Ethereum Faces Competition but Network Upgrades Could Bring Back the Bulls

The native cryptocurrency of the Ethereum blockchain, Ether (CRYPTO: ETH), has lost more than 30% of its value over the past 12 months. Despite this decline, some investors remain fiercely bullish on Ether's future, with ARK Invest's Cathie Wood predicting that its price could reach $166,000 by 2032.

This estimate represents a gain of nearly 6,220% and would boost Ether's market cap to more than $20 trillion, surpassing the current market cap of Bitcoin. However, it is essential to consider whether this forecast is realistic or if investors should maintain more modest expectations.

The Differences Between Ether and Bitcoin

Ethereum originally ran on a proof-of-work (PoW) mechanism like Bitcoin, which meant that it needed to be mined by GPUs or other chips. In 2022, Ethereum transitioned to the proof-of-stake (PoS) mechanism, making it roughly 99% more power efficient than the PoW mechanism.

The shift to PoS enabled Ethereum to support smart contracts, which are used to develop decentralized apps (dApps), non-fungible tokens (NFTs), and other crypto assets. Bitcoin's PoW blockchain, on the other hand, does not support smart contracts.

As a result, Ether's value is often linked to Ethereum's popularity as a development platform. Bitcoin is valued by its scarcity and limited supply, with 19.6 million of its maximum supply of 21 million tokens already mined.

Ether, however, has no fixed maximum supply but can be both inflationary and deflationary depending on the network activity. When Ethereum's network activity rises, the overall supply declines as a portion of every transaction fee in Ether is burned.

Ethereum's Catalysts and Challenges

One of the significant catalysts for Ethereum's growth could be its next big upgrade, The Verge. This upgrade aims to improve security features and reduce hardware requirements, making it possible to run on smaller devices like smartphones, wearables, and Internet of Things (IoT) devices.

The Verge also aims to reduce off-chain Layer 2 (L2) fees with a series of upgrades for its network to clear more space for fresh data. This could help indirectly reduce congestion issues by absorbing some of the core Layer 1 (L1) network traffic.

Assuming these upgrades bring in more developers and investors, Ethereum's network activity will increase, reducing its supply, and stabilizing Ether's price. Another potential catalyst would be the approval of new spot-price ETFs with staking features.

However, Ethereum could still face challenges from other PoS blockchains like Solana and Cardano, which offer faster transaction times and lower fees. Competition from these newer and faster blockchains might hinder Ethereum's growth and limit its potential for reaching Wood's estimated price target.

Should You Believe Cathie Wood's Bullish Outlook?

Cathie Wood believes that Ether's value will rise as Ethereum becomes a foundational layer of a new digital financial ecosystem that challenges traditional banks with decentralized finance (DeFi) apps, NFTs, and tokenized versions of real-world assets.

Wood also expects Ether's staking yield to become more appealing than the yields of U.S. Treasuries as interest rates decline, and for the approvals of new staking ETFs to bring in even more institutional investors.

While this thesis sounds reasonable, claiming that Ether could reach a $20 trillion market cap within the next seven years seems overly bullish. It is crucial to consider whether Wood's forecast is based on sound analysis or if it is an overestimation.

Should You Invest $1,000 in Ethereum Right Now?

Before investing in Ethereum, it is essential to evaluate the potential risks and challenges that the cryptocurrency faces. While some investors remain optimistic about Ether's future, others might be more cautious due to concerns about competition from other PoS blockchains and the unpredictable macro environment.

Investors should consider their risk tolerance, financial goals, and investment horizon before deciding whether to invest in Ethereum or any other cryptocurrency. It is also essential to diversify one's portfolio and avoid putting all eggs in one basket.

As The Motley Fool Stock Advisor analyst team has identified top stocks for investors to buy now, it is crucial to evaluate these recommendations and consider whether they align with your investment goals and risk tolerance.

Conclusion

Ethereum faces competition from newer and faster PoS blockchains, but its network upgrades and new ETFs could bring back the bulls. Investors should take ARK Invest's over-the-top estimates with a grain of salt and maintain realistic expectations about Ether's future performance.

While some investors remain optimistic about Ethereum's potential for growth, others might be more cautious due to concerns about competition and the unpredictable macro environment. It is essential to evaluate the risks and challenges that Ethereum faces before deciding whether to invest in it or any other cryptocurrency.