This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Ethereum (CRYPTO: ETH) has a lot going for it -- it's made some investors a bundle and it's an innovative utility coin. Investors who put money into Ethereum when it was introduced six years ago could be sitting on more than $1 million worth of profits today from an initial $1,000 investment. The coin also is the first programmable money in the world, storing instructions on the blockchain that self-execute when certain conditions are met, also known as smart contracts.

Ethereum is a major step forward from cryptocurrencies such as Bitcoin (CRYPTO: BTC), which only allow users to send money to one another. But more importantly, innovations are coming for Ethereum. Let's look at how this revolutionary coin might make a worthy addition to investors' portfolios. 

A big step forward

Ethereum is about to undergo a significant transformation that fixes a mounting challenge for cryptocurrencies like Bitcoin -- environmental sustainability. By the end of 2022, the Ethereum network will transition into one based on proof of stake (PoS) instead of proof of work (PoW). This means the network will no longer need miners using ever-more computing power to solve sophisticated, algorithmic puzzles to validate transactions on the blockchain ledger and create new coins. To put that into context, the global Bitcoin network now consumes as much energy as 23 coal-fired power plants -- and is growing day by day.

In theory, under the PoS regime, anyone will be able to validate transactions based on how many Ethereum -- their stake -- they own. The minimum requirement for staking is 32 ETH, or about $80,000. Under this setup, validators collect a network fee for their efforts, which is kind of like interest -- say 6% a year in the form of new tokens. In addition, the network also has the potential to expand to a delegated PoS network, where those who do not meet the minimum staking threshold can "delegate" their ETH to a staking pool for a fee to take part in validations. This move toward an eco-friendly model is a major bullish catalyst for Ethereum.

Growing recognition 

Some of the biggest companies in the world are using Ethereum. For example, ING Group, a Dutch multinational bank with more than $1.1 trillion in assets, uses Ethereum to settle payments, bilateral lines of credit, and trading documents. In addition, TD Ameritrade, part of discount broker Charles Schwab Corp., is using Ethereum to facilitate smart contract future trades. 

In another case, French video game titan Ubisoft Entertainment SA is using Ethereum as the basis for in-game purchases. Finally, JPMorgan Chase & Co. is looking to integrate its own digital coin (the JPM coin) with smart contracts via Ethereum.

The next revolution 

It may not be obvious at first, but programmable money like Ethereum has the potential to revolutionize the way we conduct financial transactions. Right now, smart contracts are limited to the internal data on a blockchain, or the shared ledger of all transactions in a network. However, the rise of so-called oracle tokens like ChainLink is a major game-changer. ChainLink allows smart contracts to execute based on real-world API, or the link between computer programs and computers. This will free parties from the confines of the blockchain, letting them use just about anything -- futures data, stock prices, weather events, breaking news, economic indicators or video game achievements -- as reference points to settle Ethereum transactions.  

The only problem with Ethereum is that, unlike Bitcoin, the coin does not have a supply ceiling. There now are more than 116.9 million ETH in circulation, with an annual rate of increase of about 4% a year as the supply of tokens rises. On Aug. 4, Ethereum developers unveiled five Ethereum Improvement Proposals (EIPs) -- one of which was to reduce the mining reward so the rate of increase falls to about 3% a year. Because of its widespread adoption and revolutionary potential, capital inflows into Ethereum should surpass the lowered benchmark for the supply increase.

This development, along with the move to an environmentally sustainable model helps make Ethereum the leading cryptocurrencies to invest in for the long term. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Why Ethereum is the top cryptocurrency investment of 2021 appeared first on The Motley Fool Australia.

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Zhiyuan Sun has no position in any of the stocks mentioned. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Bitcoin and Ethereum. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Even after showings signs of a recovery in recent weeks, the price of two leading digital coins, Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH), have fallen almost 30% since May. Meanwhile, trading volume for all cryptocurrencies plunged more than 40% in June, and it hit year-to-date lows last month.

But be warned, even as cryptocurrencies seem to be building positive momentum again, the fundamentals still look troubling, and it could get worse in the near future. As a result, Bitcoin, Ethereum, and other cryptocurrencies all face mounting risks looking ahead.

The end of the line for cryptocurrencies in China 

For years, Chinese investors had been some of the biggest drivers of the cryptocurrency bull market. This is because of stringent capital outflow controls enforced by the central government. In fact, citizens are only allowed to purchase $50,000 worth of foreign currencies every year, so shifting hard-earned money abroad through cryptocurrencies became a no-brainer.

This has inflated the value of some coins due to limited supply. For example, let's say Chinese tech billionaire Chen wishes to transfer $48 million to the Cayman Islands via a cryptocurrency known as the send-me-now (SMN) coin. However, there are only 100 SMN coins available, so Chen must first bid up the price of each coin to $480,000 to make it a one-time transaction. One can see how the price of cryptocurrencies could go up frequently and suddenly this way.

But the Chinese government doesn't seem to like this loophole. Recently, the ruling Communist Party barred financial institutions and corporate entities from doing business with cryptocurrency investors. In addition, provinces are beginning to outlaw cryptocurrency mining operations, citing environmental concerns (which we'll get to later). It's hard for any asset to rebound in price when its major buyers have been barred from the market, and the recent volatility for non-fungible tokens (NFTs) has only added fuel to the flames.

NFTs are not what they seem

The logic behind the NFT hype is simple: authentic, physical art is expensive. NFTs are authentic, digital art. Therefore, NFTs should be expensive as well (corollary: NFT coins go to the moon). Unfortunately, that is far from the case. Physical artwork isn't just expensive, because people who buy it are connoisseurs who like drinking red wine while viewing their collections. Much of the demand in that world is also driven by tax avoidance (that is, the reduction of taxes through legal means).

The setup works like this. Let's say a high-net-worth individual (HNWI) named Sarah purchases a $5 million piece of artwork from an auction and ships it directly to a free port -- a designated economic zone where customs duties and taxes do not apply until an asset leaves the zone -- to legally avoid the sales tax. Five years later, the artwork appreciates to $25 million. Sarah then hires an appraiser, who usually has a financial incentive to inflate the piece's value, to certify the painting. She then donates it to a non-profit and can claim the full market value of the piece at certification ($25 million) as a deduction against her income, usually over a few years. Because HNWIs do this, the value of artwork can also become grossly inflated.

But the demand is not replicable when it comes to NFTs. First of all, most non-profits don't even accept cryptocurrency. What's more, there is a lot of confusion as to NFTs' classification. Suppose the Internal Revenue Service determines Sarah's NFT was a collectible instead of an intangible capital asset, then tough luck. In that case, she could only deduct her cost basis ($5 million) for her donation -- resulting in a redundant transaction. Until there is greater clarity about how they are classified under the tax code, there is little inherent value to NFTs based on the Ethereum blockchain. On a side note, it's probably in the best interest of Uncle Sam that it stays this way.

Meanwhile, their utility for digital art collectors is very controversial. Buyers are getting exclusive rights to an item but often at a very high price for something that one can find all over the internet (i.e., a video from a professional basketball player). As a result, it's unlikely the market could attract significant capital from investors long term. Regulations haven't caught up with other possible uses like in real estate, so while NFTs are an innovative way to store something like a land deed, the practice needs greater industry and regulatory approval before taking off. 

Staggering environmental concerns 

Moving back to Bitcoin, the energy cost of mining it has gotten out of hand. Because Bitcoin's reward keeps on halving, miners need to keep upgrading their equipment to stay profitable. For example, the latest Bitcoin mining machine, the Antminer S19, has a power consumption of 3,250 watts, equivalent to a central air conditioning system. At current coin and energy prices, miners typically spend close to $2,000 on their electricity bills per year, per machine. Bitcoin mining now consumes 0.55% of global electricity production, and it's simply not sustainable. To put it into perspective, one Bitcoin transaction consumes about the same amount of energy as 1.2 million Visa card transactions. 

Bitcoin and Ethereum are two of the biggest flag-bearers for the overall cryptocurrency market, and as of this writing, they have severe utility and network issues that are unaddressed. Investors should understand that prices will continue to be extremely volatile as well. For those reasons, I believe the cryptocurrency bear market is far from over.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Is the cryptocurrency bear market over? appeared first on The Motley Fool Australia.

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Zhiyuan Sun has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Bitcoin, Ethereum, and Visa. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.