Ethereum Just Soared Past $4,000. Here's What Investors Need to Know About Its Recent Rally.

Key Points

• Ethereum's price is now well above $4,000.

• Sentiment has rapidly improved following the rise in its price.

• This rally probably still has plenty of room to run.

• 10 stocks we like better than Ethereum ›

Rather than nailing an asset's "true" value price in one steady motion, markets tend to get enthusiastic, overcorrect, stall, and then, usually, eventually, revert toward something closer to the fair value. As noisy as it may be, that pattern is sometimes a helpful guide when you're looking at a good asset that has been out of favor for a while, like Ethereum (CRYPTO: ETH) was, at least until relatively recently.

In early August, the coin reclaimed a price of more than $4,000, and during the last 30 days, it has grown by 28% (as of Sept. 3). By early September, Ethereum was only roughly 10% below its all-time high, a gap that can close quickly if fundamentals keep improving. Here's what fueled this rally, and a few possibilities for what you can expect in the short term.

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Why Ethereum finally woke up

A fresh catalyst tends to help a disfavored asset to reclaim some positive sentiment; Ethereum's Pectra upgrade went live on May 7, and it delivered two important new features, among many others.

First, regular wallets on the chain can temporarily behave like smart contracts, which should make everyday actions simpler and safer over time. Second, the effective balance ceiling was raised for network validators, which means they can cut some of their operational bloat and improve their staking efficiency. Both of those changes attract and retain more capital for the chain.

Meanwhile, the banks and financial institutions finally have a native crypto on-ramp, and they appear to be using it. U.S. spot Ethereum exchange-traded funds (ETFs) were approved for listing in May 2024, which formalized Ethereum as an investable asset for retirement platforms and wealth managers. Since then, asset flows haven't impressed investors -- until this summer, which featured several very large net-inflow days, often consecutively. These ETFs are now creating recurring demand whenever policy statements, model allocations, or market narratives tilt in Ethereum's favor.

Institutions are also building on Ethereum itself. On-chain U.S. Treasury bill and bond markets now total roughly $7.5 billion across platforms, with Ethereum boasting the most value. That combination of ETFs plus tokenized cash instruments and a large stablecoin reservoir reinforces Ethereum's growing acceptance on Wall Street.

Finally, corporate treasuries and crypto treasury companies are starting to accumulate Ethereum. Reddit disclosed Ethereum holdings, and a cohort of public companies has been accumulating it this year for treasury and staking strategies.

Those announcements don't change cash flows overnight, but they do change the buyer base by making it much larger.

How to think about the rally from here

The simplest reading of the causes behind the rally is mean reversion. Ethereum spent a long stretch out of favor relative to its potential, and a cluster of catalysts arrived at once.

Pectra improved the product, execution of the development roadmap restored some confidence, ETFs led to inflows after a slow start, and institutions validated the chain by parking their capital on it. Faced with the preponderance of evidence pointing toward the coin's value, participants in the market were willing to bid against each other to secure some of the coin's supply, forcing the price up.

From this point on, all of those catalysts will still be in play. And, with more work underway, the chain will eventually get another update with more features to potentially keep the party going. If financial institutions genuinely do prefer the chain to others, more of their capital will flow in. So between refreshed sentiment, more upgrades on the way, and big capital allocation, Ethereum's rally could plausibly continue with vigor for months on end, and continue for longer as well.

But the coin will stop going up eventually, even if there's nothing that invalidates the investment thesis for buying it.

ETF flows can and do reverse to become outflows for weeks at a time, as August showed. Beyond that, competition in smart contract platforms remains fierce, and regulatory questions about tax treatment for staking or custody requirements could slow corporate adoption. Therefore the sensible move here is to invest cautiously and slowly while planning on multiyear holding periods rather than betting the farm on quarter-to-quarter price watching.

In sum, if Ethereum's roadmap continues to attract new capital, and if you think ETFs and asset tokenization keep widening the buyer base for the coin, the recent move back above $4,000 looks more like the middle of a process than the end.

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