- Ethereum dropped 13% in September, the second-worst month for the cryptocurrency in the past year.
- The ethereum blockchain has suffered a series of setbacks of late, including an unexpected split because of a bug.
- "This is a reminder that blockchains in general and ethereum specifically are new and disruptive technologies," said Matt Hougan, chief investment officer at Bitwise Asset Management.
Jakub Porzycki | NurPhoto | Getty Images
September was a rough month for crypto investors, in particular for those betting big on ether, the token tied to the ethereum blockchain.
It's difficult to link short-term price movements to any specific event, and with the historic rally in crypto over the past 12 months, pullbacks are to be expected. Ethereum, the second most-valuable cryptocurrency behind bitcoin, is still up about 830% in the past year.
Investors are now buying the September dip. On Friday, the first day of October, ether and bitcoin both climbed over 9%.
Ether 12-month price chart CNBC
But the September roller-coaster reflects a particularly rocky stretch for the ethereum ecosystem, which has given investors and developers reasons for concern.
The speed of the network and high transaction fees continue to be a problem. The "London" upgrade in August was supposed to make transaction fees less volatile, but it's had a limited effect.
Meanwhile, rival blockchains dubbed "ethereum killers" are taking advantage of ethereum's challenges.
Ethereum also unexpectedly split into two separate chains in late August, after someone exploited a bug in the software that most people use to connect to the blockchain. That exposed the network to an attack, and not for the first time.
"All these factors could be having some impact on the speculation side, no doubt," said Mati Greenspan, founder and CEO of Quantum Economics, in an interview. "But don't forget that ethereum has appreciated quite handsomely so far this year and the entire market seems to be in consolidation at this time. So I wouldn't try to read too deeply into these short-term movements."
Still, ethereum, which serves as the primary building block for all sorts of crypto projects, like non-fungible tokens (NFTs), smart contracts and decentralized finance (DeFi), has some major hurdles to overcome to fend off the emerging competition.
A central premise of ethereum's security stems from the existence of only one set of virtual books, meaning you can't create coins out of thin air. That ledger has to work, because the decentralized nature of the blockchain means there's no rule keeper or bank that sits in the middle of transactions to act as accountant.
Ethereum developers were rightly alarmed in August when the chain split because of a bug.
Read more about cryptocurrencies from CNBC Pro
"This fork temporarily created two separate records of transactions on the ethereum network – like parallel books," said Matt Hougan, chief investment officer at Bitwise Asset Management, which created the first cryptocurrency index fund.
For a while, it was unclear whether the split would lead to a "double-spend attack," where the same token can be spent more than once and transactions can be reversed, Hougan said. Smart contracts overseeing billions of dollars in assets could have also been at risk. Smart contracts allow people to build applications on top of ethereum with self-executing code, eliminating the need of third parties to handle transactions.
Such an attack would have been difficult to execute, since it was clear which nodes were on the correct side of the split and which were not. "But in theory, there was a risk," Hougan said.
The good news for miners and exchanges is that most of them upgraded their software as recommended and the issue was resolved relatively quickly, said Tim Beiko, the coordinator for ethereum's protocol developers.