As 2021 winds down, it's a good idea to start thinking about your investment strategy heading into the new year.
Cryptocurrency has had quite the year and proven it's not just a fad. As new cryptocurrencies enter the market and established players continue to grow, there's never been a better time to add a little crypto to your portfolio.
Choosing the right cryptocurrency, however, can be challenging. There are thousands of different cryptocurrencies to choose from, and while they all carry some degree of risk, some are stronger investments than others.
The option that's best for you will depend largely on your preferences and tolerance for risk, but there's one cryptocurrency I'm continuing to buy: Ethereum (ETH -1.90%).
Why right now is a smart time to buy Ethereum
Ethereum was first launched back in 2015, but this past year has been one of its strongest. Its price has increased by more than 534% since the beginning of the year, compared to Bitcoin's (BTC -1.99%) 94% increase over the same time period.
One of the best reasons to invest now is that Ethereum is currently transitioning to Ethereum 2.0, an upgraded version that will make it faster and more sustainable. Developers have already started rolling out the update, but Ethereum won't fully transition to Ethereum 2.0 until sometime next year.
Part of this upgrade involves moving from a proof of work (PoW) system to a proof of stake (PoS) system. A PoW system, like the protocol behind Bitcoin's network, involves high-powered computers solving complicated puzzles to verify crypto transactions. This process requires an immense amount of energy, and Bitcoin already uses more energy than some countries.
A PoS system involves users putting some of their own crypto holdings at stake to validate transactions. Not only does this require around 99.95% less energy than a PoW protocol, but it also results in significantly faster transaction times -- which will allow Ethereum to scale quickly.
Is Ethereum right for you?
Once Ethereum transitions to Ethereum 2.0, it will have some major advantages over Bitcoin. While it's impossible to say just how much the update will affect Ethereum's price or whether it will ever surpass Bitcoin as the most popular cryptocurrency, Ethereum could see a price surge next year after the upgrade is completed.
Before you invest, however, it's important to think about whether Ethereum or cryptocurrency, in general, is right for you.
Despite its many advantages, Ethereum (like all cryptocurrencies) is still highly speculative at this point. Ethereum 2.0 can make the technology faster and more energy-efficient, but that doesn't necessarily mean it will succeed over the long run. If cryptocurrency or decentralized applications don't catch on with the public, it will be tough for Ethereum to have any staying power.
For that reason, it's wise to make sure you're willing to take on some degree of risk before you buy. While Ethereum is one of the safer cryptocurrencies, it's still a fairly risky investment that isn't guaranteed to earn positive returns.
Finally, double-check that the rest of your portfolio is strong before you invest in crypto. This way, if your investment doesn't thrive, it won't sink your entire portfolio.
Ethereum has had one of the most successful years in its history, but the best may be yet to come. If you're willing to take on the risk that comes with investing in cryptocurrency, Ethereum may be a smart bet right now.