If you are thinking about investing in Ethereum, focus on future growth potential, not historical track record.
Since its launch in July 2015, Ethereum (ETH -0.15%) has skyrocketed in price from just $0.31 to $3,000 today. That's a nearly 10,000-fold return on your investment! If you had invested just a few hundred dollars in Ethereum a decade ago, you'd likely be a millionaire today.
But does Ethereum still have the power to make you a millionaire? While it's hard to argue with Ethereum's historical track record, things get a bit dicier when you consider its future prospects.
Competitive landscape
When Ethereum launched back in 2015, it stood alone as the only smart contract blockchain platform. And, as such, it had an incredible first-mover advantage. Arguably, it was not until 2020, when blockchain upstart Solana (SOL -0.99%) appeared, that Ethereum saw its first legitimate rival.
To put that into perspective, imagine if your favorite Silicon Valley tech company had an incredible five-year head start on the competition. After that time period, it would probably appear to have an insurmountable lead when it comes to market share, intellectual property, and customer lock-in. Quite frankly, it would look unstoppable.
That's why I think Ethereum's ability to replicate its historical track record is limited at best. There's simply too much competition now, and Ethereum is no longer the only major Layer-1 blockchain. Check for yourself -- three of the top 15 cryptocurrencies by market cap are direct Ethereum rivals. That type of competition simply did not exist back in 2015.
Incremental vs. disruptive innovation
Moreover, I've soured a bit on Ethereum's endless blockchain upgrades. Yes, the 2022 blockchain upgrade known as The Merge was impressive. People have compared that technical feat to changing the engine of an airplane while in mid-flight. The Merge resulted in a total transformation of Ethereum. In the process, Ethereum became faster, cheaper to use, and more efficient in processing transactions.
Image source: Getty Images.
However, Ethereum originally promised us 1 million transactions per second, and we're nowhere close to that. Of even more concern, Ethereum now relies on a complicated mix of Layer 2 blockchains for scalability and functionality. The core Ethereum blockchain (i.e., the Layer 1) just isn't fast or efficient enough to handle current transaction volumes. So, we have several more upgrade cycles to go, each filled with new tweaks and upgrades.
There's nothing wrong with incremental innovation, of course. But there's a big difference between incremental innovation and truly disruptive innovation. And that's what has me concerned about Ethereum -- we may have witnessed the end of disruptive innovation with The Merge. And that's going to open up the door for fast, nimble competitors to challenge Ethereum.
The SEC and regulatory risk
Finally, there's the pesky little matter of the Securities and Exchange Commission (SEC). Ever since The Merge, the SEC hasn't quite made up its mind about whether Ethereum is a commodity or a security. When Ethereum converted into a proof-of-stake blockchain as part of The Merge, it changed the way that people interact with the blockchain, with possible regulatory consequences.
For example, the process of stakingcrypto could be interpreted by some as "the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others." According to the SEC, that would make Ethereum a security.
This might sound incredibly wonky from a legal perspective, but it matters for investors. There are some Bitcoin maximalists delighting right now in Ethereum's potential regulatory quandary, and there is a very real risk that the SEC could deem Ethereum to be a security. If that happens, all bets are off. I don't think it would pose an existential risk for Ethereum, but it would certainly scare away a lot of investors.
The myth of the 1,000x crypto
If you have $1,000 to invest in crypto today, you would need a 1,000-fold return on your investment to become a millionaire. So, let's reframe the original question of Ethereum being a millionaire-maker crypto in the following way: Can Ethereum increase 1,000 times in value from its current price of $3,000?
That would suggest a stratospherically high $3 million price tag for a single Ethereum coin sometime in the near future. Given Ethereum's circulating supply of 120 million coins, that would imply a total market cap of $360 trillion! By comparison, the total market cap of the S&P 500 these days is about $50 trillion.
At the end of the day, investing based only on past performance is like driving a car by only looking in the rearview mirror. So stop focusing so much on Ethereum's historical track record, and focus more on how it's going to create value in the future.
Dominic Basulto has positions in Ethereum and Solana. The Motley Fool has positions in and recommends Ethereum and Solana. The Motley Fool has a disclosure policy.
