Whether you're investing in stocks or digital assets, the up-and-down nature of markets can be difficult to stomach. With cryptocurrencies like Bitcoin or Ethereum (ETH -2.54%), the roller-coaster ride is something investors must get comfortable with if they plan on holding for a long time. This is especially the case with a nascent and unproven asset class.
I first purchased Ether on May 19, 2021, and my loss on that position (as of Aug. 29) is 58%. That's definitely not a return to brag about. In fact, it's the sort of result that could lead some people to completely give up on crypto and sell all their tokens.
But I plan on continuing to own this top crypto. Here's why.
A world of decentralized applications
Whereas Bitcoin was created solely to be a digital and peer-to-peer cash system, Ethereum's objective is to become the world's decentralized computing platform. The blockchain introduced smart-contract functionality when it was launched in 2015. And since then, Ethereum has produced a monster return of almost 48,000%.
Smart contracts are software programs that self-execute when certain conditions between two unrelated parties are met. They allow for the development of decentralized applications (dApps) for a variety of use cases to be built on top of the Ethereum network. Two of the most popular dApp categories are marketplaces for non-fungible tokens and decentralized finance protocols. Because Ethereum currently has nearly 3,000 dApps on its platform, any time demand for these services rises, so too does demand for ETH, the blockchain's native cryptocurrency. This should support a higher token price over time.
The issue, however, is that because Ethereum operates via a proof-of-work consensus mechanism like Bitcoin -- which uses massive amounts of electricity and computational power to solve complex math puzzles and earn the right to validate new transactions on the blockchain -- when demand is high, transaction fees are pushed up. Ethereum can only process about 12 transactions per second right now, so these slow processing times are a huge bottleneck.
But an upgrade, called "the Merge," is on the way that will help fix this problem. This will transition Ethereum to a proof-of-stake system in which token owners can choose to lock up their holdings to help secure the network and validate transactions, all while earning rewards in the form of new tokens. The Merge is set to be implemented in mid-September. It should help Ethereum scale and handle greater demand.
Plus, there are additional updates in the works. Following the Merge, Ethereum plans to undergo the Surge, Verge, Purge, and Splurge, according to co-founder Vitalik Buterin. All of these will help with Ethereum's scaling, cleanup, and evolution, and are viewed as necessary phases en route to it becoming a blockchain built for increasing levels of utility.
Given its first-mover advantage in terms of smart-contract blockchains, the amount of attention Ethereum gets in the crypto market is unsurprising. According to venture capital firm Electric Capital, Ethereum has the most monthly active developers working on it -- more than 4,000 as of the end of 2021. All of those smart and talented engineers and computer scientists using Ethereum as a foundation upon which to build the next wave of dApps and other services will only help support its adoption by more people.
The potential for Ethereum to disrupt the current structure of various industries by putting power in the hands of creators and users, while ushering in web3, is significant. And because I adopt an extremely long-term time horizon with my investments, I don't plan on selling my ETH holdings anytime soon.
