The cryptocurrency market is on fire. After plunging approximately 50% earlier this year, the collective value of all cryptocurrencies has since skyrocketed to new highs, reaching $2.7 trillion in November. Understandably, many investors are clamoring to get a piece of that action. But with thousands of different crypto assets to choose from, it can be difficult to get started.
With that in mind, Ethereum (CRYPTO:ETH) looks like a good place to start your research. Here are three reasons this cryptocurrency could make you richer over the long term.
Image source: Getty Images.
1. Ethereum is popular
Ethereum’s market value currently sits at $541 billion, making it the second most valuable cryptocurrency. Only Bitcoin is worth more. And that popularity is a significant advantage. If you don’t believe me, consider the pricing power that brands like Apple or Nike possess.
Of course, Ethereum is not a cash-producing business with pricing power, but the underlying principle is the same. Brand recognition often goes hand in hand with demand, and Ethereum’s tremendous market value clearly implies strong demand. More importantly, its support for smart contracts could boost that demand over time.
2. Ethereum is programmable
Unlike Bitcoin, Ethereum is a programmable blockchain. That means custom code (i.e., smart contracts) can be added to the network and enforced without regulatory oversight. That sounds complicated, but smart contracts are just self-executing computer programs. The important part is this: By automating enforcement, those programs have the potential to cut costs in industries like finance and real estate.
For instance, smart contracts power decentralized finance (DeFi) services, products that allow people to borrow, lend, or earn interest on cryptocurrency. And in all cases, the conditions of those contracts are defined by computer code, and when transactions occur, that code automatically executes, eliminating the need for intermediaries like banks.
Similarly, smart contracts also power other decentralized applications (dApps), such as social media platforms, web browsers, video games, and more. But all of those use cases have one thing in common: They require computing power. Computing power isn’t free, though. So users pay a transaction fee to access DeFi services and dApps. In other words, they need to buy the cryptocurrency to use products built on the blockchain. And as those products become more widely adopted, demand for Ethereum should rise, driving its price higher.
3. Ethereum 2.0 is on the horizon
Currently, the Ethereum blockchain can handle 30 transactions per second. That beats other networks like Bitcoin, but it’s still too slow to support mainstream adoption of dApps. In other words, the Ethereum blockchain lacks scalability in its current form. That’s where Ethereum 2.0 comes in.
This network upgrade is planned for 2022, and it will bring about several noteworthy changes. First, Ethereum will transition from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus mechanism. In simple terms, PoW is an energy-intensive method by which miners validate cryptocurrency transactions, meaning it leaves a significant (and potentially unsustainable) carbon footprint. PoS resolves that problem by distributing mining power based on ownership of the underlying cryptocurrency.
Second, Ethereum will add 64 shard chains to the core blockchain (i.e. the Beacon Chain), improving its throughput. Put another way, by adding more blockchains to the platform, the compute load can be spread across more infrastructure, reducing network congestion. And when combined with other measures, Ethereum’s processing power could reach 100,000 transactions per second. Assuming all goes as planned, that upgrade will make the blockchain more scalable, enabling widespread adoption of the DeFi services and dApps on the network. That’s why Ethereum looks like a smart buy right now.
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.