The world's second-largest cryptocurrency still has plenty of upside potential.
ether (Ethereum 0.71%)is the largest cryptocurrency on the open-source Ethereum network and has risen nearly 70% in the past 12 months. However, it is still trading about 35% below its all-time high of $4,815, which reached the peak of the cryptocurrency buying frenzy in November 2021.
Some bullish investors believe the price of Ether could rise further. VanEck's Matthew Sigel and Patrick Bush expect the price to reach $11,800 by 2030, while Ark Invest's Cathie Wood believes it could be worth $166,000 by 2032. There is. Investors need to take these estimates with a grain of salt, but I believe Ether has the potential to trend higher going forward. 4 simple reasons.
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1. Interest rates are stabilizing
ether, Bitcoin (BTC 0.60%), many other cryptocurrencies crashed in 2022 as rising interest rates pushed investors toward more conservative investments. However, the Fed has recently kept interest rates on hold and is unlikely to raise them again this year. That stability, and the hope that interest rates will fall once inflation subsides, should lead more investors back to cryptocurrencies and riskier plays.
2. Supply is decreasing
In August 2021, the Ethereum network implemented two major changes with the “London” upgrade. First, we have changed the calculation of transaction fees, also known as “gas fees,” to a manual bidding system instead of an automated bidding system. This change simplifies and streamlines the process by setting prices based on network congestion.
Secondly, it began to “burn” the basic charges of all transactions on the network, that is, remove them from circulation. This combustion process allows only Ether to be used to pay for transactions across the Ethereum network (which locks in economic value) while gradually reducing supply to stabilize market prices. .
In September 2022, the Ethereum network switched from the energy-intensive proof-of-work (PoW) mining method (used by Bitcoin) to the more energy-efficient proof-of-stake (PoS) method. This transition, known as “merging,” reduced total mining energy consumption by approximately 99.95%.
The Ethereum network also became deflationary, with more Ether being consumed than being issued. As a result, approximately $12.7 billion of Ether has been consumed since the London upgrade. This represents 3% of its current market capitalization of $378 billion. Although its burn rate may decline over time, the ongoing process should limit the potential for cryptocurrency declines.
3. Possibility of ETF approval in the future
The U.S. Securities and Exchange Commission (SEC) approved the first spot-price Bitcoin exchange-traded fund (ETF) earlier this year. However, the SEC is reluctant to approve the first Ether spot-price ETF because it believes Bitcoin is the only virtual currency that can be considered an asset rather than a security.
The SEC believes that Bitcoin's PoW process is more similar to the physical process of mining precious metals, allowing it to be assigned a market-driven spot price similar to gold and silver. However, the company says that the PoS process used by Ethereum makes it more like a security, which is subject to stricter regulation than a commodity.
The SEC doesn't seem keen on approving the first “spot-priced” Ether ETFs any time soon, but ETF issuers including VanEck, Ark Invest, and seven others have filed suit against the SEC to speed up the process. may occur. The recent approval of Bitcoin and Ether ETFs in Hong Kong could also dissuade the SEC from dragging its feet.
4. Growth of decentralized apps
The main thing that differentiates Ether from Bitcoin is its open source network. Although Bitcoin's blockchain can only be used to mine cryptocurrencies, developers can build decentralized apps, tokens, and other cryptoassets on top of the Ethereum network.
According to Fortune Business Insights, the decentralized app market will grow at a compound annual rate of 28% from 2023 to 2030 as more companies deploy decentralized investing, lending, and crypto services that are not tied to centralized financial institutions. potential to grow at a CAGR of . This expansion could lead to more businesses and consumers adopting Ether as a mainstream digital currency.
Investors need to prepare for high volatility
Ether, like Bitcoin, is a volatile asset that can easily lose half its value before doubling in value again. Therefore, investors should not use the cash required to purchase Ether over the next 5 to 10 years. That being said, Ether still has the potential to generate huge long-term profits for investors who can tolerate all the short-term volatility.
Leo Sun has no position in any stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
