Ethereum (ETH -3.14%) investors have had a wild ride so far this year. The price of this popular cryptocurrency has dropped by more than 50%. The sudden collapse has even spooked long-term investors.
Should you be panicking or staying the course with Ethereum? As with any volatile investment, it's difficult to tell right now. But I'm keeping my eye on the critical metric below for clues on what might happen next.
CRYPTO: ETH
Key Data Points
This one number can determine Ethereum's future
Many people hold Ethereum for purely speculative reasons. But the cryptocurrency's true underlying value derives from its ability to act as a decentralized computer. Entire applications and third-party infrastructure can be built on top of its network, with no single entity controlling its functioning or performance. And due to its early mover advantage and size, Ethereum remains the go-to network for the rapidly evolving decentralized economy.
How can investors gauge Ethereum's success in this regard? By monitoring the total value locked (TVL) on its network. This metric demonstrates how well Ethereum has done at not only convincing developers to build on top of its network, but also how successful those applications have been at attracting hard-earned capital from consumers, businesses, and other applications.
Ethereum's TVL has grown considerably over the years, from just $600 million at the start of 2020 to nearly $45 billion today. Put simply, Ethereum's decentralized ecosystem is maturing rapidly, especially in emerging categories like DeFi. This TVL has fluctuated wildly in recent years, with a high correlation with the value of Ethereum itself. But the long term trend is clearly headed in the right direction.
In 2021, Ethereum had a market cap high of $560 billion, with a TVL of $107 billion -- roughly 20% of its market cap. Today, Ethereum has a market cap of $180 billion and a TVL of $45 billion -- around 25% of its market cap. So is the price of Ethereum plunging? Yes. But does a rising percentage of TVL to market cap suggest a more mature network? Also yes. Keep an eye on this figure.
