The second-most-popular cryptocurrency, Ether (ETH -0.95%), the native cryptocurrency on the Ethereum network, has been crushing Bitcoin (BTC -0.05%) so far in 2021 after Bitcoin's huge run-up at the end of 2020 and earlier this year. Even after the big recent drop in crypto prices, Ethereum is still up roughly 280% year to date as of May 20, while Bitcoin is up about 43%. With the outperformance and the recent dip, I think now could be an opportune time to buy Ethereum. Here's why:
Like Bitcoin, Ethereum is a decentralized network powered by the digital ledger blockchain technology, and it can be used to conduct digital payments. But it differs from Bitcoin in that code can be built and programmed onto Ethereum's blockchain network to create smart contracts and decentralized apps that run constantly and that can't be manipulated or controlled by a third party. Ethereum.org calls Ethereum "the world's programmable blockchain," which I think is a great description.
And this is what is making Ethereum exciting right now and part of what has been driving up the price. For a while now, people have been saying how much real-world applicability blockchain has, but now we are really starting to see it. Ethereum is powering most nonfungible tokens (NFTs), which have taken off this year. NFTs are digital files such as art, video, and audio stored on blockchain, and each has a digital signature that makes it unique and impossible to duplicate. Owning a piece of digital art that anyone can see a copy of by Googling might sound silly, but it's not unlike owning physical art or baseball cards. Sure, you could get a famous painting copied and no one might know, but you wouldn't have the original of that painting, which is worth way more.
Ethereum is also popular for running smart contracts, which are basically programmed and automated contracts that can't be retroactively changed and that run without needing to be carried out by some sort of third party. For instance, a smart contract could be set up in a pizza delivery transaction -- once the person who ordered the pizza receives it, money is automatically sent to the restaurant. NFTs are actually powered by smart contracts to verify authenticity and ownership.
Another big catalyst could be the network's transition to Ethereum 2.0. The transition, which is supposed to fully take place later this year or in 2022, is a set of upgrades that is supposed to make the blockchain more secure, more scalable, and less reliant on energy for mining and therefore more sustainable.
That's exciting on its own, but the merge could also effectively increase demand for Ethereum. Other than the fact that Bitcoin was the proof of concept for all decentralized cryptocurrencies, investors are drawn to it because it has a finite supply of only 21 million Bitcoins, leading some to believe the cryptocurrency is a hedge against inflation. Ethereum does not have a fixed supply of Ether tokens, but there is talk that the minting of new Ethereum tokens may start to slow once the network transitions to Ethereum 2.0.
Ethereum co-founder Vitalik Buterin has said that new-token issuance should be reduced under Ethereum 2.0. Last year, annual issuance was around 4.7 million new Ether per year. Following the implementation of Ethereum 2.0, he said issuance could fall to somewhere between 100,000 and 2 million per year.
Investors typically watch how Ethereum trades compared to Bitcoin. Since the beginning of 2020, the price of Ethereum has ranged from 1.3% to as high as 8% -- recently when Bitcoin began to tumble -- of Bitcoin's price per token. But during the last big bull run for crypto in 2017 and 2018, Ethereum's price got as high as nearly 14% of Bitcoin's price, so we really haven't even seen it outperform its historic performance in relation to Bitcoin.Given all the apps and smart contracts Ethereum is starting to power in the real world, the catalyst that could come from Ethereum 2.0, and the recent decline in crypto prices, I would definitely recommend buying Ethereum.