have fallen. A more hawkish Federal Reserve could weigh on ETH going forward.
Ethereum has been running on two different blockchains since April 2022. One operates using proof-of-work, like bitcoin. The other is a test chain what uses proof-of-stake. The merge is an upcoming event where these two blockchains will combine, ending proof-of-work. It is expected to happen in Q3/Q4 2022, and it will eliminate the energy-intensive mining required in proof-of-work. Guest author Nikhil Shamapant explains more about the ethereum merge and what it could mean for ETH price in 2023 in his recent article.