2021 was nothing but extraordinary for Ethereum, the second-largest cryptocurrency by market cap. Ether (ETH) – the native cryptocurrency of the Ethereum blockchain – which was trading at around $700 on 31 December 2020, grew by more than 300% to be valued above $4000 per token by December 2021.

Conceived in 2013 by programmer Vitalik Buterin, Ethereum is a decentralized, open-source blockchain with smart contract functionality. Since then, it has gone on to become the second-largest cryptocurrency both by market capitalization and price. 

Several factors have gone into play to make Ethereum an investor favourite. In fact, one of the primary factors that have made Ethereum the best alternative to Bitcoin is how the former differs from the latter. 

• Ethereum is a ledger technology that firms leverage to build new applications, while Bitcoin is merely a digital currency. While both Bitcoin and Ethereum are based on “blockchain” technology, Ethereum’s blockchain is far more reliable.

• With its birth, Ethereum brought forward the concept of smart contracts to the crypto space for the first time, along with decentralized apps (dApps) that operate independently without the requirement for top-down oversight and control by any one organization or individual.

• Over the last year, institutional investors have shown a keen interest in Ethereum, owing to the advent of applications such as decentralized finance (DeFi) and non-fungible tokens (NFTs). Fueled by a slew of celebrity endorsements and collaborations, NFTs ruled the market last summer. Lately, Ethereum has become a core asset in emerging crypto markets like NFTs, DeFi, and the Metaverse. Firms in this field need Ether to run their smart contracts, which has boosted demand for the cryptocurrency and maintained a consistent upward trend in its price.

• There’s also Web 3.0, which is propelling Ethereum forward. In essence, Web 3.0, a newer generation of the internet, is in charge of defining how we use it and decentralizing the internet. In the context of Ethereum, decentralized programs that operate on the blockchain can be referred to as Web3.0. This will not only open up new opportunities in giving users control of their content, but it will also improve the security and efficiency of everything that happens on the Internet.

After reaching a high of $4,100 on 27 December 2021, Ethereum has since hovered between the $3,000 and $4,000 price range. However, Ether prices have dropped significantly in recent days, reaching their lowest level in more than three months. At the time of writing, Ethereum is trading at $3,240.75.

So what has caused this massive decline in prices? What’s the future of Ethereum? And will an investment in Ethereum be worth it? Keep reading to find out all about Ethereum’s outlook for 2022. 

Ethereum – The recent decline

The crypto market is no stranger to extreme bouts of volatility. When viewed from this perspective, the recent price decline may appear insignificant. Furthermore, the meltdown is not limited to Ethereum. In the last few days, Bitcoin values have also plunged to a three-month low. After a year of major gains and historic highs, it seems that cryptocurrencies are again experiencing major volatility. 

A large part of this downtrend in prices can be attributed to the emergence of the Omicron COVID-19 variant and the subsequent uncertainty. In the USA, the Federal Reserve Chairman Jerome Powell‘s statements on the economy’s health, as well as continuous comments by US policymakers on cryptocurrency regulations, have had a significant influence on prices and the overall market environment.

The future of Ethereum

Despite the fact that Ethereum is more advanced than Bitcoin, it still has several challenges that it must solve in order to gain market dominance. And this is precisely what developers hope to achieve with Ethereum 2.0. Ethereum 2.0 is a massive upgrade to the Ethereum network that will shift the underlying blockchain’s consensus mechanism from proof-of-work to proof-of-stake. This will undoubtedly make the network more scalable, secure, and long-lasting.

The upgrade will also add a processing mechanism known as sharding to the network, which will increase Ethereum’s efficiency and capacity to scale. In the present version of the blockchain, any data contributed to the chain must be verified by all participating nodes. This has led to the system’s overall processing speed being limited by the speed of the slowest participant. 

With the introduction of sharding, Ethereum 2.0 will be able to improve the efficiency of its resource utilization significantly, perhaps scaling to 100,000 transactions per second or more. 

With devnets being set up, specifications being finalized, and community outreach gaining traction, Ethereum’s transformation to proof of stake is nearly complete. There’s little question that this update will significantly impact Ethereum’s value since cheaper fees and quicker transactions will attract more users to the network.

Layer 2 scaling solutions that aim to revolutionize the way we transact on Ethereum, as well as the rise of the metaverse and Web 3.0, are all coming together for the cryptocurrency. 

With the increasing adoption of the Ethereum blockchain for dApps and NFTs, prominent traders and investors predict the ether price to climb in the long run. The demand for Ethereum is projected to stay strong in 2022, prompting several analysts to forecast values between the $6,000 to $10,000 range. 

Closing thoughts

Experts suggest ignoring the ups and downs, as with any other long-term investment, indicating that the recent drop does not rule out Ethereum as a viable investment. Without a doubt, 2022 will be a turning point for Ethereum and its blockchain. While most experts and investors are unfazed by the recent price drop, they are certain that with the release of ETH 2.0, Ethereum will address its scalability problem and open up endless possibilities for its blockchain.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.