Ethereum (ETH 2.68%), the second-largest cryptocurrency by market value, has been on a monstrous run and is up about 453% this year. Furthermore, Ethereum, which is fueled by Ether tokens, has really begun to show that it can be used in many other ways aside from just as a currency. After such a big run, however, let's take another look at the bull and bear cases for Ethereum.
Bull: Real-world utility and a big upgrade coming
Bram Berkowitz: Ethereum showed how much real-world utility it has this year with the widespread release of non-fungible tokens (NFTs), which are essentially digital ownership certificates for things like artwork, pictures, audio, and video files that are stored and secured on a distributed ledger, and typically associated with some kind of scarcity. Who knows, in 50 years, people may be more likely to show off their digital artwork in the metaverse than hang it on the actual walls of their homes. Ethereum's technology also is being used in many other industries such as finance, gaming, and advertising.
I am also excited about Ethereum 2.0, the sweeping upgrades Ethereum developers have been working on for the blockchain network. Many cryptocurrencies have come under fire this year because the amount of electricity required for proof-of-work -- in which new tokens are mined using thousands of high-powered computers -- is seen as bad for the environment. But once the upgrade is complete, Ethereum will move to a so-called proof-of-stake mining process that uses much less power, in which existing owners "stake" their tokens to validate transactions and create new tokens. The network upgrade will also allow Ethereum to operate much faster. Ethereum's blockchain now can only process 15 to 45 transactions per second, but after the upgrade, it will have the potential to process as many as 100,000 per second.
Ethereum 2.0 has also led the network to burn Ether tokens, which has started to rein in the unlimited supply of the cryptocurrency. In the last three to four months, more than 1 million Ether have been burned, meaning they've been taken out of circulation. Now, the goal of this is to actually try to lower the high transaction fees on the network, which hasn't totally worked yet. But if the upgrade curbs the supply of tokens, that's probably going to be a good thing for investors.
Bear: There are more risks than you think
Rick Munarriz: I'm generally bullish when it comes to Ethereum, but it doesn't mean that I don't see the many risks that come along with owning a piece of the world's second-most valuable cryptocurrency. Right now it's easy to see the allure of Ethereum. It's the crypto that put smart contracts -- agreements that self-executive when certain conditions are met -- on the map. Stumble onto an NFT trading platform or other blockchain app and there's a good chance that it's fueled by Ethereum at the other end.
The problem here is that Ethereum -- and its investors -- may be overestimating where they stand in the crypto food chain. Ethereum fans keep looking forward to the "flippening," that moment when Ethereum overtakes Bitcoin (BTC 1.92%) in market cap. The problem is that instead of Ethereum being a disruptor to Bitcoin we could be seeing other digital currencies crashing Ethereum's party. With eyes on the market-cap prize, Ethereum investors seem to be ignoring a lot of smaller cryptocurrencies that have zoomed past Ethereum in terms of the number of transactions that can be completed and at lower transaction costs. The bullish counter here is that Ethereum will strike back when it completes its 2.0 transformation to proof of stake in the coming months, but one word can silence the room: Taproot.
Taproot is the first major upgrade to Bitcoin in four years, and when it was rolled out last month it finally got the world's largest crypto player into contention in the smart-contracts market. Bitcoin? Smart contracts? Is the flippening about to become the floppening? More importantly, Bitcoin didn't rally on the Taproot news, just as Ethereum isn't likely to take off once its makeover is complete. We've seen "sell on the news" happen way too often on the crypto landscape, with the market discounting future upgrades. Oh, and that's when Ethereum actually gets there. There's still no firm date for when Ethereum will be ready to take things to the next level. There are also no guarantees that there won't be bugs or other hiccups along the way, possibly delaying or even derailing the next critical evolutionary step. Ethereum is naturally one of the most promising cryptocurrency denominations to own, but the risks are likely a lot bigger than the cheerleaders think.
Like most in the crypto world, we are generally pretty bullish on Ethereum, its real-world use cases, and the transformative nature of Ethereum 2.0. But that doesn't make the cryptocurrency a guarantee to overtake Bitcoin or mean that it has no risks. The potential for Ethereum is sky high, but make sure you are evaluating downside scenarios, as you should with any investment you're considering.