The price of Ethereum (ETH 0.10%) has been on an upward swing lately, as it recently reached a record high of around $4,800 per token -- an increase of more than 900% over the past 12 months.

While there's no way of knowing for certain how Ethereum will perform in the future, there's a chance it could surpass $5,000 per token in the relatively near future. Does that mean it's time to invest now? Here's what you need to know.

Piggy bank with a digital coin inside

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Is Ethereum a smart investment?

Cryptocurrency, in general, can be a risky investment. It's highly speculative at this point, meaning nobody knows for sure whether it will succeed over the long run. Cryptocurrency has only existed for a little over a decade, and it's too soon to tell how much staying power it has.

That said, Ethereum does have a lot of potential, and it's one of the strongest players in the crypto space right now.

The Ethereum blockchain is one of the most popular blockchains for decentralized applications (dApps), such as non-fungible tokens (NFTs) and decentralized finance. These dApps require the use of Ethereum's native token, Ether. This means that if any of these dApps become widely adopted, the use of Ether will increase -- and its price could skyrocket.

Ethereum is also in the process of updating from a proof of work (PoW) mining protocol to a proof of stake (PoS) protocol. The PoW protocol is incredibly energy-intensive, as it involves high-powered computers solving complex puzzles to verify transactions on the blockchain. This type of protocol is also slower than PoS, resulting in fewer transactions per second.

Ethereum 2.0 is expected to be fully rolled out sometime next year, and once that happens, not only will it require around 99% less energy, but it will also be able to process transactions significantly faster. This can give it a major advantage over competitors such as Bitcoin that still use a PoW protocol.

Potential downsides to consider

Ethereum may be a strong investment, but it's not perfect. Before you invest, it's important to understand the potential disadvantages as well to make sure you know what you're getting into.

For one, new cryptocurrencies are being developed quickly, and Ethereum could face some stiff competition. There are already some so-called "Ethereum killer" cryptocurrencies, such as Cardano (ADA 2.44%), that aim to capitalize on Ethereum's weaknesses.

Cardano, for instance, already uses a PoS mining protocol, and it also has the ability to host dApps on its blockchain. To maintain an edge over the competition, Ethereum will need to continue innovating over time.

In addition, cryptocurrency can be a risky investment because it's so speculative. Unlike stocks, cryptocurrency doesn't have a long track record of growth over time. While Ethereum may have strong potential, there are no guarantees that it (or cryptocurrency in general) will still be around in a decade or two.

Before you invest, then, consider how much risk you're willing to tolerate. If you're a risk-averse investor, crypto may not be the right option for you. And if you do choose to invest, only invest money you can realistically afford to lose.

Nobody knows for certain where Ethereum is headed, but if you're ready to invest in cryptocurrency, it could be a strong choice. Just be sure you're aware of the pros and cons of this investment to determine whether it's the right option for you.