1 New Sign That Ethereum Is a Risky Buy Right Now

Ethereum (CRYPTO: ETH) can't seem to catch a break. Between its tumbling price and the terrible sentiment about the chain's present and future, there isn't much for investors to be happy about.

And there's a new sign that now might not be the right time to buy it, even if you are willing to hold on to it for a good while. Here's what's going on.

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This is a sign that a chain utilization crisis is underway

Ethereum is the second-largest cryptocurrency, with a market cap of almost $220 billion. That means that if its ecosystem is healthy, there should be a vast number of users interacting with its chain via crypto wallets. As users can have more than one wallet, and many do, there isn't a precise 1-to-1 relationship between the number of users and the number of wallet addresses, but there's still a connection between how many wallets are active and the amount of activity there is on a chain. So the number of active wallet addresses is a useful proxy for a chain's health.

For the month of March, Ethereum had 13.9 million active wallet addresses on its chain. Its largest competitor, Solana, had roughly 68 million active wallet addresses despite having a much smaller market cap of about $78 billion. But even much smaller chains than that have one-upped Ethereum. Sui reported about 38 million active addresses despite having a market cap of only $12 billion.

There is nothing inherent in Solana's chain that makes its users more likely than Ethereum's to need multiple wallet addresses, though the fact that it's much cheaper to move funds around probably contributes to there being more addresses in active use. The issue here for Ethereum holders is that a year ago, there were 15.4 million active wallet addresses, a decline of 1.5 million. That makes the coin a risky buy because it is clearly not seeing an increasing rate of adoption, which would result in more active wallets than before.

And Ethereum's price has declined by about 33% during the past three years. The chain is facing an unhealthy combination of persistently poor investor sentiment and a decline in its user base. The competition is winning, stealing capital share, and looks set to increase its lead. And that will take some significant work across multiple fronts to reverse.

Heed this warning

It is very risky to buy Ethereum at the moment, even though its price is nowhere near an inflated valuation. Despite significant impending network upgrades, specifically the Pectra update that's currently in testing, it is unlikely that new features will soon make Ethereum a faster and cheaper chain to the point where it can rival Solana. The rate of capital flight from Ethereum to Solana will probably accelerate rather than decelerate until Ethereum becomes a better place to develop decentralized applications or invest in them.

The chain's chances of a reversal in the near term are not zero, but they are not very good, either. Winning in an important emerging growth segment, like artificial intelligence agents, real-world asset tracking, or decentralized physical infrastructure networks, could attract more investment. Presently, it isn't a leader in any of those areas, though it's still fairly competitive in AI infrastructure and agent tokens.

In the longer term, Ethereum could well recover, and it is important to note that it is practically guaranteed to survive even the most protracted doldrums on the basis of its technical leadership, its legacy in cryptocurrency, and its centrality to the decentralized finance ecosystem alone, not to mention the still-vast sums parked on its chain. Regardless of its current problems, it's also a very important cryptocurrency advocate, which lends it legitimacy that most other chains cannot approach. But you don't need to bet your money on its recovery. And given its declining user base, it is probably better if you don't.

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Alex Carchidi has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Ethereum, Solana, and Sui. The Motley Fool has a disclosure policy.