Buy Ethereum (Proffed from Motley Fool)

Business Basics

The blockchain industry is just a dozen years old, but it has grown at a pace nearly unparalleled in the investing world. The Ethereum (CRYPTO: ETH)network went live in 2015, providing a decentralized open-source blockchain platform for developers looking for new and innovative applications for the budding technology. In just six short years, Ethereum and its cryptocurrency token, Ether, have grown to make it the second-most-valuable cryptocurrency in the world, trailing only blockchain pioneer Bitcoin (CRYPTO: BTC).

Ether's soaring value has captured the attention of cryptocurrency investors. But to get why Ether's price has risen so much, you have to look beyond the token itself to the entire Ethereum network. Ethereum provides a highly flexible and innovative development platform for blockchain enthusiasts looking to enforce contractual agreements without relying on a centralized arbiter, as the self-executing "smart contracts" that are embedded directly within the network's own program code allow for decentralized enforcement.

Ethereum's special programming features made it more suitable to that task than Bitcoin. Developers flocked to the Ethereum platform, creating an ever-growing array of applications and features. And because users of the network have to spend a modest amount of Ether in order to take advantage of those features, the resulting soaring demand for Ether has sent its price up more than 40,000% since late 2016.

Leadership

Ether is an asset rather than a company, and the decentralized nature of Ethereum makes the concept of a single corporate leader foreign to the cryptocurrency realm. The strength of the entire user base will play a pivotal role in determining Ethereum's future.

However, that doesn't mean Ethereum doesn't have key supporters. Vitalik Buterin and Gavin Wood were two of Ethereum's co-founders, and they and others who were instrumental in its early development continue to advocate for its further evolution.

In addition, the nonprofit Ethereum Foundation provides support to projects across the Ethereum community in an effort to foster transformative growth to help the entire network. The foundation runs annual conferences to bring developers, researchers, and other stakeholders together, and it runs a fellowship program to focus Ethereum's beneficial impact on emerging economies.

What Makes Ethereum a Good Investment

As Motley Fool Chief Investment Officer Andy Cross explained in his recent mega stock rankings, Ethereum made it into the top 10 among recommendations our analysts believe are most likely to produce 3x returns in the next five years. What Andy saw was both the leadership role that Ether already plays in the cryptocurrency space and the optionality from what the Ethereum network is likely to develop in the future.

Already, we've seen many new and interesting crypto applications that rely on Ethereum. Nonfungible tokens have taken the art and collectibles world by storm; some have fetched millions of dollars and driven a buying frenzy across the space. Meanwhile, decentralized autonomous organizations, or DAOs, have sprung up around the world, and they're looking to play a disruptive role in transforming corporate and consumer finance.

Decentralized finance, or DeFi, has also gravitated toward Ethereum to pursue its goals of circumventing centralized authorities in conducting financial transactions like money transfers and asset trading. Even as crypto prices have gone through short-term corrections, the total value of crypto locked into DeFi protocols has risen to more than $185 billion — up from less than $10 billion less than a year ago. Locked Ethereum makes up more than two-thirds of that total.

Beyond that, many independent crypto projects have chosen to rely on Ethereum as the basis for their own blockchain projects and cryptocurrency tokens. Uniswap (CRYPTO: UNI), Chainlink (CRYPTO: LINK), 0x (CRYPTO: ZRX), and MakerDAO's stablecoin Dai (CRYPTO: DAI) are all based on Ethereum. More tokens are likely to follow suit, and each one that does will only heighten the underlying importance of Ethereum — and build greater demand for Ether.

Yet Ethereum still flies under the radar for many investors who are just getting into cryptocurrency investing. Bitcoin has a higher profile, but we're intrigued by Ethereum's much greater utility and how the network continues to attract so much innovation. Total transaction volume on the network jumped more than 20-fold to $777 billion in the second quarter of 2021, and an even bigger rise in fees shows that users haven't shied away from paying for what Ethereum offers.

Nor has Ethereum exhausted its potential uses. The recent move toward a proof-of-stake concept will concretely show the support the network has from its users. Meanwhile, Ethereum's latest improvement proposal could work to reduce fees for the benefit of all users, encouraging even greater adoption.

Risks

Ethereum has gotten off to a great start, but in the fast-changing crypto world, that's no guarantee of long-term success. Despite the huge influence it has already had in defining the future course of technology, further disruptive advances from rival projects could make Ethereum obsolete if the network doesn't keep fostering its own innovation. Even a schism within the Ethereum community itself could jeopardize its future. The stakes are high, and that contributes to the huge volatility in Ether's price.

Moreover, the regulatory environment for cryptocurrency remains less than supportive. Most government officials don't fully understand what crypto platforms like Ethereum are trying to do, making the rules they impose lacking in clarity. Issues like whether crypto tokens like Ether are securities subject to SEC rulemaking and the appropriate taxation of gains and losses on cryptocurrencies remain unsettled. As long as conflicts between regulators and crypto entrepreneurs exist, there will always be risks of restrictions that could have a big impact on users.

Finally, crypto assets like Ethereum are notoriously volatile. So if you invest, make sure you choose an appropriate position size according to your stomach for handling uncertainty and the inevitable sharp declines you'll see along with equally sharp upward moves. We like Ethereum for its long-term applications and growth, but we wouldn't be surprised at all if it falls to $2,000 before it crosses $4,000 again (and lots of places in between). For the Backstage Portfolio, we expect to open a starter position in Ethereum that's somewhat smaller than the capital we've invested (and will invest) in our more typical high-quality companies.

The Foolish Bottom Line

Even with those risks, we see huge potential in the Ethereum network, and we think its work could redefine the way people use the internet and handle financial transactions of all kinds. Key leaders in the crypto world are relying on Ethereum to help drive their vision of the future. As long as that continues, we see a lot of value in investing in Ether and the Ethereum network.