Ethereum, like all other cryptocurrencies, has had a difficult start to the year. At the time of writing, Ether is trading at $2,500, which is about 47% below its all-time high of near $5,000. According to CoinGecko, its total market capitalization has crashed to about $297 billion. In this article, we will explain the recent price action and what to expect in 2022. If you are interested in buying Ethereum, we recommend this guide from Bankless Times which explains the different options very well.
Why Ethereum has retreated
There are three main reasons why the Ethereum price has declined sharply in the past few months. First, the drop is mostly because of profit-taking considering that the coin’s price has jumped from less than $100 in 2020 to almost $5,000. Historically, investors tend to take profit after an asset has had such a spectacular performance.
Second, investors are worried about the change in tone among central banks. In their response to the pandemic, most central banks decided to lower their interest rates to record lows. Other banks such as the Federal Reserve, European Central Bank (ECB), Bank of England (BOE), and Bank of Japan (BOJ) launched their biggest asset purchases program on record.
Now, with the world economy recovering, there are concerns that these banks are embracing a tight monetary policy. For example, the Federal Reserve has hinted that it will end its quantitative easing policy in March and then start a period of rate hikes. Economists expect that the bank will implement three to four rate hikes.
Other banks are expected to follow suit. For example, the Bank of England has already started hiking interest rates while the Bank of Canada has ended its QE program.
Therefore, investors are exiting assets that did well during the easy-money period. Other cryptocurrencies like Bitcoin, Ripple, and Cardano have slumped. Similarly, the S&P 500 and Nasdaq 100 have moved to a correction zone.
The third reason why the Ethereum price has slumped is that competition in the industry is rising. In the past few months, the number of blockchain projects with smart contracts has risen substantially.
These Ethereum-killers are all trying to solve the challenges that exist in Ethereum’s ecosystem. One of these challenges is the fact that Ethereum transactions are extremely slow. It is not uncommon for a transaction to take more than 15 minutes to complete.
Also, transactions in Ethereum’s network are a bit expensive. Most importantly, Ethereum uses a proof-of-work technology, which means that its network is not climate-friendly.
Some of the biggest Ethereum-killers are blockchain projects like Cardano, Binance Smart Chain, Polkadot, Terra, and Avalanche.
Ethereum price prediction
While Ethereum faces significant challenges, there are several reasons why its price will rebound in 2022. First, while Ethereum is facing significant challenges, it still has a strong market share in the industry. For example, it has the biggest share in the DeFi industry. According to DeFi Llama, its applications have a total value locked (TVL) of over $140 billion. This amount is bigger than that of all the other projects combined. Terra, the second-biggest platform, has a TVL of less than $20 billion.
Second, Ethereum developers are actively solving the challenges that exist in its ecosystem through the ETH 2.0 transition. The final result will be a platform that has a high throughput and lower costs. There is a likelihood that Ethereum’s price will rise ahead and after the launch of the proof-of-stake network.
Third, while higher interest rates pose risks to Ethereum prices, there is a likelihood that these fears have been overblown and already priced in by investors. Therefore, when the Fed starts hiking rates, investors will likely buy the fact. Also, they will embrace the new normal and buy cryptocurrencies.
A good example of this is what happened in 2018 when the Fed made four rate hikes. At the time, Ethereum prices did relatively well even with the tight monetary conditions.
Finally, Ethereum will do well because of the overall performance of other sectors of the blockchain industry. Analysts expect that sectors like Decentralized Finance (DeFi), metaverse, and non-fungible tokens (NFT) will do well in 2022.
If this happens, Ethereum price will do well because it is the leading player in these sectors. For example, on DeFi, Ethereum powers the biggest coins in the world like InstaDapp, Uniswap, and Aave. On NFTs, it powers platforms like OpenSea and in metaverse, it powers Axie Infinity and Decentraland.
Another reason why we believe that Ethereum price will do well in 2022 is that it will gain mass adoption from institutional investors. There is a likelihood that Ethereum futures will be launched this year.
Ethereum has grown from a relatively popular blockchain platform that powers other ecosystems like Decentraland and even Shiba Inu. While the coin’s price has fallen, at Bankless Times, we believe that its price will rebound this year and possibly test the key resistance at $5,000.
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