For better or for worse, the 2021 chapter in all our investing journeys has come to a close. Looking ahead, many investors may feel uneasy about buying or even just holding high-priced stocks considering that the S&P 500 is hovering around an all-time high after nearly doubling in three years.
Ethereum (CRYPTO:ETH) increased by over fourfold in 2021. But price alone isn’t the only measure of value. Zooming out, there are plenty of reasons to suggest Ethereum is still a bargain for long-term investors. Here are a few reasons why.
The bedrock of decentralized finance
If 2021 taught us anything, it’s that investing in proven industry-leading companies is a great way to compound wealth and beat the market year after year. Just look at the charts of powerhouse stocks like Apple (NASDAQ:AAPL) and Microsoft.
Crypto has gone more mainstream, but it’s still an incredibly young industry with few practical applications. Rather, most existing projects are valued for their potential to disrupt the financial industry, whether that’s through smart contracts, a public ledger (blockchain) that avoids the need for third-party middlemen (banks), or a whole new way to safeguard and transfer wealth.
Ethereum is an infrastructure play on the growth of decentralized finance (DeFi), non-fungible tokens (NFTs), initial coin offerings (ICOs), and more. As the base layer on which many Layer 2 projects are built (think Polygon and Chainlink to name a few), Ethereum isn’t necessarily contributing a lot of the innovation itself. But without it, a lot of blockchain innovation doesn’t happen.
In this way, Ethereum is like an iPhone, while DeFi projects (dApps) are like applications on a smartphone. Apple isn’t the most valuable U.S. company because it created more use cases for its computers and phones. It’s valuable because it continued to make its hardware faster and stronger while other companies exponentially improved the necessary role phones and computers play in our everyday lives.
A highly anticipated upgrade
Ethereum’s goal is to maintain a safe, secure, and fast network that remains the backbone as DeFi grows. The issue is that Ethereum’s transaction fees have increased, and its speed has slowed as traffic on its network has surged in recent years. Ethereum’s solution is to pivot from a proof-of-work consensus mechanism to a proof-of-stake mechanism that reduces energy costs, improves speed, and also makes Ethereum more user-friendly and scalable.
Expected to happen sometime this year, Ethereum 2.0 sounds great in theory. But the reality is that no one really knows how well the upgrade will go until it’s said and done. If it does go well, the sky really could be the limit for Ethereum. Validators, not miners, will make the network more decentralized and safer than ever. Sharding, which is basically spinning off multiple blockchains from one blockchain, allows for better load management as Ethereum scales over time.
Ethereum 2.0 would create the potential for Ethereum to perform much of the utility that other Layer 2 solutions currently provide. Put another way, Ethereum would gain an even larger slice of the activity on its blockchain, and that could make it even more valuable as it hosts more projects.
Room for competition
You may have heard other Layer 1 proof-of-stake cryptos like Solana (CRYPTO:SOL) referred to as potential “Ethereum killers” because they perform similar functions to Ethereum at lower cost and faster speeds.
Solana has risen to become one of the largest cryptos by volume as well as by market cap because its network is so cheap and fast. Yet that’s because Solana is more centralized than Ethereum and Bitcoin, so it sacrifices some security in favor of usability. As DeFi grows, there is plenty of room for Solana, Ethereum, and other Layer 1 blockchains to coexist. For now, Solana is great for building applications or providing quick and simple services. But large projects that depend on ironclad security would still probably favor an Ethereum-based backbone even though it’s currently slower and more expensive.
A balanced way to invest in crypto
Ethereum’s upgrade is exciting and a little scary. But these feelings are par for the course in the crypto world. Some investors may prefer to simply wait on the sidelines to make sure Ethereum 2.0 is everything we hope it will be. Others may want to dollar-cost average into Ethereum, trusting that it will iron out its kinks and grow over the long term.
No matter your personal preference, Ethereum stands out as the best risk/reward cryptocurrency out there for its potential to disrupt the global economy in 2022 and beyond.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.