Editor’s Note: This article is a part of our “If You Only Buy One Stock” series where we look at 2021’s most popular investing trends and have our top financial journalists make their very best pick. Click here to see more names for your must-buy list.
New cryptocurrency investors often see an upside-down world. Cryptocurrencies have no intrinsic value nor earnings potential; to a traditional stock investor, they seem to have zero worth. Yet, anyone who bought $10,000 in Bitcoin (CCC:BTC-USD) in 2015 would have over $2 million today. Dogecoin (CCC:DOGE-USD) prices have gone up even faster; the same investor could have waited until 2020 to buy DOGE for the same returns. The rulebook has changed, and investors need to start tiptoeing into this new world. The first cryptocurrency to consider? Ethereum (CCC:ETH-USD).
First, we have to address the elephant in the room. Like other coins, the world’s #2 cryptocurrency technically has no intrinsic value. As its name suggests, Ether can’t be touched, tasted or seen.
Yet, Ethereum has emerged as one of cryptocurrency’s most promising investments. Virtually all of the $1.5 billion NFT (non-fungible token) market runs on Ethereum. The network’s ERC-721 NFT Standard has become the gold standard for trading digital art.
ETH-USD is also quickly improving its codebase — an essential step to avoid losing ground to Cardano (CCC:ADA-USD), Polkadot (CCC:DOT1-USD) and other “third-generation” coins. It might not be a smooth ride up, but investors looking to buy just one cryptocurrency need to consider Ethereum.
ETH-USD: A Departure from Bitcoin
When a team of programmers developed Ethereum in 2013, they wanted to build a Bitcoin alternative. At the time, Bitcoin operated much like a debit card — it was a good way to store money and track transactions, but relatively limited beyond that.
Meanwhile, ETH-USD would turn out more like a cryptocurrency equivalent of Apple (NASDAQ:AAPL) Pay or PayPal (NASDAQ:PYPL). E-Commerce marketplaces could use Ethereum’s “smart contract” ability to create escrow accounts. And firms like Dapper Labs used Ethereum’s token system to develop an ecosystem of NFTs.
The results were nothing short of breathtaking. Today, Ethereum is the world’s second-largest cryptocurrency by market capitalization. Only Bitcoin eclipses its size.
The Rise of NFTs Could Power Ethereum Higher
Skeptics have long claimed that cryptocurrencies hold little societal value. Bitcoin’s legacy architecture takes over ten minutes to confirm a block, making multiple successive transactions impossible. When firms like Visa can perform transactions a thousand times faster at a fraction of the cost, the main reason people use cryptocurrencies often comes down to hiding your tracks.
Ethereum, however, has upended that notion with Non-Fungible Tokens. These strings of randomly generated numbers and letters are much like a vehicle’s VIN number:
These identifiers then get assigned to a particular piece of digital art, website URL or other collectible item. Anyone wanting to confirm ownership can do so by reading the Ethereum blockchain.
Meanwhile, the Ethereum network makes transacting these pieces far easier. If a buyer wanted to bid on the token above (in this case, it represents a picture of the Monopoly man holding an umbrella), the seller could use the network to confirm the funds before making the exchange. There’s almost zero risk that either side could cheat the other out of their product or money.
Though the NFT market has cooled to a more reasonable level in recent weeks, the ubiquity of ERC-721 tokens will make Ethereum far longer-lasting. Any new NFT coin looking to replace Ethereum will theoretically need to create new tokens for every asset that ETH-USD now secures.
Keeping Competition at Bay
Ethereum also has a secret weapon: an energy-efficient blockchain in development.
In December 2020, Ethereum launched a Proof of Stake (PoS) blockchain, an energy-efficient chain that uses 99% less power than its current Proof of Work (PoW) protocol. The network could switch entirely to the new system by Q3 2021.
The change couldn’t come soon enough. Rival coins Cardano and Polkadot have already launched successful PoS coins, highlighting the absurdity of how much energy PoW miners consume. Today, Bitcoin miners use more electricity than does the country of Sweden.
Fortunately, Ethereum’s flexibility puts it in a far better position. In March, Ethereum’s founder Vitalik Buterin issued a “quick merge via fork choice change” document that “ostensibly serves as a notice against any further agitation from Ethereum miners as the merge would allow Ethereum to abandon mining in a rapid fashion.” In other words, Ethereum’s development team has already pre-empted the revolt by miners who would rather see more of the PoW status quo.
Meanwhile, legacy coins like Bitcoin and Litecoin (CCC:LTC-USD) will likely fall further behind in development.
What about Dogecoin?
There are obviously good alternatives to Ethereum. Dogecoin has already risen over 50-fold in 2021, and other meme coins look set to grow.
Dogecoin and others have become all the rage of 2021 — a trend I suspected that could happen. These adrenaline-fueled coins can rise thousands of percent in days on well-timed viral social media posts. As cryptocurrency exchanges make it easier for people to make these long shot bets, investors should expect more meme coins to follow.
There are other alternatives with plenty of upside too. If the SEC drops its investigation against Ripple Labs, XRP (CCC:XRP-USD) will benefit. And decentralized-exchange coins like Uniswap (CCC:UNI-USD) could give Coinbase and other exchanges a run for their money.
But if investors can only buy one coin, make sure it’s Ethereum. Even though no cryptocurrency is technically safe from zero, ETH’s dominant position in NFTs and smart contracts make it one of the safer bets in the crypto world.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.