Seasoned crypto investors have come to expect volatility. It's the price of admission for participating in this emerging industry. That being said, it never feels good to lose money, and many popular cryptocurrencies have taken a beating recently. In fact, the crypto market as a whole has fallen 30% from its high in November 2021.
This is hardly the first time the market has crashed, and I doubt it will be the last. But every past downturn has been a buying opportunity. Ethereum (ETH -0.71%) remains the second most valuable cryptocurrency, but it currently trades 30% below its all-time high. Is now a good time to buy?
Here's what you should know.
The most popular programmable blockchain
Ethereum is a programmable blockchain powered by the Ether token. Unlike the Bitcoin blockchain, which serves only as a ledger for electronic transactions, Ethereum also supports smart contracts (i.e., computer programs). That technology is the key to decentralized applications (dApps), software that exists on a peer-to-peer network rather than on the centralized servers of a corporate entity.
Like other software, dApps can be anything from social media and file storage solutions to decentralized finance (DeFi) products. More importantly, because dApps exist beyond the control of any single authority, they prevent censorship and protect user privacy. Additionally, DeFi products -- dApps that allow users to borrow, save, and earn interest without banks or other institutions -- make financial services more accessible and more efficient.
In 2015, Ethereum made its debut as the first programmable blockchain, and it has since parlayed that edge into a more substantial advantage. Today, the platform boasts over 2,900 dApps and $151 billion invested in DeFi products. Put another way, Ethereum accounts for 75% of all dApps and 62% of all DeFi investments, making it the most popular programmable blockchain by a wide margin.
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A solution for the scalability problem
Unfortunately, that popularity has created a problem. As more users have transacted on the platform, network congestion has caused speeds to slow and fees to rise. Transaction fees have jumped 750% over the last six months. That problem points to a lack of scalability.
For context, Visa regularly processes 1,700 transactions per second (TPS), and its payments platform is theoretically capable of 24,000 TPS. By comparison, Ethereum can manage just 30 TPS. If left unchecked, that low throughput will continue to push fees higher, and eventually, Ethereum will fall out of favor due to its exorbitant fees.
Fortunately, the Ethereum 2.0 upgrade aims to solve that problem. First, it will change the energy-intensive proof-of-work consensus mechanism to the eco-friendly proof of stake (PoS) architecture. The PoS system selects validators to verify transactions based on their stake in the network, rather than pitting miners against each other based on computing power. This phase should take place in 2022.
Second, the upgrade process will add 64 shard chains to Ethereum. Think of these shard chains as additional blockchains connected to the core chain, distributing the network load more efficiently. And with a few additional tweaks, those shard chains could raise throughput to 100,000 TPS, thereby solving the scalability problem. This phase should arrive in 2023.
The investment thesis
While dApps and DeFi products are more efficient, they aren't free. Users pay transaction fees to access the products, and those fees are paid in the native cryptocurrency. In the context of Ethereum, that means Ether tokens. In other words, as dApp and DeFi products on the Ethereum blockchain become more popular -- an event that seems likely, in light of the benefits -- demand for Ether should rise, pushing its price higher.
Additionally, a recent study from Nickel Digital Asset Management suggests that institutional investors are increasingly interested in the crypto space. The study predicts that 82% of institutional investors plan to increase exposure to digital assets by 2023. Given Ethereum's popularity, I think it's safe to assume those big money movers will add to the demand for Ether.
For these reasons, now looks like a good time to buy this cryptocurrency.
