Ethereum Just Approached $3,500. 3 Reasons This Leading Cryptocurrency Is Still a Buy

Key Points

• Ethereum is the world's second-largest cryptocurrency by market cap.

• It has underperformed this year, especially compared to Bitcoin.

• Several developing catalysts could change this.

• 10 stocks we like better than Ethereum ›

Cryptocurrencies are rounding into form. Bitcoin, the world's largest cryptocurrency by market cap, hit fresh all-time highs of more than $123,000 on July 14. The asset's run has also sent a jolt into Ethereum (CRYPTO: ETH), which shot up to almost $3,500 per token on July 17 after having a difficult year so far.

Ethereum has traded at much higher levels in the past (its record is $4,892 back in November 2021), and I think it's been a bit surprising to see the performance chart of the world's second-largest cryptocurrency diverge so much from Bitcoin's. Here are three reasons Ethereum can keep its momentum going.

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1. The environment remains favorable

Republicans in the House of Representatives kicked off "Crypto Week" on Monday with the goal of passing three crypto bills that are intended to create a more favorable regulatory environment for digital assets.

Image source: Getty Images.

The Genius Act is set to create a regulatory framework for stablecoins, which are digital assets backed by a commodity or currency. The Digital Asset Market Clarity Act (Clarity Act for short) would create a regulatory framework for digital assets that its backers say will provide "strong safeguards and long-overdue regulatory certainty." The Anti-CBDC (Central Bank Digital Currency) Surveillance State Act would prevent the Federal Reserve from issuing its own digital currency, which would essentially give the private sector first crack at stablecoins and other forms of innovation in the digital currency space. The Genius Act is the furthest along in the legislative process, having already been passed by the Senate.

Other potential tailwinds include lower interest rates, which have historically benefited cryptocurrencies. The market is expecting the Federal Reserve to make a few cuts to its benchmark federal funds rate later this year, with more to follow in 2026.

2. Institutional interest is heating up

As the regulatory environment continues to become more favorable, institutional investors and mainstream financial institutions will likely lose some of their trepidation about getting involved with cryptocurrencies. While Bitcoin could be the largest beneficiary of that, Ethereum is drawing interest as well.

Recently, SharpLink Gaming purchased nearly $48.9 million worth of Ethereum. Bitmine Immersion Technologies also recently announced a $250 million private placement led by a group of top crypto investors. The plan is to follow in the footsteps of Strategy, which has tapped the capital markets to raise funds that it then uses to buy Bitcoin. But in Bitmine's case, the plan is to buy Ethereum.

Part of the recent interest is around stablecoins because Tether and USDC, the two largest stablecoins, are issued on Ethereum's network. Fundstrat's Tom Lee, board chairman at Bitmine, said in a recent interview on CNBC that interest around stablecoins is set to drive Ethereum much higher this year and long term:

"Stablecoins have really exploded because consumers, businesses, and banks are really interested in adopting this. The majority of stablecoins are actually transacted on the Ethereum blockchain. And if Treasury Secretary [Scott] Bessent is right, and it goes from a $250 billion market to $2 trillion, that's exponential demand for Ethereum."

3. This metric suggests Ethereum is set to close the gap with Bitcoin

It's never easy to value cryptocurrencies because they don't generate earnings or cash flow -- at least, not in the traditional sense like publicly traded companies do. Still, as the asset class has grown more popular, many experts and analysts have tried to apply some sort of valuation methodology. One easy one to look at is the Ethereum-to-Bitcoin ratio, which divides the price of Ethereum by the price of Bitcoin.

Currently, the ratio is at roughly 0.025. While that's not the lowest the ratio has ever been, it's definitely toward the lower end of the spectrum, looking back to 2015. Now, historical data can never predict the future. It's also possible that Bitcoin's now more prominent position, which has it viewed as a form of digital gold, will continue to send its price to new highs and create a wider disparity in the ratio. But it's also quite possible that Ethereum is undervalued right now and well positioned for a run-up.

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Bram Berkowitz has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.