How do you know cryptocurrencies are the real deal? When high-brow business publications start talking about Ethereum (CCC:ETH-USD), Bitcoin (CCC:BTC-USD), and the million other coins and tokens available to buy and sell these days.
Recently, The Economist discussed the decentralized finance (DeFi) ecosystem and why Ethereum is losing market share.
You don’t have to be a rocket scientist to know the senior crypto faces competitive challenges. They don’t call them “Ethereum killers” for nothing. Sam Bankman-Fried recently suggested that Avalance (CCC:AVAX-USD) and Solana (CCC:SOL-USD) fit this description.
I have to agree with Bankman-Fried. Solana’s utility puts it on a trajectory to the moon. So, one must wonder if Ethereum’s best days are beside it. I’ll look at both sides of the discussion.
Ethereum Might Have Waited Too Long for 2.0
As I discussed at the end of December, one crypto prognosticator sees ETH-USD hitting $16,858 by 2028. It gets there on the back of Ethereum 2.0 and a transaction processing rate of more than 100,000 per second.
Here’s what The Economist had to say about Ethereum’s journey:
“With the planned changes to Ethereum likely to take at least a year, if not longer, ‘the risk is that…the Ethereum network will lose further market share’, wrote Nikolaos Panigirtzoglou of JPMorgan. For Mr Allaire, the picture is pleasingly competitive,” The Economist wrote on Jan. 16.
“Just like with the web, where Windows, iOS and Android all compete, there are competing blockchain platforms too.’ He thinks the ultimate victor will be the network that attracts the best developers to build applications and therefore reaps network effects.”
I don’t know about you, but I thought “utility” when I read this.
The Economist goes on to question the validity of a winner-take-all philosophy regarding DeFi.
“For as long as decentralised finance holds promise, competition to be the network of choice will naturally be fierce. But the idea that the winner will take everything, gaining overall control over the digital economy and how it develops, may one day seem as outdated as the video cassette.”
The Future Remains Intact
While its argument that there are plenty of seats on the DeFi bus is sound, I question if that necessarily means Ethereum is a loser in this future scenario.
In 10 years, Ethereum might be processing a million or more transactions a second. If so, despite losing some market share to the likes of Solana and others, its early adopters will likely be wealthier than sin.
Ethereum’s success is not mutually exclusive with the loss of market share. Both can happen at the same time. We see it time and again with stocks. For example, Apple’s (NASDAQ:AAPL) success doesn’t come at the expense of Microsoft’s (NASDAQ:MSFT) standing in the world. The list of examples is long.
The reality is that you have Bitcoin far ahead of the pack, with a market capitalization of $809 billion, clearly the winner with investors big and small when it comes to an alternative currency to the greenback.
It’s the new gold, only better.
Then you have Ethereum at $374 billion, solidly in second place. And then you have the rest. As I write this, the 3rd largest crypto — Tether (CCC:USDT-USD) — through the 10th largest — Polkadot (CCC:DOT-USD) — have a combined market cap of $382 billion.
Using the stocks analogy once more, the combined market cap of the five S&P 500 companies above $1 trillion is $9.5 trillion. I didn’t bother counting, but the following 40 largest stocks in the index probably add up to $9.5 trillion.
Once you get past Meta Platforms (NASDAQ:FB), Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B), and Nvidia (NASDAQ:NVDA), there aren’t any companies ready to join this exclusive club.
The Bottom Line
The biggest risk to Ethereum is that 2.0 doesn’t happen or go as planned. In that scenario, your ETH-USD investment goes up in smoke rather quickly.
So, it wouldn’t be the worst idea in the world if you’re on the Ethereum bandwagon to put some funds into Bitcoin. For example, if you’re committing 3% of your $100,000 portfolio to cryptocurrencies ($3,000), you might buy $1,500 in BTC and an equal amount in ETH.
I don’t believe you ought to get off the Ethereum bandwagon at this point. However, you might want to protect your downside just in case.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.
