Ethereum (ETH +2.27%) is now 65% below last August's $5,000 peak, which, at least to some investors, might seem like a whopper of a bargain waiting to be seized. It's the dominant home of decentralized finance (DeFi), the busiest smart-contract platform, and a leading chain for tokenizing real-world assets, which is a major emerging growth segment in crypto.
So, is this the time to add Ethereum to your portfolio, or is there a smarter move available?
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Buying the coin doesn't get you much exposure to the success of the chain
The catch with this asset is that the mechanism that's meant to convert activity on the Ethereum network into better returns for holders has stalled. To make matters worse, the scheduled protocol upgrades arriving over the next two quarters are engineered to widen the gap rather than close it.
Holding Ether is supposed to pay in three ways: getting a share of the transaction fees that get burned, capturing a 3% to 4% staking yield, and via exposure to the network's growth. But none of those mechanisms are working as advertised right now anyway.
Rather than transaction fees leading to burning of sufficient tokens so as to make the asset deflationary, the new tokens created to pay off stakers mean that net supply inflation runs about 0.8% annually. So technically, holders can still capture the staking yield, but at a paltry rate of return with a fairly high level of risk.
As for platform growth, it simply doesn't matter much. So few fees are burned per unit of activity, it would take a vast amount of new activity or capital on the chain to make much of a difference.
Of course, investors can still get upside from buyers who aren't aware of these facts and who are thus willing to bid higher prices for Ether regardless of its issues.
CRYPTO: ETH
Key Data Points
August's upgrade is built to cut fees
For this coin's supply to regularly tighten again, thereby giving it a tighter link to its underlying value, fee-paying activity has to grow faster than the upgrade is compressing revenue per unit.
Glamsterdam, the network's next major update, is set to launch in late August. It will enable parallel transaction execution, and includes a repricing package that's projected to cut fees by even more. This will make the issues raised above even worse despite simultaneously making the chain a cheaper (better) place to do business.
So is Ethereum worth buying here? Slow accumulation at the lows could make sense for buyers with a multiyear time horizon, as the troublesome tokenomics could theoretically be changed to favor holders at some point in the future.
In the two quarters after Glamsterdam ships, if the regular coin burn rate is high enough to drag net supply growth back toward zero, the investment thesis for buying Ether will be somewhat repaired. If supply keeps drifting higher over time, something will need to be fixed before the coin's price rises consistently. I won't be adding to my position.
