3 Reasons Ethereum Is Plummeting: Should You Buy Now?

The Motley Fool
The Motley Fool

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The cryptocurrency market has slumped dramatically in recent weeks. The total market cap has fallen from almost $3 trillion on Nov. 11 to just over $2 trillion at time of writing, according to CoinMarketCap data. That's a loss of almost $1 trillion in two months.

Ethereum, which reached an all-time high of $4,891 on Nov. 16, is now trading at $3,248 -- down about 33%. So, why has it fallen so far and is now a good time to buy? Here are some of the reasons for Ethereum's recent price drop and what to consider before you buy.

1. The Fed plans to raise interest rates

U.S. inflation is at 7% according to data from the Labor Department -- higher than it's been in 39 years. This is one reason the Federal Reserve is pulling back on its pandemic economic stimulus measures. It will likely raise interest rates in March and is tightening its quantitative easing program.

This, combined with fears about the economic impact of the omicron variant , means people are looking for safer investments. Simply put, with less money sloshing around, higher-risk assets like crypto have tumbled.

2. The whole crypto market is falling

Ethereum is not alone in seeing substantial price drops. Bitcoin (BTC) has lost over 30% in the past two months, and Cardano (ADA) is down 40%. Plus, crypto derivatives trading can magnify market dips. So, thousands of traders were forced to sell -- called liquidation -- because they didn't have enough to support their position.

Some traders use margin trading to multiply their positions. But if the price changes dramatically, as it has in recent months, they may not have enough collateral to support their position. There's a risk they lose everything -- and those forced sales can snowball and push prices further down.

3. Ethereum's competitors are taking market share

Ethereum was the first programmable cryptocurrency, which made it the first ecosystem to host other applications and cryptocurrency projects. It still hosts more applications than any other network and has the largest amount of money locked into its platform. However, it struggles with high fees and heavy congestion.

It's in the process of a staged upgrade to Eth 2 and is due to make significant progress this year. However, Ethereum won't complete the upgrade until 2023. Plus, a recent report from JPMorgan said that Ethereum is already losing ground and suggested that its competitors may be able overtake it by 2023.

Should you buy?

Buying the dip sounds like a great investment strategy. We all want to buy the lows and sell the highs. But it isn't that simple -- if it were, we might all be millionaires. It's extremely difficult to know when an asset has hit its highest or lowest point, and it isn't clear whether Ethereum's price has bottomed out yet.

Here are some questions to consider before you log on to your favorite cryptocurrency exchange and buy Ethereum.

Are you prepared for Ethereum to fall further?

Ethereum may seem like a bargain today, but will you be able to stomach any losses if the price continues to fall? Some people have a high tolerance for risk, but that isn't true for all investors.

Cryptocurrency investors need to be ready for extreme volatility. This is a relatively new and untested market, and there are many potential hurdles to cross in the coming years. While there could still be huge potential upside, there are no guarantees prices will return to 2021's highs.

Have you done your research?

Before you put your hard-earned money into any investment, you need to understand the project. The more research you do, the better. In Ethereum's case, that means understanding how smart contract cryptos work, how Ethereum stacks up against the competition, what impact Ethereum's upgrade could have, and how it will fit into your portfolio.

Are you on top of your other financial goals?

If you want to invest money in Ethereum or any other cryptocurrency, it's a good idea to first make sure your emergency fund is in good shape. It's also smart to cover other financial bases, such as topping up your retirement savings. It's easy to look at the gains of 2021 and believe that crypto can only go up, but these are still high-risk investments and we don't know what will happen next.

Are you investing money you can afford to lose?

The golden rule of crypto investing is to only invest money you can afford to lose. You don't want to be in a position where you can't cover your day-to-day expenses because you went all in on Ethereum, only for the bottom to fall out of the market. If crypto is only a small percentage of your overall portfolio, you're cushioned against future price drops.

Bottom line

Buying Ethereum now may be a solid move, as long as you're doing it for the right reasons. If you believe in Ethereum's long-term potential and are ready to wait out any further price dips, it could make sense. But if you're jumping in because Ethereum is "on sale" and you're spending money you need to pay next month's rent or mortgage, you'd be better off holding on to your cash.

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Emma Newbery owns Bitcoin, Ethereum, and Cardano.

We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool owns and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy .

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