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Use Logic, Not Clichés When Analyzing Your Next Move With Ethereum

InvestorPlace - Stock Market News, Stock Advice & Trading Tips While the rise in Ethereum is incredibly enticing, it pays for prospective ETH-USD investors to step aside and take a...

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This story originally appeared on InvestorPlace

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

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I have a lot of respect for Magnetic Managing Director Megan Kaspar. During an interview with Yahoo Finance, she stated that Ethereum (CCC:ETH-USD) — the world’s second-largest cryptocurrency by market capitalization — still had a chance to reach her 2021 price target of $8,000 to $10,000 by the end of this year. While I respect the person, I’ve got to question the prognostication.

A concept image of mining an Ethereum (ETH) token.
Source: Shutterstock

To be fair, Kaspar — who is a co-founder of the blockchain and cryptocurrency investment firm — called for Ethereum to roughly triple back when ETH coins were trading closer to $1,000 in January of this year. She got that right and then some. But to hit the average price upside target of $9,000 requires Ethereum to double in value from the time-of-writing price of $9,000. That would imply that the alternative crypto will command a market cap over $1 trillion.

If so, that would also imply that Bitcoin (CCC:BTC-USD) will move substantially higher, perhaps to the $100,000 level. It’s not impossible but I find it difficult to believe it’s probable. Such price targets require considerable faith among otherwise overstretched retail investors. It would also put institutional players in a bind. Sure, everybody loves riding the bull but even established cryptos like Ethereum can bite you in the rear in a nanosecond.

However, Kaspar defends her price target, noting that “Investors are still using crypto as a favorite tool to hedge against inflation.” Further, system upgrades within the Ethereum protocol will result in a burning of some portion of ETH coins previously paid to miners.

To Kaspar’s point, “Toward the end of the year, beginning of next year, we’ll have about a million worth of Ethereum coming out of supply. So that will initiate it becoming a deflationary asset.”

So again, it’s not impossible that ETH can make a remarkable run to astonishing levels. But is it likely?

Get Emotion Out of Ethereum

Let’s get something straight here: I would love for Ethereum to hit $8,000 to $10,000. As anybody with a modicum of pride will attest, people don’t like to be wrong. But in this case, I will gladly eat crow. I just don’t think I’ll be able to chow down. Worse yet, I think such price targets present an unrealistic picture for crypto newcomers.

First, the deflationary argument is intriguing from a structural standpoint. I’m just not sure if it holds much water. Ultimately, assets rise in value because of demand, not necessarily because of limited supply. Don’t believe me? How is it possible under this logic that platinum, which is 30-times rarer than gold, is priced at a 43% discount to the yellow metal?

For whatever reason, investors prefer gold. Similarly, I’d avoid buying Ethereum on the “burn rate” argument. Yes, lower supply may convince investors to bid up ETH to $10,000. But the demand still has to be there.

Second, I’m not entirely sure if cryptos are a hedge against inflation. It’s a commonly held belief and one that has gained traction because of the deflationary nature of Ethereum and other coins and tokens. But that would imply that logic, rather than euphoria, is driving the ETH price. But is that really the case?

Personally, I believe that fear of missing out (FOMO) is playing a bigger role than people realize. Bluntly, undergirding Ethereum is a blockchain technology that anyone can duplicate for their own purposes. On the other hand, the U.S. dollar represents a unit of promise of the U.S. government.

True, those units are buying fewer goods and services than in prior years due to inflation. But that’s always been the case. Just because the U.S. is dealing with serious economic problems right now doesn’t mean Ethereum should command a trillion-dollar valuation.

Do What’s Best for You

Ultimately, you must do two things when dealing with cryptos: Use common sense and invest in a manner that’s right for you.

Frankly, I wouldn’t get caught up on anyone’s price targets for Ethereum or any other digital asset because it’s easy to be bullish in a bull market. But that doesn’t mean contrarian downside targets are by default legitimate. You’ve got to do your due diligence.

In that respect, let me give you my last pointer. According to FINRA, stock trading on margin hit a record high in August 2021. But in September, that borrowing slipped roughly 1%. A minor blip, yes, but it points to the fact that the investment community has limited resources.

Yes, Ethereum can move to a $1 trillion market cap. But it might not get there without deflating other assets, particularly meme stocks which speculators also love. That’s why you must use common sense here. What goes up does not, cannot continue moving higher uninterrupted.

On the date of publication, Josh Enomoto held a LONG position in ETH and BTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.

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