At its peak, Ethereum (ETH -3.11%) had a market cap of just under $550 billion. Today, Bitcoin (CRYPTO: BTC) and Ethereum combined have a market cap of less than $550 billion. There's no sugarcoating the fact that the crypto sell-off has been swift and brutal.
That Ethereum is down nearly 80% from its high is a compelling reason to consider buying it now. However, an even better investment thesis is the multidecade growth that Ethereum could achieve if it transitions from crypto industry–specific utility to real-world applications. Here's a simple explanation of why Ethereum could be a good buy now, and a better investment than Bitcoin for some investors.
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Digital energy
For now, Bitcoin and Ethereum both have proof of work consensus mechanisms that use computing power to mine tokens, verify and complete transactions, and support and power the network. The Ethereum native currency, the ETH token, is used to pay what are called "gas fees." Gas powers the network. ETH is used to verify transactions and is the currency for Ethereum. BTC, the Bitcoin native currency, functions similarly to the ETH token. However, Ethereum is transitioning from proof of work to proof of stake which should speed up transactions and lower costs (more on that later).
Although they function more or less the same, the practical use cases of Bitcoin and Ethereum have widened in recent years. Bitcoin is better suited as a store of value and a means of exchange. But Ethereum is what's really driving a lot of the growth and development in the crypto industry. You've probably heard Bitcoin referred to as digital gold. Ethereum is more like digital energy.
Ethereum's differentiating factors
The Bitcoin whitepaper was formed out of the collapse of the financial system in 2008 as a global means of exchange that could function independently and without interference from sovereign nations. The folks that launched Ethereum built upon where Bitcoin started by realizing that the blockchain -- a distributed public ledger -- can be used for so much more than just transactions and payments.
At the core of Ethereum's utility are smart contracts. A smart contract executes automatically based on a predetermined set of terms. Put another way, "if x happens, do y." Examples include insurance contracts, loans, real estate contracts, etc. But smart contracts can be used in virtually every industry. The biggest advantage of smart contracts is that they are fair, transparent, and instantaneous -- which saves administrative costs and speeds up the payment of claims.
Ethereum is also the currency for most non-fungible tokens (NFTs). The second largest is Solana.
The vast majority of today's decentralized finance (DeFi) protocols run on Ethereum. However, many of these protocols and decentralized applications (dApps) are still in beta phases or are mostly used to help other crypto projects perform better. Like the internet in the early days, crypto has so far failed to penetrate the lives of everyday consumers.
So while Bitcoin provides a better store of value, Ethereum is more like a hub around which most of the creativity and venture capital funding in the world of crypto turns. Ethereum is a much better investment for folks who believe decentralized blockchains will eventually have practical utility -- such as through smart contracts that automatically execute an insurance policy. On the flip side, Bitcoin is better suited for investors who believe blockchains are best used as a form of security against centralized institutions and as a path to ownership and control of one's wealth.
Some risks to consider
Unlike Bitcoin, which is virtually unopposed in terms of security and longevity, Ethereum is a higher-risk, higher-reward asset. Solana and Cardano are just a few of the many Layer 1 blockchains that are competing with Ethereum. Like Ethereum, these blockchains provide the groundwork upon which Layer 2 protocols can be built. You can think of Ethereum as a smartphone, Layer 2 protocols as applications on the smartphone, and the creation and execution of smart contracts as things those applications do.
To make itself more competitive, Ethereum has been planning an upgrade -- formerly known as Ethereum 2.0 -- that will transition Ethereum from the previously discussed proof of work consensus mechanism to proof of stake. It should make the network faster and more secure while also drastically reducing gas fees. However, the project keeps getting delayed. And if it goes wrong, it could pose a threat to the security of Ethereum.
What's more, a competing Layer 1 blockchain could one day surpass Ethereum and offer a better all-around package. There is only one internet. And many folks believe there can be only one Layer 1 blockchain in the end. So far, however, these blockchains have been able to coexist and grow. We could see multiple Layer 1 blockchains coexist and offer different advantages in terms of speed and security.
Reasons not to buy Ethereum
The Ethereum sell-off paired with the growing investment in DeFi provides an exciting investment opportunity. But if you don't believe in the practical use cases of Layer 1 blockchains or you just want to see the network become more sophisticated, it's perfectly understandable to hold off on buying Ethereum or maybe buy Bitcoin instead.
Ethereum has been around only since 2015 -- which feels like forever in the crypto space. But in reality, it's still in the early stages. The crypto sell-off provides a great stress test for the long-term stability of crypto and the exchanges that support it. If crypto can get through yet another prolonged bear market and then reenter a period of growth, it will go a long way toward building trust that crypto isn't just a passing fad.
