Despite its gut-wrenching volatility, ongoing regulatory uncertainty, and questionable utility, the cryptocurrency market doesn't seem to be going away anytime soon. Investors will continue to try to find winners among the wild asset class.
Ethereum (ETH -1.08%) might make for a smart choice. This blockchain network has seen its price soar historically. If you were smart enough to invest $1,000 in Ethereum five years ago in early 2019, you'd be sitting on a balance of $21,500 today. That translates to a ridiculously large gain of over 2,000%, which crushes the broader Nasdaq Composite index.
Let's take a closer look at Ethereum's past, while trying to figure out what investors can expect going forward.
The second cryptocurrency
Bitcoin was launched on the heels of the great financial crisis of 2008 and 2009 as the world's first cryptocurrency. With this invention, people anywhere in the world could send value to someone else without the use of an intermediary. It was truly revolutionary.
But Ethereum wanted to be much more than this. It was the second cryptocurrency, launching in 2015. The difference compared to Bitcoin was that Ethereum allowed for the creation of smart contracts. These are software programs that automatically run when the parties of a transaction fulfill their requirements. Think of an escrow payment being released to a seller only after a buyer receives property, for example. This innovative feature put Ethereum on the map.
Nowadays, there are many other cryptocurrencies that enable smart contract functionality. But Ethereum is still the leader. According to Electric Capital, a venture investment fund, there were 2,400 active monthly full-time developers working on advancing Ethereum's network, far more than any other crypto asset. This bodes well for Ethereum's ability to continue introducing new features that could boost adoption over the long term.
Nonetheless, Ethereum has already become the most popular cryptocurrency when it comes to decentralized applications (dApps). There are 3,000 different dApps operating on Ethereum. Ethereum's ultimate success will depend on its ability to drive greater use cases, something that it is well positioned to do compared to other cryptocurrencies out there.
What the future might hold
Like Bitcoin, Ethereum originally operated with the proof-of-work consensus mechanism. This meant that so-called miners had to expend computational resources and energy in order to approve transactions and validate the blockchain. But because critics believe this is a waste of electricity, Ethereum made the long-anticipated transition to a proof-of-stake model in late 2022 with the completion of The Merge. This system leaves the approval of transactions to Ethereum owners who have locked up their holdings. It's meant to be significantly more energy efficient.
The Merge was viewed as a major breakthrough for Ethereum, not only due to its lower energy needs, but because it sets up the cryptocurrency to scale better in the future. The issue with Ethereum is that it can still only process 13 transactions per second, which doesn't even hold a candle to the 65,000 that a massive payments network like Visa can handle. If Ethereum wants to gain greater adoption across the world, it needs to scale better. And The Merge is one step in that process because it can help to reduce transaction fees while speeding up processing times.
Ethereum's developers have numerous other technical updates in the pipeline. While this does add a lot of implementation risk, as many things can go wrong that weren't anticipated, it is encouraging for supporters to see the blockchain constantly trying to improve itself.
Ethereum currently sits 52% below its all-time high. Bullish investors who have been on the sidelines might want to take a closer look at this cryptocurrency. It's best to start with a tiny position and potentially add more as your knowledge and conviction grow.
