Cryptocurrency assets are flashing signs of weakness in the latter half of November, with the market's total valuation dropping around 10% to $2.5 trillion in the last 15 days. But the sector's long-term outlook is still strong as investors look for an alternative to fiat currencies amid rising inflation and low interest rates in developed economies.
Let's explore how Ethereum (ETH -2.61%) and Aave (AAVE -1.47%) can benefit from these favorable long-term trends.
1. Ethereum
Ethereum is the first blockchain network designed to create self-executing programs called decentralized applications (dApps). These dApps expand the potential of cryptocurrency outside of just storing and transmitting value. With a first-mover advantage and scalability upgrades on the horizon, Ethereum is still an excellent bet for investors.
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In a loosely regulated industry like cryptocurrency, trust is everything. And Ethereum's six-year history and $500 billion market cap (20% of the entire market) make it the crypto equivalent of a blue-chip company. This brand recognition helps it stay relevant, even as rivals like Solana (capable of handling 50,000 transactions per second, compared to Ethereum's 15) surpass it in scalability.
But Ethereum isn't resting on its laurels. Its blockchain aims to transition from its current proof-of-work (miners solve puzzles to verify transactions) to a proof-of-stake (PoS) system wherein transactions are verified using existing tokens. Ethereum founder Vitalik Buterin claims that the upgrades, dubbed Ethereum 2.0, could send the network's transaction capacity as high as 100,000 per second.
It is unclear when Ethereum 2.0 will go live, but the developers are making progress. In October, the network completed its Altair update, which is designed to help introduce a PoS system.
2. Aave
Unlike Ethereum, which is an independent blockchain, Aave is a dApp programmed on Ethereum. It offers crypto-related financial services without a centralized intermediary. And it looks poised for long-term success because of its utility for cryptocurrency investors.
Passive income is hard to find in this economy. According to the FDIC, the average annual percentage yield (APY) on savings accounts is just 0.06%. And many public companies prefer to reinvest their profits or repurchase shares instead of paying a meaningful dividend. This lack of generous yields creates an opportunity for Aave, allowing users to earn interest (undertaking exchange-rate risk) on their cryptocurrency holdings by lending them to other users through liquidity pools -- a "bank" of digital assets from which the borrowers can draw.
Aave's deposit yields can hit double digits for less-liquid assets. But popular stablecoins (cryptocurrencies pegged to fiat currency) like DAI and Gemini Dollar boast APYs of 2% to 3%. As an Ethereum-based dApp, Aave faces the same challenges as Ethereum with transaction capacity and fees. But investors should expect the platform to get a boost as the Ethereum 2.0 upgrades go live.
Investing for the long term
Cryptocurrencies are notoriously volatile. But Ethereum and Aave look likely to outperform over the long term because of their strong fundamentals. In addition, both assets have early-mover advantages and will benefit from the Ethereum 2.0 upgrades, making them top choices for investors will a long-term horizon.
