The crypto market is back to its volatile old ways. Bitcoin (BTC -0.81%) prices rose 119% in 2024, easily outpacing the S&P 500 (^GSPC -1.78%) stock market index’s 23% gain. By February 28, Bitcoin had dropped 8.6% below the year-end price level while the S&P 500 had gained a modest 1.4%.

But Bitcoin’s volatility is just a serene breeze next to the unpredictable pricing gale around Ethereum (ETH -3.44%). The second-largest cryptocurrency fell 33% last year and followed up with another 31.4% price drop across January and February.

So Ethereum is falling out of favor with the cryptocurrency investing community. Is this the start of a long downtrend, or is Ethereum poised for a robust comeback from these dark days? And how should investors approach this fickle digital asset?

How has Ethereum fared recently?

You know how the crypto market is supposed to move. Once every four years, Bitcoin halves the rate of rewards for mining new coins, turning the production economics upside down. With lower rewards (paid in Bitcoins, of course) and fixed computing costs, the whole system would break down unless the coin price increases. The price reaction is never immediate, usually playing out roughly 9 to 12 months after the so-called halving.

The rest of the crypto market tends to follow along with Bitcoin’s price swings. None of them do exactly what Bitcoin does, so it’s always a bunch of apples-to-mangosteen comparisons, but the whole sector tends to benefit when the leading value storage coin is soaring.

Ethereum enjoyed massive price gains in the second and third halving cycles. Bitcoin’s 22,280% rise from March 2015 to March 2024 looks flat in the context of Ethereum’s much larger gains — and wilder swings along the way:

Ethereum Price data by YCharts

It just isn’t working out that way in the fourth halving cycle. Bitcoin’s price increase has been relatively muted in comparison to the previous halvings, or perhaps the whole cycle is just taking longer to develop this time. One popular theory is that the introduction of Bitcoin-based exchange-traded funds (ETFs) in January 2024 released some of the expected upward momentum a bit early, leaving less room for post-halving gains.

And Ethereum’s chart isn’t following the expected script at all. Ethereum-based ETFs have been available since last July, but that launch was immediately followed by steep price drops. The leading ETF in this class, the iShares Ethereum Trust (ETHA -1.54%), soaked up $3.6 billion of investor funds in the first six months, but then stayed flat for two months before losing 22% of its assets under management near the end of February.

Why is Ethereum crashing amid a general crypto upswing?

Squiggly price charts rarely explain why the investment it depicts is making these moves. Technical analysis is black magic at best and pure nonsense most of the time. That’s only more true in extra-volatile sectors like the crypto market.

There are some business-like explanations for Ethereum’s recent woes. Investors are worried about a couple of things. At the heart of it all, Ethereum was supposed to be the leading provider of smart contract services in an explosion of decentralized finance (DeFi) apps and other Web3 concepts. But the decentralized revolution seems slow to start, and a plethora of Ethereum alternatives are emerging in the meantime.

The top-ten list of most valuable cryptocurrencies now includes would-be Ethereum killers Solana, Cardano, and TRON. Further down the list, you’ll find layer 2 tokens such as Mantle, Arbitrum, and Optimism sharing Ethereum’s spotlight. These tokens are meant to accelerate transactions and smart contract functions on Ethereum’s core network, with the potential downside of diverting investment value away from Ethereum itself.

Is this the end of Ethereum as you know it?

Revolutions take time. Traditional banking systems are more than ripe for disruption. The one-two punch of Bitcoin’s value storage plus DeFi systems with smart contracts should eventually rip large chunks of market share away from the trillion-dollar banking industry. The decentralized alternatives can be both faster and less expensive to use, with fewer middlemen building revenue streams around your banking needs. There are similar stories of simmering changes brewing in other industries, from media services and e-commerce to supply chains and video games.

Rivals like Solana and Cardano may be even faster and cheaper than Ethereum for these purposes, but they can’t hold a candle to the market leader’s massive developer community and its industry-standard programming platform. The Ethereum system is also undergoing several technology improvements to boost its speed and lower transaction prices, all without sacrificing its reliability and data security.

Yes, you may have seen headlines about a billion-dollar Ethereum heist in recent weeks, but Ethereum is still a nearly unbreakable digital currency. The hackers stole their tokens by exploiting a trusted digital wallet service, ultimately relying on social engineering (aka “tricking people”) to move the funds. Furthermore, the Bybit crypto exchange froze and then recovered 88% of the stolen Ethereum tokens three days later. The event was still stressful and undermined public trust in crypto assets to some degree, but it also showed that there are significant safeguards in place around those tempting digital wallets.

Final verdict: Ethereum is a good buy as long as you’re careful with it

So Ethereum holds a pretty unassailable position of leadership in the smart contracts sector, and the sea change to decentralized services could start any time. And those Ethereum-boosting layer 2 tokens are explicitly designed to make that ecosystem better, not worse. The 5 largest layer 2 tokens add up to a $7.7 billion market value — a respectable total but less than 3% of Ethereum’s market value.

Put these robust long-term opportunities together with Ethereum’s swooning coin price, and it adds up to a fantastic buying opportunity. I doubled my modest Ethereum position a couple of weeks ago, hoping to capture some of that future value while it’s cheap.

That doesn’t mean I’m ready to take out a second mortgage or sell my car to finance my Ethereum buys, though. It’s a promising investment but not a slam-dunk winner. Some of the smaller smart contract systems could gain momentum and overthrow Ethereum in the long run. The Web3 revolution might take longer than I expect, like the cord-cutting upheaval did in the media market or the rise of electric cars. I don’t want to go bankrupt before the big payoff arrives, so it’s best to keep those Ethereum investments fairly small.