Should I invest in Ethereum in 2022?

Some Interesting Ethereum Facts

Should you invest in Ethereum in 2022? Before we dive into this vexing question, lets have a quick snapshot of some interesting and related facts:

• Name: Ethereum (ETH)
• Value (8 Feb 2022): $3,136.44USD
• All Time High: $4,878.26USD (10 Nov 2021)
• Market Capitalisation: $375,204,676,054USD
• Rank: #2
• Website: https://ethereum.org/en/
• Founders: Vitalik Buterin and Joe Lubin

 

What is Ethereum?

Ethereum is a platform powered by blockchain technology that is best known for its native cryptocurrency, called ether, or ETH, or simply Ethereum. The distributed nature of blockchain technology is what makes the Ethereum platform secure, and that security enables ETH to accrue value. A blockchain is a distributed database that is shared among the nodes of a computer network. As a database, a blockchain stores information electronically in digital format.

The Ethereum platform supports ether in addition to a network of decentralized apps, otherwise known as dApps. Smart contracts, which originated on the Ethereum platform, are a central component of how the platform operates. According to Investopedia, a smart contract is a self-executing contract with the terms of the agreement between buyer and seller being directly written into lines of code. The code and the agreements contained therein exist across a distributed, decentralized blockchain network. The code controls the execution, and transactions are trackable and irreversible.

Ethereum also allows creation and development of Decentralized Finance (DeFi) tokens and Non Fungible Tokens (NFTs).

As a cryptocurrency, Ethereum is second in market value only to Bitcoin as of February 2022.

What are some of the issues facing Ethereum in 2022?

High Gas Fees

Arguably Ethereum’s biggest drawback, transaction (gas) fees, hold back the network from reaching mainstream adoption. Using Ethereum’s blockchain can cost hundreds of dollars, so retail investors with smaller amounts of capital are priced out from using the network. While other smart contract blockchains have cheaper fees, Ethereum has the most applications and use cases built on its blockchain.

According to Investopedia, gas refers to the fee, or pricing value, required to successfully conduct a transaction or execute a contract on the Ethereum blockchain platform. Priced in small fractions of the cryptocurrency ether (ETH), the gas is used to allocate resources of the Ethereum virtual machine (EVM) so that decentralized applications such as smart contracts can self-execute in a secured but decentralized fashion.

The price of the gas is determined by supply and demand between the network’s miners, who can decline to process a transaction if the gas price does not meet their threshold, and users of the network who seek processing power.

Below is a summary of gas fees for Ethereum over the last year:

Source: ycarts.com

Volatility

The cryptocurrency market is probably one of the most volatile of all areas to invest in. Drops/rises in price of 20% are common. With potential high rewards comes higher risk. Over the last 12 months alone, Ethereum on 15 Feb 2021, was priced at $1804.98 and reached a maximum price of $4,878.26 on 10 Nov 2021. It is now priced at $2,900 as of 12 Feb 2022.

New regulations

The government is unlikely to let cryptocurrencies remain completely unregulated for long. New regulations could interfere with business models, and cause crashes that are entirely out of your control. Ethereum is likely to be considered one of the safer and more established ‘Alt’ coins but it still may be subject to future government changes.

Online hacking

Hacks are a threat faced by all cryptocurrency investors. These could be personal attacks or even attacks to large crypto exchanges. Hackers are on the increase and their methods are becoming more sophisticated. Most exchanges let you buy and sell your cryptos using a mobile app or website. However, many users also store their crypto on exchange wallets. This leaves them susceptible to losing their investments should the exchange get hacked, and their private keys being stolen. Cryptocurrency held on many exchanges is not insured. The safest way to store your crypto is offline via hardware wallets such as Trezor or Ledger. A hardware wallet is a cryptocurrency wallet that stores the user’s private keys in offline in a secure hardware device.

Competitors

There are many emerging smart contract platforms challenging Ethereum’s current supremacy, including the Binance Smart Chain, Cardano, Polkadot and Solana. While these cryptocurrencies offer better scalability than ETH, they lack decentralization and the established and robust DeFi ecosystem that Ethereum has on its network.

Solana (SOL) is considered by many to be the number one potential ETH killer. As outlined by Blockworks, Solana is a public, open-source blockchain that supports smart contracts, including non-fungible tokens (NFTs) and a variety of decentralized applications (dApps). Native to Solana’s blockchain is the SOL token which provides network security through staking as well as a means of transferring value. Solana boasts a theoretical throughput of 65,000 transactions a second with near zero fees.

Should you invest in Ethereum?

Currently both the US stock market and Crypto continue to gyrate violently as the US navigates a raft of challenges including: continued uncertainty over the Omicron COVID-19 variant, concerns by Federal Reserve Chairman Jerome Powell about the health of the economy and record high inflation levels, the potential invasion of the Ukraine by Russia and ongoing comments by US policymakers like SEC Chairman Gary Gensler about cryptocurrency regulation.

Below is a list of some of the key positives relating to Ethereum:

• It supports the execution of smart contracts
• It allows for the creation and development of both Decentralized Finance (DeFi) tokens and Non-Fungible Tokens (NFTs)
• It is decentralized
• It supports a vast variety of exciting projects including: microgrids, charging stations for electric vehicles, crypto collectibles, home mortgages, health care records
• It is considered one of the Crypto ‘blue chips’ and much more than just a ‘store of value’. Raoul Pal, a former hedge fund manager and Goldman Sachs executive, has stated that “Ethereum’s growth in price has been a function of Metcalfe’s Law and that Ethereum is actually growing faster than Bitcoin at the same stage of its lifecycle which would suggest it has the potential one day to eclipse Bitcoin”.

As I am not a licensed financial planner/adviser, I cannot offer any financial advice. However, my own investing experience and learnings along the way (some of these have been painful and do include cryptocurrency) have tended to guide me well over the course of time. My personal view is that Crypto is indeed a risky investment but with potential high reward and as such, should only form a small percentage (~5%) of your overall investment portfolio. Any crypto portfolio should include both Bitcoin and Ethereum. It will be volatile, and it is still very early days in this investment space, so, if possible, look to holding for the longer term and use ‘Dollar-Cost-Averaging’ as a means of entering this market. As per investing in the share market, in the words of Warren Buffett, “look to invest when others are scared and look to take profits when others are greedy”.

Your PROFITABLE ACTION STEPS this time around:

1. Review your current portfolio carefully and see how it has performed over 2021. Decide on a plan of action for 2022 and stick with it. Remove dud performers which have no chance of turning around. Decide on what asset class needs some attention. Investing even a small amount, on a regular basis, will add up over the course of time.
2. Keep reading and learning. Find great investment books and knowledgeable YouTube channels. This will help you decide on suitable investment objectives and strategies.
3. Ethereum or any other cryptocurrency should only comprise a small percentage of your portfolio. As crypto is highly volatile, don’t invest anything in this space that you cannot afford to lose. As always, do your research first and consult your own financial planner/adviser.
4. Have a read of this article, ‘Where Should I Invest In 2022? Risks and Opportunities‘, you will find it an interesting and informative read.
5. Check out the ‘Coin Gecko‘ website for the latest prices of the top cryptocurrencies.

Stay safe, healthy and wise and most importantly of all, take ACTION.