For the year, Ethereum (ETH 0.38%) is up 45%. While that recent performance is impressive, there are still plenty of skeptics out there. After all, a a recent price of about $1,730, Ethereum is 64% below its all-time high of $4,892 from two years ago, and hasn't had the type of monster rally many investors were expecting when it completed The Merge, a system upgrade, last September.
In fact, Ethereum is trading at almost exactly the same price it was one year ago. And it has had unexpected difficulty breaking through the $2,000 price level. So is Ethereum undervalued or not? To answer that question, there are three important factors to consider.
Innovation leader
Ethereum recently celebrated its eighth birthday, and it's fascinating to look back and see how far Ethereum has come in such a relatively short time. Ethereum has become the de facto benchmark standard that all other Layer-1 blockchains measure themselves against. There have been a large number of blockchains that have attempted to become "the next Ethereum" and failed -- and that list includes Cardano, Avalanche, and Solana.
Image source: Getty Images.
By investing in Ethereum, you are investing in the innovation leader with a clear competitive advantage. Ethereum pioneered the concept of smart contracts for the blockchain and has consistently been first to market with new innovations. That includes the launch of non-fungible tokens (NFTs), new decentralized finance exchanges, and new gaming and metaverse experiences. Given Ethereum's track record of innovation, I'm confident that there's plenty of upside potential ahead.
Diversification benefits
All of that innovation happening on the Ethereum blockchain means that the size and scope of the Ethereum ecosystem continues to grow. Ethereum still has the largest community of blockchain developers in the world, and the number of use cases for Ethereum continues to grow. For example, Wall Street firms are experimenting with Ethereum as a new form of payment network, while manufacturing companies are experimenting with Ethereum's blockchain technology to improve their supply chains.
From my perspective, Ethereum is simply the most diversified crypto that you can own in your portfolio. You're not investing in a one-trick pony, and that is really the key to Ethereum's allure for both retail and institutional investors. That's an important consideration during volatile and uncertain market conditions, when diversification is the key to riding out the tough times.
Roadmap for success
One other key consideration is that Ethereum has a roadmap for success, so you can see exactly where Ethereum has been, and where it's headed. After The Merge, Ethereum co-founder Vitalik Buterin unveiled an updated roadmap that includes five new distinct stages, known as the Surge, Scourge, Verge, Purge, and Splurge. Even if each of those stages only lasts six months, that's still a three-year strategic vision. If you're a buy-and-hold investor, that's exactly what you want to see: a long-term plan for success.
CRYPTO: ETH
Key Data Points
When you dig into the specific milestones on Ethereum's roadmap, that's when things get really interesting. For example, the current phase of development ("The Surge") has a goal of boosting Ethereum's transaction processing abilities to 100,000 transactions per second. That's blazingly fast speed, even faster than the theoretical maximum speed of the Visa card payment network (65,000 transactions per second). Eventually, says Buterin, the goal is to hit 1 million transactions per second.
What could possibly go wrong?
Investing in crypto can be risky and speculative, and it's no different with Ethereum. So, yes, there's actually quite a bit that could go wrong for Ethereum. The Securities and Exchange Commission, for example, might decide that Ethereum is actually a security, thereby sending it to crypto purgatory and upending future plans for development. There's also a risk that an upstart "Ethereum killer" might truly emerge, dooming Ethereum to the dustbin of history.
But, as noted above, Ethereum has a strong track record of innovation, growth, and diversification. At recent prices it seems remarkably undervalued. Just two years ago, Ethereum was trading for nearly $5,000. So I'm very confident buying Ethereum now, while it still seems to be trading at a discount. Over the long haul, Ethereum's upside potential is just too high to ignore.
