Two months ago, it seemed inevitable that Ethereum (ETH -0.22%) would break through the $5,000 ceiling. The popular cryptocurrency hit an all-time high just below $4,900 in mid-November, and momentum was on its side. But it didn't happen.
Digital currencies have corrected sharply in recent weeks, and Ethereum has tumbled along with most of the market. With the digital currency trading at roughly $3,150 on Wednesday morning, it would have to climb 59% to hit $5,000. A milestone that seemed so attainable and obvious just a couple of months ago now seems so far away.
Ethereum can still get there. There's never a dull moment for the world's second-most-valuable cryptocurrency. It's just no longer a foregone conclusion that it will happen anytime soon. Let's break down the bullish case for Ethereum hitting $5,000 as well as the roadblocks that could stop that from happening.
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Eyes on the prize
Ethereum didn't plant the flag on crypto; it didn't arrive on the market until the summer of 2015. But it did raise the bar when it comes to what crypto's blockchain could do. Ethereum made smart contracts possible, and in the process has become the cornerstone to thousands of the market's decentralized apps. There are plenty of smaller cryptocurrencies that run circles around it in terms of speed, bandwidth, and cost, but right now it continues to be the undisputed top dog in this niche.
A popular metric for sizing up protocols in the world of decentralized finance is total value locked, or TVL. Ethereum currently has $138 billion in TVL, representing the value of the assets that are currently being staked in a specific protocol across all decentralized finance apps worldwide. Ethereum has 60% of the market, and its TVL is nearly eight times greater than its closest rival.
The problem with 60% in TVL is that Ethereum's share of the market has been shrinking. A lot of the faster and cheaper protocols are gaining ground on it, and that's what makes the next phase of its migration to proof of stake so important.
Ethereum is currently proof of work, a mining method that has its advantages but ultimately makes it costly to do business with and an eco-unfriendly drain on energy resources. The rivals that are gaining ground on Ethereum are proof of stake, and its migration to the new protocol (currently expected to happen in June, but we've seen timelines get bumped before) will help it compete more effectively with the cryptocurrencies nibbling away at its market share.
If Ethereum hits $5,000 later this year, it will likely require a successful move to proof of stake. Delays will give smaller players more opportunities to grab market share, and the Ethereum bullish case will be harder to justify if it's no longer the obvious lead horse in the smart-contract revolution.
Naturally, Ethereum itself isn't immune to the wild price swings of the crypto market. All but 2 of the 15 most valuable crypto tokens have moved sharply lower over the past month. There was a time when crypto was disconnected from growth stocks, but both markets have been weak since November. Cryptocurrencies would sometimes move higher when inflation reared its head, but that hasn't been a bullish catalyst these days.
History has been kind to Ethereum in its less than seven years of trading, and buying the dip has been a smart call in the past. But with rival denominations piling up use cases, and uncertainties heading into the crucial phase of the Ethereum 2.0 migration, it isn't the golden child it was last year. Doubt isn't a bad thing, and if anything, it gives Ethereum investors a wall of worry to climb higher if it's able to execute its goals in 2022.
Hitting $5,000 is within reach this year, and that would be a spectacular return of nearly 60% from today's starting line. The risks are high as well, but crypto investors know that going in -- the moment they buy into the volatile world of digital currencies.
