Ethereum (ETH -0.46%), the world's second-largest cryptocurrency, has had quite a nice year in 2021. The price of Ether, the token that fuels the network, has been up roughly 460%, with just a few days remaining in 2021. Furthermore, the network has grabbed the spotlight as the use of smart contracts and non-fungible tokens have shown how much real-world utility there is with Ethereum. Currently, Ethereum has a $486 billion market cap. Could it rise all the way to $1 trillion in 2022? Let's take a look.
The state of Ethereum
Ethereum heads into the new year with a lot of momentum. Known as the programmable blockchain, Ethereum has smart contract capabilities, which are self-executing contracts run on the blockchain and carried out when certain conditions are met. These contracts are currently powering non-fungible tokens (NFTs), which are digital files like art, audio, and video that are tokenized and stored on the blockchain, making them secure and essentially providing a digital certification of ownership. The smart contracts help create NFTs, designate the owner of the NFT, and allow them to be transferred when they are bought and sold. It's one of many ways that Ethereum has shown the world its practicality, not that there isn't debate over how much value NFTs will have in the future.
Ethereum is also in the midst of its big Ethereum 2.0 upgrade. Once complete, the upgrade will make the network more secure, more efficient by switching from the energy-intensive, proof-of-work mining concept to proof-of-stake mining. By easing congestion -- and hopefully gas fees -- it will enable many more transactions per second. The upgrade will also likely make Ethereum more deflationary because Ether tokens are now being burned during every transaction.
While I see plenty of catalysts abound, hitting a $1 trillion market cap could be a challenge for Ethereum. Bitcoin currently has a $967 billion market cap, so either the broader cryptocurrency market will have to rise, Ethereum would have to potentially overtake Bitcoin (BTC 0.68%), or close the gap significantly. It's always hard to predict what will happen with the broader cryptocurrency market. But over the past few months, higher inflation and the Federal Reserve's actions -- including the tapering of its bond purchases and indicating interest rate hikes next year -- has hit the crypto market in a similar way that it has hit growth stocks. If rate hikes do come to fruition, I don't see it being a good thing for the crypto market, given what's happened recently.
While there has been plenty of talk around a "flippening" in which Ethereum's market cap overtakes Bitcoin's, I am not sure I see that happening in 2022. Ethereum has held up well against Bitcoin when you consider the world's largest cryptocurrency only grew about 73% this year. But I still see the broader acceptance of cryptocurrencies being adopted through Bitcoin. More banks seem to be offering crypto services related to Bitcoin, the market seems to view it as a greater hedge against inflation than Ethereum, and El Salvador adopted Bitcoin as legal tender. I also see a few banks beginning to offer loans collateralized by Bitcoin. The token still seems to be the main entrant into the ecosystem, although if Bitcoin were to go on any kind of big run, I am sure Ethereum would move along with it.
Can Ethereum hit $1 trillion in 2022
You never say never in the crypto world, but I don't think Ethereum will hit $1 trillion next year. The macro conditions may make it difficult, and it would seem like a stretch for Ethereum to overtake Bitcoin in one year, not that it can't happen eventually. I am still quite bullish on Ethereum and think it could have a good year in store, but reaching $1 trillion in 2022 may be tough after such a strong year in 2021. Long term, I am sure that Ethereum will eventually reach the $1 trillion market cap and beyond.