Cryptocurrencies aren't great investments for conservative investors, since they're usually volatile, difficult to understand, and tough to properly value. Higher interest rates also tend to curb the market's appetite for cryptocurrencies and other risky investments. Therefore, it's not a great idea to park your life savings in the crypto market.
But if you have some cash you can afford to lose, it still might be smart to nibble on a few promising cryptocurrencies. One of the best tokens to buy right now is Ether (ETH 0.39%), which could turn a modest $500 investment into a few thousand dollars within the next few years.
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What sets Ether apart from other cryptocurrencies?
Ether is the native cryptocurrency of the Ethereum blockchain, which was launched in 2015. Ethereum originally used the same proof of work (PoW) consensus mechanism as Bitcoin (BTC 0.33%), which meant its tokens could be mined. But in 2022, Ethereum transitioned to the more energy-efficient proof of stake (PoS) consensus mechanism.
After that transition, Ether could no longer be mined -- it had to be "staked" to earn interest-like rewards. Ethereum also gained the ability to support smart contracts, which are used to develop decentralized apps (dApps), non-fungible tokens (NFTs), and other tokenized assets. Ethereum is now the largest developer platform for decentralized applications, and it has deployed over 3 million smart contracts and hosts thousands of dApps, NFTs, and other assets.
Every transaction that occurs on Ethereum costs a "gas fee," which is paid to the validators who process the transactions and execute the smart contracts. A percentage of each fee, which is paid in a tiny fraction of Ether called a "gwei," is then burned (removed from circulation).
That process makes Ether both an inflationary and deflationary token. When Ethereum's network activity increases, it becomes deflationary as more tokens are burned than issued. But when its network activity declines, it becomes inflationary as more tokens are issued than burned. That's why Ether, which has a circulating supply of 120.7 million tokens, is usually valued by the growth of its developer ecosystem instead of its fluctuating scarcity.
Why is Ether a promising long-term investment?
Ethereum faces some competition from Solana (SOL 2.33%) and Cardano (ADA -2.03%), which are both PoS blockchains that can process transactions faster than its Layer 1 (L1) blockchain. That might seem like a red flag for Ethereum's developer-oriented blockchain.
Yet, Ethereum is keeping pace with those faster challengers with its Layer 2 (L2) solutions, which bundle together multiple transactions and process them off-chain at higher speeds. After being processed, they're returned to Ethereum's L1 blockchain, which is often considered more secure than Solana or Cardano because it has the biggest pool of validators. Ethereum's usage of L2 solutions also relieves the network congestion on its L1 blockchain.
Solana is the fastest L1 PoS blockchain, but it has consistently struggled with congestion and security issues. Cardano's network also slows down during peak periods.
Ethereum's next three upgrades -- The Verge, The Purge, and The Splurge -- should widen its moat against Solana, Cardano, and other developer-driven PoS blockchains. The Verge will improve its scalability, The Purge will reduce its network congestion and gas fees, and The Splurge will provide more optimizations to ensure its blockchain runs as efficiently as possible. As those upgrades attract more developers and boost Ethereum's network activity, more Ether will be burned.
Lastly, the first spot price ETFs for Ether were approved last year, but they didn't include any of its staking features (which would have added a 3% to 4% annual yield). If the Securities and Exchange Commission (SEC) approves a new batch of Ether ETFs with staking rewards, they could draw in more investors as interest rates gradually decline.
How much could a $500 investment in Ether grow?
Ether currently trades just below $4,500 with a market cap of $542 billion, but it's still a lot less valuable than Bitcoin, which trades at nearly $120,000 with a market cap of $2.38 trillion. The near-term price targets for Ether are all over the map, but some analysts expect it to rise as high as $20,000 and boost its market cap to $2.4 trillion within the next year. Ark Invest's Cathie Wood previously claimed its price could reach $166,000 by 2032.
I'd take those bullish estimates with a grain of salt, but I believe lower interest rates, new staking ETF approvals, and its upcoming network upgrades could easily cause its price to double or triple within the next few years. So while its price might remain volatile, it has a clear path toward turning a $500 investment into at least a few thousand dollars. As always, crypto should only make up a small part of a larger, diversified portfolio.
