Key Points
If Ethereum plays a part in real-world blockchain adoption, its price could soar.
Ethereum dominates decentralized finance and stablecoin markets.
All cryptocurrencies are risky, but those with utility have stronger long-term potential.
- 10 stocks we like better than Ethereum ›
One of the first things almost every cryptocurrency investor hears is that it is a risky asset class. Unfortunately, that doesn't mean much: Risk is measured on a spectrum, and learning to evaluate it is a key part of many retail investors' journeys. If buying an exchange-traded fund (ETF) that tracks the S&P 500 is more akin to flying as a passenger in a commercial airplane, buying crypto has more in common with skydiving.
That's why many crypto investors have lost money, even now as prices begin to show signs of recovery. One way to minimize crypto risk is to stick to the dynamic digital duo, Bitcoin and Ethereum (CRYPTO: ETH). Over time, both have produced big gains, though it's been a volatile ride. In this article, I'll focus on Ethereum, particularly why its role as a settlement layer gives it solid long-term potential.
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What is a settlement layer?
Ethereum is often referred to as a settlement layer because it is the base, or Layer-1 blockchain, that underpins a host of other cryptocurrencies and on-chain activities. Ethereum pioneered smart contracts, pieces of code that make blockchains programmable and enable decentralized finance (DeFi) applications, so people can, for example, borrow or lend money without a financial intermediary like a bank.
Ethereum dominates DeFi, accounting for more than 50% of on-chain funds, but it struggles with scalability -- the network can get congested, which then makes it expensive to use. This is where Layer-2 blockchains come in, because they siphon off a lot of the busywork. Think of Ethereum as being the chief accountant with a team of Layer-2 bookkeepers. It doesn't need to redo their calculations and paperwork; instead, it checks and records the final conclusions.
Image source: Getty Images.
Layer 2s can quickly process large quantities of DeFi transactions, backed up by the security and reliability of Ethereum. If you've been burned by crypto, you may think, "So what? That won't mean anything if decentralized finance tanks alongside the rest of the crypto industry." It's a fair point. But after years on the fringes of mainstream finance, money and assets are starting to move onto the blockchain.
Stablecoins -- on-chain versions of traditional money -- may well be the missing part of the puzzle. Clearer regulation has removed roadblocks, and major financial institutions and payment providers are starting to integrate stablecoins into their operations. They mean consumers can use the blockchain to spend money and move it across borders as easily as swiping a card or making a bank transfer.
Look for crypto utility, not hype
There are many ways to invest, with varying degrees of risk and reward. If you've lost money on crypto investments, think about how much risk you're OK with and use that to build a balanced portfolio. If allocating a small percentage of your holdings to riskier assets like crypto fits with your long-term goals, be prepared to hold through the inevitable volatile periods.
About 5% of my portfolio is in cryptocurrency, and the majority of that is in Ethereum. My Ethereum is staked, which means I earn yield and contribute to network security by locking up my coins. I'm comfortable holding Ethereum for the coming five to 10 years because it might play a key part in what could be a huge shift in the way money works.
It is by no means certain, but the growth of stablecoins means there's a strong chance that blockchain will become integrated into everyday payments and asset management. Ethereum may serve as the settlement layer for at least some of those transactions.
Should you buy stock in Ethereum right now?
Before you buy stock in Ethereum, consider this:
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Emma Newbery has positions in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. 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.
