As the top cryptocurrency out there, Bitcoin (CRYPTO: BTC), unsurprisingly, receives a lot of the attention from the media and Wall Street. The global peer-to-peer internet currency, however, has lagged its smaller rival in recent years when it comes to financial returns.
Despite being down 22% this year (as of April 28), a $100 investment in Ethereum (ETH 0.41%) five years ago would be worth a whopping $4,000 today. Let's take a closer look at the world's second-most-valuable cryptocurrency, which carries a market cap of $358 billion as of this writing.
Ethereum's characteristics
What makes Ethereum unique is its programmable blockchain that allows for the development of smart contracts. While Bitcoin is simply a decentralized payments network, Ethereum can be viewed as the world's computing platform. This means that two unrelated parties can conduct a transaction in a range of different functions without the use of expensive middlemen.
Ethereum currently operates with a proof-of-work (PoW) consensus mechanism. Miners must use massive amounts of computational power in order to solve complex math puzzles to earn the right to validate new transactions on the blockchain. But the same issues that have plagued Bitcoin, namely around speed and scalability, have also hurt Ethereum. The network can only process 13 transactions per second (TPS). And the average cost per transaction is a little over $13.
For Ethereum to continue disrupting the status quo and for it to keep rising in value, slow transaction times and high costs just won't cut it. Luckily, a planned upgrade is in place (discussed below).
As the crypto industry hopes to make the transition from being viewed purely as a speculative arena to one of growing real-world use cases, Ethereum is sure to be at the forefront of this push thanks to its powerful first-mover advantage.
Image source: Getty Images.
Ethereum's future shows promise
Ethereum's smart-contract functionality has spawned the introduction of decentralized applications (dApps), such as decentralized finance (DeFi) protocols and non-fungible tokens (NFTs). As things stand today, Ethereum has 2,960 different dApps on its platform in a broad array of categories like gaming, social media, identity, and insurance.
It's not surprising that Ethereum has become a top choice for these crypto use cases. That's because it has a deep developer network, a key ingredient for the progress of any blockchain project. According to Electric Capital, an early-stage venture capital firm, Ethereum had more than 4,000 active developers working on it in the month of December 2021. That's far more than any other cryptocurrency out there, a situation that obviously bodes well for the future of Ethereum.
But as these dApps become more popular, Ethereum's network just doesn't have the capacity to handle higher demand. That's why the founding team is working on an upgrade called The Merge (formerly known as Ethereum 2.0). This update will transition the blockchain from PoW to a proof-of-stake system, which promises to be faster, cheaper, and more energy-efficient. The Merge should be complete sometime in 2023, barring any development setbacks and roadblocks, which are all too frequent in the crypto world.
Although Ethereum has clearly been one of the single best assets anyone could have owned in recent years, its outlook continues to be positive thanks to the potential for cryptocurrency use cases to gain in popularity over time. As a result, I think a small allocation (1% to 2%) to ETH in a well-diversified and long-term focused portfolio makes complete sense.
