The world's second-largest cryptocurrency still has a lot of upside potential.
Ether (ETH 1.22%), the largest cryptocurrency of the open-source Ethereum network, has rallied nearly 70% over the past 12 months. However, it's still trading about 35% below its all-time high of $4,815, which it reached during the apex of the buying frenzy in cryptocurrencies in November 2021.
Some bullish investors believe Ether's price could soar even higher. VanEck's Matthew Sigel and Patrick Bush expect its price to reach $11,800 by 2030, while Ark Invest's Cathie Wood believes it could be worth $166,000 by 2032. Investors should take those estimates with a grain of salt, but I believe Ether could still head much higher for four simple reasons.
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1. Interest rates are stabilizing
Ether, Bitcoin (BTC 0.84%), and many other cryptocurrencies were crushed in 2022 as rising interest rates drove investors toward more conservative investments. However, the Federal Reserve recently left its rates unchanged and won't likely raise them again this year. That stability -- and expectations for lower rates after inflation cools off -- should drive more investors back toward cryptocurrencies and riskier plays.
2. Its supply is declining
In August 2021, the Ethereum Network implemented two major changes with its "London" upgrade. First, it changed the calculations of transaction fees -- also known as "gas fees" -- from a manual bidding system instead of an automated one. That change simplified and streamlined the process by setting prices based on the congestion in the network.
Second, it started to "burn" -- or remove from circulation -- the base fee of every transaction on its network. That burning process ensured that only Ether could be used to pay for transactions across the Ethereum Network (which solidifies its economic value) while gradually reducing its supply to stabilize its market price.
In September 2022, the Ethereum Network switched from the energy-intensive proof of work (PoW) mining method (used by Bitcoin) to the more energy-efficient proof of stake (PoS) method. That transition, known as "The Merge," reduced its total mining energy consumption by about 99.95%.
It also made the Ethereum Network deflationary -- so more Ether was being burned than being issued. As a result, about $12.7 billion in Ether has been burned since the London upgrade. That's equivalent to 3% of its current market cap of $378 billion. While that burn rate might gradually cool off, the ongoing process should limit the crypto's downside potential.
3. Possible ETF approvals in the future
The U.S. Securities and Exchange Commission (SEC) approved the first spot price Bitcoin exchange-traded funds (ETFs) earlier this year. However, the SEC has been reluctant to approve the first spot price ETFs for Ether because it believes Bitcoin is the only cryptocurrency that can be considered an asset instead of a security.
The SEC believes that Bitcoin's PoW process is more similar to the physical process of mining precious metals, so it can be assigned a market-driven spot price like gold and silver. But it says the PoS process that Ethereum uses makes it more similar to a security, which is subject to tighter regulations than commodities.
The SEC doesn't seem eager to approve the first "spot price" Ether ETFs anytime soon, but ETF issuers -- including VanEck, Ark Invest, and seven other companies -- could file litigation against the agency to accelerate the process. The recent approvals of Bitcoin and Ether ETFs in Hong Kong could also force the SEC to stop dragging its feet.
4. The growth of decentralized apps
The main thing that sets Ether apart from Bitcoin is its open-source network. Bitcoin's blockchain can only be used to mine the cryptocurrency, but developers can build decentralized apps, tokens, and other crypto assets on the Ethereum Network.
According to Fortune Business Insights, the decentralized apps market could grow at a compound annual growth rate (CAGR) of 28% from 2023 to 2030 as more companies roll out decentralized investing, lending, and crypto services that aren't tethered to centralized financial institutions. That expansion could drive more companies and consumers to adopt Ether as a mainstream digital currency.
Investors should brace for lots of volatility
Ether, like Bitcoin, is a volatile asset that could easily lose half its value before it doubles again. Therefore, investors shouldn't use any cash they need over the next five to 10 years to buy Ether. That said, Ether could still generate massive long-term gains for investors who can stomach all the near-term volatility.
Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.
