Key Points
1. Ethereum has soared more than 30,000% in the past five years.
2. It has more functionality than Bitcoin, giving it an advantage in potential use cases.
3. Changes in the way transactions are processed should increase its speed and scale.
Don't bother with high-flying tech stocks. Ethereum (CRYPTO:ETH), the world's second-most valuable cryptocurrency after Bitcoin (CRYPTO:BTC), has increased in value by about 30,000% in the last five years. This means that a $1,000 Ethereum investment made in January 2017 is now worth around $300,000.
Is it too late to buy now? Would you just be looking for a quick buck at this point? No, I don't believe so. Even after the massive price increase, purchasing Ethereum in 2022 could be a profitable investment.
Surging developer activity
Ethereum is a programmable blockchain that allows smart contracts, or self-executing software, to be used. In this way, it varies from Bitcoin's blockchain, which is merely a decentralised payment network with limited functionality.
It's good to think about Ethereum as a massive, global computer that everyone can look at and play with. Developers have flocked in droves as a result of the openness. According to a survey from venture capital firm Electric Capital, Ethereum now has over 4,000 monthly active developers, much more than it did in 2020. This is a significant advantage in terms of moving technology ahead.
The fact that some of the industry's sharpest minds are working on Ethereum projects is a positive sign for the Ether coin. This activity creates a network effect, in which more developers leads to more innovation and better projects, which leads to increased utility and, ultimately, a larger Ethereum market cap.
A near-term catalyst
Ethereum's current consensus mechanism -- the way that it processes and validates transactions -- is something called proof-of-work. Heavy computing power is needed to solve complex math problems in order to gain the right to add a transaction to the blockchain. By supplying it, crypto miners earn new tokens. This is how Bitcoin works as well.
The problem with that process is that it is slow and energy-intensive. And for all of Ethereum's positive traits, the blockchain can only process about 15 transactions per second today. This is a major hindrance to expanding the network, and it results in high costs for users. How is Ethereum supposed to gain widespread adoption if it can't fix this issue and boost its throughput?
Well, there's a solution for this, an upgrade called ETH2. The second phase of this, set to release this year, will allow for a proof-of-stake consensus mechanism -- in which participating token owners validate transactions -- for the entire network. And in 2023, shard chains will be introduced with the ability to process upward of 100,000 transactions per second. Of course, these updates could be delayed, but it's a good sign that they're in the pipeline.
Investing in cryptocurrencies is not without its risks. But Ethereum, with its huge developer network, innovative dApps library, and pending conversion to a proof-of-stake mechanism, is one of the more promising blockchains people can invest in today. This cryptocurrency may have surged in value in the past few years, but it still looks like a solid buy in 2022.
