Why Ethereum Is Surging -- and Could Surpass Bitcoin

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Everybody's talking about Ethereum. Here's why.

Ethereum has already surged about 330% this year. On Jan. 1, Ethereum was worth about $735, and as of this writing, it is worth roughly $3,130, according to data from CoinMarketCap.

It hit a high of over $4,300 on May 12 but has fallen in recent days. Indeed, we've seen cryptocurrency price drops across the board this week. This was driven by Tesla CEO Elon Musk's announcement that Tesla would stop taking Bitcoin payments because of environmental concerns. In addition, banks in India are cracking down on crypto, and the IRS is investigating well-known international cryptocurrency exchange, Binance.

Ethereum hasn't come through the drop unscathed, although it's still up 30% month on month.

What is Ethereum and why is it surging?

Ethereum is the second biggest cryptocurrency by market capitalization. Unlike big brother Bitcoin, Ethereum is a programmable digital currency. It's faster and more flexible than Bitcoin

Here are some of the reasons Ethereum is surging:

  • It runs smart contracts: These self-executing contracts are why investors like Mark Cuban love Ethereum. It's a coded contract that can execute itself automatically when certain conditions are met. Imagine an insurance policy that paid out without you needing to even make a claim. That's just one potential use of this code. Smart contracts also drive non-fungible tokens (NFTs). Sales of NFTs -- digital collectibles -- have soared this year, as they give digital artists and other creators a way to profit from their artwork. The smart contracts in NFTs contain copyright and royalty information.
  • It's a DeFi platform: Ethereum is a programmable blockchain, so other currencies and applications can be built on its network. Decentralized Finance (DeFi) is another blockchain application that's taken off this year. It means you no longer need a bank account to borrow, lend, or earn interest on your money. According to State of the DApps, a directory of decentralized applications, about 80% of the available apps are currently on the Ethereum network.
  • Eth 2 is on the way: Eth 2 is a long-awaited upgrade to Ethereum that's being rolled out in phases. It promises to make Ethereum more secure, more scalable, and more environmentally friendly. The hope is that the move to a more sustainable model of mining will happen this year.

Could Ethereum surpass Bitcoin?

That's a good question. After Bitcoin's extraordinary growth story, everybody's looking for the next Bitcoin, and Ethereum is a solid candidate. Ethereum is only six years old -- Bitcoin is now 12.

It's not entirely fair to look at Bitcoin's price when it was at the same stage because the market has changed so much since then. Plus, when Bitcoin soars, so does the rest of the market -- including Ethereum. But back in 2015 when Bitcoin was also six years old, it was worth around $250. Ethereum is currently priced at over $3,000.

However, in recent weeks, Bitcoin has been falling while Ethereum has reached new highs. That's because the market is starting to recognize that Bitcoin and Ethereum do very different things.

  • First mover Bitcoin is a decentralized digital currency that people are starting to see as a form of digital gold. It is extremely secure, but it can't do much more than it already does. Plus, there are concerns about Bitcoin's carbon footprint -- mining the coin currently uses as much energy as a large country like Egypt.
  • In contrast, Ethereum still has room to grow. We're only just beginning to see the business applications of smart contracts and DeFi. Eth 2 will help the platform to meet increasing demand and move to a more sustainable mining model.

The bigger question is what will happen to the cryptocurrency industry as a whole. These are highly volatile and unpredictable investments. For every expert that predicts the price of Ethereum or Bitcoin will continue to rise, there's another who says this is a bubble that could collapse completely.

That's why it's advisable to only invest money you can afford to lose and to invest for the long term. If you buy Ethereum today and the market drops, you want to be able to hold until the price rises again. If you've tied up money you need to pay your rent or cover an unexpected emergency you might be forced to sell at a loss.

Ethereum may not be the next Bitcoin, but it may be a strong choice in its own right -- it all depends on your personal investment goals and risk tolerance. Just remember, a lot could happen, especially if Eth 2 doesn't deliver as expected or the U.S. brings in strict cryptocurrency regulation.

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