For well over a century, the stock market has been a money machine. Though it might not outpace bonds or gold every year, the average annual return of the broader market is substantially higher than bonds and all other commodities over the very long term.
But over the past couple of years, cryptocurrencies have lapped the stock market many times over. In just the past 23 months, since hitting its pandemic low, the aggregate value of the crypto market has catapulted higher by more than 1,100%. By comparison, the benchmark S&P 500 has roughly doubled in value over the same stretch.
Although Bitcoin (BTC -1.92%) gets most of the glory, as the largest digital currency by market value, it's Ethereum (ETH -1.71%) that's delivered the truly jaw-dropping returns of late.
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If you invested $100 in Ethereum on Day One, you're now rich
When comparing the two largest cryptocurrencies by market cap, Ethereum has the advantage over Bitcoin during most time frames. Over the trailing one-year, three-year, and five-year stretch (as of Feb. 10), Ethereum has respectively edged out Bitcoin 64% to (11%), 2,350% to 1,060%, and 25,540% to 4,110%.
But these gains are still a drop in the bucket compared to how well Ethereum has performed since its debut.
On Aug. 31, 2014, Ether, the protocol token of the Ethereum network, was introduced to the world via an initial coin offering (ICO). A total of 50 million Ether were sold on Day One at a price of $0.31 per token, which raised in the neighborhood of $16 million. Yet, as of late evening on Feb. 11, these same tokens were exchanging hands at $2,955 on major cryptocurrency exchanges. That's an increase of more than 953,000% in about 7.5 years.
To put this into some perspective, if you had bought $100 worth of Ether on its first day and held those tokens through its numerous ups and downs, you'd be sitting on $953,319, as of Feb. 11, 2022. In fact, as recently as 12 hours prior to this writing, you'd have been a millionaire. Considering that the S&P 500 has delivered a total return, including dividends, of "only" 28,567% since the beginning of 1965, Ethereum's 7.5-year return is truly jaw-dropping.
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Here's why Ethereum has gained over 953,000% since its ICO
If you're wondering what Ethereum has done to deserve these mammoth gains and a whopping $353 billion market value, look no further than the following three factors.
To begin with, Ethereum has run with its first-mover advantage. It was the first blockchain-based network to introduce smart contracts -- the protocol that help to verify, facilitate, and enforce the negotiation of a contract between two parties. Smart contracts are what allowed blockchain to move beyond just financial applications. They're also the foundation from which decentralized finance and decentralized applications (dApps) are being developed.
Second, the data has shown that real dollars and real traffic are flowing into the Ethereum network. For instance, whereas Bitcoin has averaged around 300,000 transactions daily on its blockchain for years, Ethereum's average daily transactions have increased from 200,000 in the summer of 2017 to around 1.2 million as of today. This is tangible evidence of growing activity on its network.
To add, no other project comes remotely close to the protocol revenue on the Ethereum network. According data from TokenTerminal.com, Ethereum collected nearly $6.5 billion in protocol dApp revenue over the trailing 180 days. Blockchain-based gaming coin Axie Infinity is the next-closest with $869 million in dApp protocol revenue.
The third factor lifting Ethereum to the No. 2 market valuation in the cryptocurrency space is partnerships. The Enterprise Ethereum Alliance, which seeks to promote the use of Ethereum's blockchain in real-world settings, has more than 100 members from a wide swath of industries and sectors.
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Ethereum is trusted, but it's set to face a mountain of competition
Long story short, there are tangible reasons for the excitement surrounding Ethereum and its future potential in both financial and nonfinancial applications.
But even now, success isn't a given.
For example, Ethereum's popularity has turned into a bit of a curse for users. Though upgrades designed to improve the operating efficiency of its network have been in the works for years, the existing network is relatively slow and costly. Ethereum is only capable of handling 14 transaction per second (TPS), and it takes an average of six minutes to finalize a transaction. To boot, Ethereum's average transaction fee has been off-the-charts high ($20 to $60 per transaction) since last summer.
Comparatively speaking, there are a number of smart contract-based blockchain projects that have the potential to do what Ethereum is doing far more efficiently. For instance, Avalanche (AVAX -4.67%) operates a network capable of more than 4,500 TPS, with transactions that complete in an average of less than two seconds. The cost per transaction has also consistently undercut Ethereum.
What makes Avalanche such a threat is that the Ethereum Virtual Machine (EVM) is already running on its blockchain. The EVM is the software that developers use to create dApps on the Ethereum blockchain. Avalanche is effectively hanging a digital carrot on a wire and offering developers a faster, cheaper, and more scalable experience using the software they're likely already most comfortable with.
Another threat to Ethereum is Cardano (ADA -2.06%). Cardano's network was already faster and less costly than Ethereum when tested over four years ago. Last year, the Goguen update introduced smart contracts, which now allow Cardano users to undertake more complex transactions.
While there are plenty of additional upgrades on the way, most eyes are on the eventual Hydra upgrade. Though no timeline has been offered, the Hydra upgrade will move transactions off the main chain to staking pools known as Hydra Nodes. In theory, each of these nodes could handle up to 1,000 transactions and send Cardano's TPS well beyond what even today's payment processors like Visa can handle.
The point being that even though Ethereum has been an incredible investment, thus far, the project still has a lot to prove.
