ether (CRYPTO: ETH), the second largest cryptocurrency by market value, has had a monstrous run and is up about 453% this year. Additionally, Ethereum, which is powered by Ether tokens, has really started to show that it can be used in many other ways besides being just currency. However, after such a big run, let’s take another look at the bull and bear cases for Ethereum.
Bull: Real-world utility and a major upgrade is coming
Bram Berkowitz: Ethereum has shown just how useful it is this year with the widespread release of non-fungible tokens (NFTs), which are essentially digital certificates of ownership for things like works of art, images, audio and video files that are stored and secured on one In the real world, distributed ledgers and has usually been associated with some sort of scarcity. Who knows, 50 years from now, people will be more likely to show their digital works of art in the Metaverse than to hang them on the actual walls of their homes. Ethereum’s technology is also used in many other industries such as finance, gaming, and advertising.
Image source: Getty Images.
I’m also excited about Ethereum 2.0, the major upgrades that the Ethereum developers have been working on for the blockchain network. Many cryptocurrencies have come under fire this year because the amount of electricity required for proof of work – which involves mining new tokens with thousands of high-performance computers – is viewed as environmentally harmful. But once the upgrade is complete, Ethereum will move on to what is known as a proof-of-stake mining process, which uses much less power, where existing owners “plug in” their tokens to validate transactions and create new tokens. The network upgrade will also allow Ethereum to operate much faster. Ethereum’s blockchain can now only process 15 to 45 transactions per second, but after the upgrade it will have the potential to process up to 100,000 per second.
Ethereum 2.0 also caused the network to burn Ether tokens, which has started to curb the unlimited supply of the cryptocurrency. In the last three to four months, more than 1 million ethers have been burned, i.e. withdrawn from circulation. The goal now is to actually try to lower the high transaction fees on the network, which hasn’t quite worked yet. But if the upgrade slows down the supply of tokens, that’s probably a good thing for investors.
Bear: There are more risks than you think
Rick Munarriz: I’m generally optimistic when it comes to Ethereum, but that doesn’t mean I don’t see the many risks that come with owning some of the world’s second most valuable cryptocurrency. At the moment, it’s easy to see the appeal of Ethereum. It’s cryptocurrency that puts smart contracts – agreements that execute themselves when certain conditions are met – on the map. If you stumble upon an NFT trading platform or other blockchain app, there’s a good chance it’s powered by Ethereum on the other end.
The problem here is that Ethereum – and its investors – may overestimate where they stand on the crypto food chain. Ethereum fans are always looking forward to the “flipping”, this moment in which Ethereum overtakes Bitcoin (CRYPTO: BTC) in market capitalization. The problem is that instead of being a disruptive factor for Bitcoin, Ethereum could see other digital currencies crashing the Ethereum party. Looking at market cap price, Ethereum investors seem to be ignoring many smaller cryptocurrencies that have zoomed past Ethereum in terms of the number of transactions that can be completed and lower transaction costs. The bullish counter here is that Ethereum will hit back when it completes its 2.0 transformation to Proof of Stake in the coming months, but one word can silence the room: taproot.
Taproot is the first major upgrade to Bitcoin in four years, and when it launched last month it finally got the world’s largest crypto player in the smart contracts market. Bitcoin? Smart contracts? Is the flippening going to be a floppening? More importantly, Bitcoin has not rebounded on the Taproot news, just as Ethereum is unlikely to take off once its overhaul is complete. We have seen that “sell on the news” happens far too often in the crypto landscape, with the market discounting future upgrades. Oh, and then Ethereum actually gets there. There’s no set date yet when Ethereum will be ready to take things to the next level. There is also no guarantee that there will be no bugs or other hiccups along the way that could delay or even derail the next critical evolutionary step. Ethereum is, of course, one of the most promising cryptocurrency names, but the risks are likely a lot greater than cheerleaders think.
Conclusion
Like most in the crypto world, we’re generally pretty optimistic about Ethereum, its real-world use cases, and the transformative nature of Ethereum 2.0. But that doesn’t make the cryptocurrency a guarantee to overtake Bitcoin or mean it doesn’t pose any risks. The potential for Ethereum is sky high, but make sure to evaluate bearish scenarios as you should with any investment you are considering.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all reflect critically about investing and make decisions that will help us get smarter, happier, and richer.
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