Is Ethereum Poised to Surge After Hitting Recent Lows?

We don't yet know if Ethereum's price has reached the bottom.

Ethereum's (ETH) price rose almost 400% last year, reaching a high of $4,891 on Nov. 16, according to CoinMarketCap data. However, 2022 hasn't got off to a great start. This week, Ethereum's price fell to lows we haven't seen since September. As is often the case with cryptocurrencies, these price drops precipitated the usual dire warnings from crypto skeptics and calls to "buy the dip" from enthusiasts.

If you're wondering whether Ethereum might now be ready to surge, here are some factors to consider.

1. Why Ethereum fell

The whole cryptocurrency market has fallen in the past two months, mainly due to wider economic factors. The Federal Reserve is winding back on the economic stimulus measures it introduced during the pandemic, and it may raise interest rates in March. This has a ripple effect for cryptocurrencies as tighter monetary policies make risky assets less appealing.

One of the drivers for crypto's enormous growth has been the big injection of cash into the U.S. economy. Now that's changing. Not only is that driving prices down, it also makes it less likely we'll see the same surge in prices that came after the May 2021 crash. Ethereum's price may recover, but it could take time.

2. Ethereum's Eth2 upgrade

Ethereum was the first cryptocurrency to introduce smart contract functionality. This meant developers could build applications and other cryptocurrencies on its ecosystem. It is the engine behind much of the booming decentralized finance (DeFi) and non-fungible token (NFT) market.

However, Ethereum is a victim of its own success. The network is heavily congested, and gas fees can be prohibitively high. Ethereum is in the process of a staged upgrade to make the system cheaper, more scalable, and more sustainable. But it's taking time and it isn't easy to do -- it's a bit like trying to fix a car engine while the car is speeding along the highway.

According to Ethereum's website, the final phase of the upgrade won't be completed until 2023. And a recent JPMorgan note warned that this may be too late for the widely used blockchain. The analysts said there's a risk that Ethereum's competitors could have grown so much that developers won't return to Ethereum once the upgrade is complete.

3. Ethereum's competitive environment

There are various ways to measure the success of smart contract cryptos, such as the number of projects running on a network and the total value locked (how much money has been deposited into applications on the platform).

Right now, Ethereum dominates. For example, according to DeFi Llama, about 60% of the total value locked is on the Ethereum network. Next in line are Terra (LUNA), Binance Smart Chain (BSC), Avalanche (AVAX), and Solana (SOL). What's interesting is that at the start of 2021, Ethereum accounted for over 95% of total value locked.

If you consider that a transaction on Ethereum could cost as much as $100, it's not surprising that investors and developers want alternatives. Other platforms have significantly lower fees, faster processing times, and are offering funding incentives to potential new projects.

Nonetheless, Ethereum's first-mover advantage can't be underestimated. Developers are used to its programming language, and the system has been well and truly battle tested, which builds confidence. However, two years is a very long time in the crypto world, and it would be wrong to assume Ethereum can keep its position at the top simply because it's the most established coin.

4. Outlook for cryptocurrency market

The final factor to keep in mind is what might happen to the rest of the crypto market. We touched on the overall economic situation, but it's also worth noting that the crypto industry made huge strides in terms of adoption and real-world use cases last year.

DeFi is likely to grow even further, metaverse and gaming tokens could mean more people enter the crypto world, and the evolution of Web 3 could change the way people use the internet. However, there are a lot of ifs and buts -- regulation remains a big cloud on the horizon, and this is still a highly speculative asset class. But it's important to consider the bigger picture when looking at the recent price slump.

What's next for Ethereum?

At the time of this writing, Ethereum's price is up 2% in the past 24 hours. It's too early to say if this is the turning point, especially as the coin's price is still down about 30% on its November high. However, for long-term investors, the question isn't whether Ethereum might be about to surge, but what the outlook is for the coming years.

Cryptocurrency is volatile, and these types of price swings are to be expected. It doesn't make them any less scary, especially if you're a new investor. If you're thinking about buying Ethereum, it's important to only invest money you can afford to lose and research the risks involved before you jump in. The worst thing you can do is panic sell when prices are low.

It's good to remember that Ethereum's recent lows weren't down to a failure or loss of confidence in the second-biggest crypto -- they are a symptom of wider economic uncertainty that's impacting all higher-risk investments. That said, there's still a chance that Ethereum could fall further, especially if the regulatory environment becomes less friendly toward cryptos. And it is worth watching the smart contract race and Ethereum's upgrade as these could impact your overall investment thesis.

But in general, what matters is whether you're confident about the cryptocurrency market and are convinced by Ethereum's long-term potential -- especially once it's completed its upgrade. If so, you can consider buying the dip and waiting for the price to rise again. Even if that takes a little longer than you'd hoped.