Many cryptocurrencies pulled back a couple of years ago from their all-time highs as rising interest rates drove investors toward more conservative investments. Yet three tailwinds have lifted the broader market this year: expectations for lower rates, the approvals of the first Bitcoin (CRYPTO: BTC) spot exchange-traded funds (ETFs) in January, and Bitcoin's halving in April.
But now that Bitcoin has concluded its long-awaited halving, which reduces the rewards for mining Bitcoin every four years, there will probably be fewer near-term catalysts for the world's top cryptocurrency. So is it time to turn our attention toward Ethereum (CRYPTO: ETH), the world's second largest cryptocurrency, for bigger gains this year?
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The differences between Ethereum and Bitcoin
Ether is the native token of the Ethereum blockchain, which was launched in 2015. Ethereum initially used the same energy-intensive proof of work (PoW) mining method as Bitcoin, but it transitioned to the more energy-efficient proof of stake (PoS) method in a process called The Merge in 2022. That transition reduced Ethereum's mining energy consumption by 99.95% and made it deflationary -- which meant more coins were being burned, or permanently removed from circulation, than created. PoS blockchains also allow investors to stake, or lock up, their tokens for fixed periods to earn interest-like rewards.
The Ethereum blockchain was also developed to support smart contracts, which can be used to create decentralized apps (dApps), smaller tokens, and other crypto assets. Bitcoin's blockchain can be used only to mine more coins. That's why Ethereum is usually valued by the expansion of its developer ecosystem, while Bitcoin is often compared to gold or silver.
That key difference drove the U.S. Securities and Exchange Commission (SEC) to say that Bitcoin was the only cryptocurrency that could be classified a commodity. That classification supported its approvals of the first spot Bitcoin ETFs.
Yet the SEC was reluctant to call Ethereum and other PoS coins commodities, saying the staking process made it similar to securities. Nevertheless, the SEC still cleared the way for Ethereum's first spot-price ETF applications earlier this year.
The tailwinds and headwinds for Ethereum
Ethereum's biggest near-term catalyst will be the potential approvals of its first spot ETFs. The SEC has already reportedly granted preliminary approvals to at least three of the eight planned spot-price ETFs, according to Reuters, and the latest speculation suggests most of those funds could start trading as early as July 23.
Ethereum's price has already risen about 50% this year, but the first spot ETFs might drive its price even higher. For reference, Bitcoin's price has rallied more than 40% since the approvals of its first 11 ETFs on Jan. 10.
Another major catalyst is Ethereum's recent Dencun upgrade, which increases its speed and reduces the gas fees -- essentially network user fees -- for its Layer-2 blockchain. Stabilizing and declining interest rates could also drive investors back to Ethereum and other cryptocurrencies.
Yet Ethereum still faces unpredictable headwinds. The Dencun upgrade made Ethereum inflationary again, and its supply will keep rising unless more tokens are burned. It also still processes transactions at a slower rate than newer PoS blockchains such as Solana (CRYPTO: SOL) and Cardano (CRYPTO: ADA) -- and those limitations could curb the expansion of its ecosystem.
Ethereum's planned spot ETFs also won't feature any staking mechanisms like its underlying tokens, so it might not be a compelling alternative to directly owning the cryptocurrency. Lastly, the market's expectations for lower rates and ETF approvals might have already been baked into its current price.
So is Ethereum a no-brainer buy right now?
Ethereum is trading at about $3,400 as of this writing, but some bullish investors expect it to generate huge gains during the next few years. VanEck's Matthew Sigel and Patrick Bush expect its price to more than triple to $11,800 by 2030, while Ark Invest's Cathie Wood says it could be worth a whopping $166,000 by 2032.
We should take those rosy estimates with a grain of salt, but I believe Ethereum's spot-price ETF approvals and lower interest rates should limit its downside potential this year. The Ethereum network's next planned upgrade, Pectra, should further increase its speed and lower its gas fees to keep pace with Solana and Cardano. Therefore, I believe Ethereum is still a good cryptocurrency to accumulate right now -- but investors shouldn't necessarily expect it to blast off in the next few months.
Should you invest $1,000 in Ethereum right now?
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, Cardano, Ethereum, and Solana. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
