Ethereum (ETH -0.47%) didn't generate the knock-your-socks-off returns that some cryptocurrencies did this year. Other digital coins, especially Shiba Inu, absolutely exploded.
But make no mistake about it: Ethereum was still a big winner. If you bought $1,000 of the cryptocurrency in early 2021, here's how much you'd have now.
Crunching the numbers
Ethereum opened on Jan. 1, 2021 at a price of $737.31. An initial investment of $1,000 would have allowed you to purchase 1.356 ETH tokens.
The cryptocurrency took off right out of the gate in 2021. By the end of January, it was already up 88%. By mid-April, Ethereum had more than doubled.
Unsurprisingly, though, there was plenty of volatility. Ethereum lost nearly half its value within a few weeks in May. After rebounding, it fell roughly 20% again in September. Over the past several weeks, the cryptocurrency has pulled back by 16%.
However, investors who held onto their Ethereum stake during this volatility were richly rewarded. Those 1.356 tokens that $1,000 could have bought at the beginning of the year would now be worth more than $5,423. In less than 12 months, Ethereum has delivered a return of over 450%. That's close to the 459% gain the cryptocurrency achieved in 2020.
Some cracks in the armor
Ethereum's strong performance is especially impressive considering the challenges that it's faced. In August, it split into two chains in response to a bug that exposed the Ethereum network to attacks.
The blockchain is also slow compared to up-and-coming rivals. Ethereum currently can process between 15 and 45 transactions per second. Most concerning, though, are the high gas fees. Su Zhu, a prominent cryptocurrency investor, slammed Ethereum in November due to its high costs. He even stated that he had "abandoned" the cryptocurrency despite supporting it in the past.
These challenges have paved the way for so-called "Ethereum killers" to gain ground. For example, Solana (SOL -1.04%) now ranks as the fifth-largest cryptocurrency based on market cap after skyrocketing more than 117 times in 2021. Avalanche (AVAX -0.79%) is now the tenth-biggest cryptocurrency after soaring more than 39 times.
One big difference between Avalanche and Solana, compared to Ethereum, is that they use proof of stake (PoS). This mechanism is more energy-efficient, faster, and has lower transaction fees than the proof-of-work approach used by Ethereum.
Will an investment of $1,000 in Ethereum make investors a lot more money over the next 12 months? There's a pretty good chance that could happen.
Billionaire Mark Cuban, a vocal cryptocurrency supporter, thinks that Ethereum could be a monster winner in 2022. He expects important new apps to be built on the Ethereum blockchain. Cuban is personally promoting the idea of using the blockchain for monetizing carbon offsets.
Another important potential growth driver for Ethereum is the planned Ethereum 2.0 upgrade. The first phase of this upgrade -- implementation of the beacon chain, which introduces the proof-of-stake mechanism -- has already been completed. In 2022, the Ethereum mainnet will merge with the beacon chain to bring the benefits of PoS to the entire network. The final phase -- the introduction of shard chains that expand Ethereum's capacity and scalability -- is planned for 2023.
Ethereum might not deliver another 450% or more gain in the new year. There are plenty of variables that could cause the cryptocurrency to disappoint investors. However, even if Ethereum doesn't knock your socks off in 2022, it's less likely than some cryptocurrencies to result in you losing your shirt.