Forget about high-flying tech stocks. Ethereum (ETH -0.67%), the world's second-most-valuable cryptocurrency behind Bitcoin (BTC 0.06%), has skyrocketed by almost 30,000% over the past five years. This means that a $1,000 investment in Ethereum made on January 2017 would be worth about $300,000 today.
So, is it too late to buy? Would you just be chasing returns at this point? I don't think so. Even after the huge price gain, buying Ethereum in 2022 could still be a lucrative investment.
Here are three reasons why.
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Surging developer activity
Ethereum is a base layer programmable blockchain that enables the use of smart contracts, or self-executing software. In this, its blockchain differs from that of Bitcoin, which is simply a decentralized payments network that doesn't have much functionality.
It can be helpful to view Ethereum as a gigantic, worldwide computer that is open for all to see and tinker with. That openness has invited a ton of developer activity. According to a report from venture firm Electric Capital, Ethereum at this point has more than 4,000 monthly active developers working on it, significantly more than than in did in 2020. This is a huge advantage when it comes to propelling the technology forward.
The fact that some of the sector's best and brightest are working on Ethereum projects is a bullish argument for the Ether token's value. That activity generates a network effect, where attracting more developers leads to more innovation and better projects, which leads to greater utility and, ultimately, a higher Ethereum market cap.
The growth of decentralized applications
The aforementioned developers are building extremely interesting decentralized applications (dApps) on top of the Ethereum blockchain. There are 2,900 dApps now operating on the network, with use cases ranging from gaming and social media to finance and security.
Decentralized finance applications like Aave and Compound allow users to lend and borrow crypto without the need for intermediaries. Another trend is the burgeoning popularity of non-fungible tokens (NFTs), blockchain-based certificates that represent ownership of a digital or real-world asset. OpenSea is the leading peer-to-peer marketplace for NFTs.
As users find utility in these dApps, Ethereum benefits. Since Ether (Ethereum's native token) is often converted to a particular application's coin, demand for it should rise over time as the number of projects created on Ethereum continues to grow. Therefore, the entire network should become more valuable. And as I alluded to earlier, this network effect will attract greater numbers of developers in a virtuous cycle.
A near-term catalyst
Ethereum's current consensus mechanism -- the way that it processes and validates transactions -- is something called proof-of-work. Heavy computing power is needed to solve complex math problems in order to gain the right to add a transaction to the blockchain. By supplying it, crypto miners earn new tokens. This is how Bitcoin works as well.
The problem with that process is that it is slow and energy-intensive. And for all of Ethereum's positive traits, the blockchain can only process about 15 transactions per second today. This is a major hindrance to expanding the network, and it results in high costs for users. How is Ethereum supposed to gain widespread adoption if it can't fix this issue and boost its throughput?
Well, there's a solution for this, an upgrade called ETH2. The second phase of this, set to release this year, will allow for a proof-of-stake consensus mechanism -- in which participating token owners validate transactions -- for the entire network. And in 2023, shard chains will be introduced with the ability to process upward of 100,000 transactions per second. Of course, these updates could be delayed, but it's a good sign that they're in the pipeline.
Investing in cryptocurrencies is not without its risks. But Ethereum, with its huge developer network, innovative dApps library, and pending conversion to a proof-of-stake mechanism, is one of the more promising blockchains people can invest in today. This cryptocurrency may have surged in value in the past few years, but it still looks like a solid buy in 2022.
