You want to invest in Ethereum, but you don’t really know much about its use and relevance except that it is probably like Bitcoin.
Maybe you just heard an investor you trust say it’s a good move, or perhaps you have been running into endless articles that espouse its utilities.
You might not even know what the difference between this and Bitcoin is, or if they’re the same thing.
If this is your case, you have come to the right place. Crypto discussions are at an all-time high, but largely, the trend is to wrongly assume that many people have a good knowledge of digital currencies.
Today, we’ll be breaking that standard and going for a basic guide to the uninitiated about Ethereum, what it is, how it works, and why you should (or shouldn’t) invest in it.
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What is Ethereum?
This question can be answered in the most basic of ways by saying it’s a cryptocurrency. While said statement is true, there are naturally much deeper details that need to be mentioned if one wishes to actually capture the essence of it.
Ethereum isn’t Bitcoin. Both of them are cryptocurrencies, but they’re different – something important, since different cryptocurrencies have different values, uses, and outlooks.
Still, for most users, Ethereum works in the same way: It’s a digital currency created using blockchain technology, and in this case tied to the Ethereum blockchain.
It is also one of the most successful cryptocurrencies in the market, and one many consider a sound investment.
Ethereum has emerged as the leading altcoin and that puts in a pole position as the go-to option for many people who are not able to buy bitcoin.
How does Ethereum work?
To understand how Ethereum works, we should first know what makes it special – that is, what makes it different from Bitcoin.
While following the original Blockchain implementation set by Bitcoin, Ethereum has always been an attempt to push crypto forward.
While the Bitcoin blockchain has remained mostly static over a decade now, the Ethereum blockchain sees constant improvements and new features, keeping it relevant where other blockchains fail to.
More importantly, the Ethereum blockchain has an actual, measurable use.
While Bitcoin has since launch had a use, specifically the same our fiat currencies have, there was little justification for the blockchain itself.
Sure it was (and is) secure, and (mostly) anonymous, but there were few, if any, reasons your average person would want to use it.
Such is still the reality for Bitcoin, since the blockchain has barely changed in a decade and it’s not expected to change anytime soon.
Ethereum, instead, comes with its ecosystem, both to support and justify its cryptocurrency.
In its core, Ethereum is a platform dedicated to running distributed apps (dApps,) that is, applications and programs that run on the blockchain, using its own power.
It’s also an extremely potent tool for smart contracts (that is, contracts that are self-executing.)
The cryptocurrency, Ethereum, is there to help keep this platform running. It works as a payment for transactions taking place on the blockchain, whether for accessing services therein or to power initial coin offerings as they occur.
4 Reasons to invest in Ethereum
Ethereum solves real world problems
As mentioned above, Ethereum has an actual goal and well-defined case uses beyond being crypto for the sake of crypto.
It solves problems for many developers by allowing them to have distributed (i.e., non-centralized) apps that can’t be taken down, and its implementation of smart contracts is second to none.
This last feature is indeed the most important part of the Ethereum ecosystem these days. Self-enforcing contracts are being positioned both as a solution to contract disputes and as an easy, convenient way for two parties to draft contracts without needing a middleman.
For example, a company could on creation decide all proceedings will be split evenly among its directing board.
The money, instead of going through an accountant, would be moved through the blockchain, where the smart contract would automatically divide it among the parties.
There wouldn’t need to be anyone to enforce the contract, and it would be considered inviolable.
Ethereum is backed by Fortune 500 Companies
One of the main worries many crypto investors have is whether the value of their holdings might plummet overnight due to a sudden shift in the market.
We could tell you this won’t happen with Ethereum, but in truth it’s impossible to know and all cryptocurrencies are vulnerable to sudden price changes.
However, there are factors that tell us if a currency or a stock is more or less likely to lose its value quickly.
One of those indicators is who is investing in it and why. The more reputable people we have among investors, the less likely the investment is likely to be exposed to credibility issues.
In Ethereum’s case, major investment banks and fortune 500 companies have backed or invested in the crypto token.
This list includes banks such as J. P. Morgan, who once flatly opposed cryptocurrencies, and companies like Credit Suisse and Accenture.
While this doesn’t guarantee anything regarding Ethereum’s long-term value, having major players in the economy hold tokens means there’s a decent level of trust in it among the higher elites – which can’t really be a bad thing.
The Role of Financial institutions
Besides companies investing in it, banks and investment firms have taken Ethereum not only as part of their holdings, but as part of the options they offer for their customers.
While we’re not yet at the point where cryptocurrencies are widely used by everyone, many financial institutions have understood their value as investments and are offering their services to customers who wish to invest.
Firms like Etoro have been offering it as part of its investible portfolio for years, for example.
Beyond this, certain institutions are actually using the blockchain to push their crypto presence. J. P. Morgan, who earlier this year announced its own cryptocurrency (a USD-pegged stablecoin,) is using Quorum as its driving force.
Quorum is itself based on Ethereum, which speaks for the blockchain’s usability and position in the crypto environment.
Price - It’s not as expensive as Bitcoin, yet valuable nonetheless
The last, important point here is Ethereum’s value. Historically, Ethereum has always been valued lower than Bitcoin.
This is attributable in part to the number of tokens in existence and part in thanks to the latter’s huge popularity as an investment option.
While Bitcoin’s price is above the $10,000 mark, keeping a full unit of it out of the reach of small investors, Ethereum’s value has hovered under $300. This lower price makes it easier for investors to purchase and hold tokens.
Sure, Bitcoin can be purchased in units much smaller than 1, but it’s always simpler to manage whole amounts rather than tenths or hundreds of a unit.
Another advantage of Ethereum’s comparatively low price is that the risk is smaller: Since the currency is worth less per unit, losses incurred from market shifts are also smaller.
If Ethereum were to lose 10% of its value today, it would amount to roughly $17/unit. If Bitcoin did, it would be a bit over $1000/unit. It’s still 10%, but the real size of the numbers changes.
Last, while Ethereum is cheaper than Bitcoin, it is also more expensive than most of the other cryptocurrencies out there.
This puts it in a sweet spot of sorts where it’s one of the market leaders, but it’s not the token that competitors might be aiming to bring down – even when sabotage isn’t a common thing among blockchains.
How to invest in Ethereum
Investing is an art that goes well beyond the “buy low, sell high” mantra. In fact, that saying might not be the best one to follow depending on both the market and your own goals.
There’s a lot more to investing than that, and a lot more to investing than just purchasing tokens or assets to keep your money from losing value and make a bit of extra money in the process.
How you should go about investing instead depends on the market you’re investing on and the goals you have.
While a FOREX trader and an Amazon stockholder both could be considered investors, they share little more than the noun: Both use wildly different methods, have different goals, and success will look different in both cases.
Buy and Hold
The most common type of investment, and the process that comes to mind when you hear the word, is this one. Buying and holding refers to buying a token (or a stock) and keeping it until you feel it’s the right time to sell.
This means waiting until the value goes high enough, and then selling. The typical “buy low, sell high” methods is exactly this one.
Naturally, it’s not as simple as it seems. You can’t just buy anything that’s cheap and expect it to increase in value, nor can you just buy a good token at just any moment.
Ideally, you’ll first watch out for market fluctuations, waiting for the right moment to buy. Ideally, you’ll want to buy when it’s low, but not when it’s looking like a low the token won’t recover from.
Then, you’ll have to wait (hold) the tokens, hoping the value goes up so you can sell at a profit.
A lot of people did this with Bitcoin. Many people bought the token in 2009 or all the way up to 2014, when prices were still low, and cashed out in late 2017.
This method can work, but ideal cash-outs don’t usually happen quickly. It may be years before you see any returns on an investment with a buy and hold method – so this is one for the long term.
Invest in your IRA
More than a flat-out method, IRA investments are there to try and keep a person’s savings from losing value as markets shift and inflation drives prices up.
Cryptocurrencies are one of the more popular investments for people to add to their portfolios these days, partly because they’re semi-liquid (they’re in theory currency, after all,) partly because they’re known to appreciate, and partly because they’re a separate entity from the fiat currency and economy of any one country.
As such, crypto tokens are treated in the same way as shares in a company when it comes to your IRA. Unlike in the “Buy and Hold” method, you don’t purchase Ethereum for your IRA with the longing that you’ll sell it soon.
You buy it mostly as a security, with the added value that it might bring some earnings if the markets go up, and the added disadvantage that it might lose some of its value. But if things go well, you won’t be selling these Ethereum in a long time.
Curiously, the relatively lower value of Ethereum makes it more desirable for this than Bitcoin, because its lower value also brings increased stability.
For an IRA investment, you want stability above all, with the chance for price appreciation being a plus.
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The last method you could use is short-term trading. For this, there are two styles you could go for.
The first one is simply buying low, selling high, but using lower peaks and valleys. So you’d be buying and selling your Ethereum constantly, depending on market whims, and preferably doing the same with other cryptocurrencies.
If you know how to read the market based on news, fluctuations, and alerts, you’ll be able to make a profit with this, although it’s risky.
There’s an even riskier method, which is known as day trading. This one involves buying and selling tokens in very small timeframes, always under a day – sometimes several times during a day.
In essence, you’ll be doing the same thing FOREX traders do, but with cryptocurrencies. It’s an extreme, risky method of making money where profits are razor thin.
However, with this method, you get short-term income, which is what many day traders go for.
An even more extreme method of day trading, known as leveraging, includes taking a loan to perform day trading with, the amount of said loan usually tied to how much money you own yourself.
You are then allowed to invest somebody else’s money, with two conditions: First, a part of your earnings will be the loaner’s.
Second, the moment prices go down and you lose the equivalent to your initial stake (known as your leverage,) you must pull out and return your loaner all of their money.
The upside, of course, is you get to make more money… if the market holds up to your expectations.
How to buy Ethereum
While there are many places that offer Ethereum, including investment houses and retirement plans, we’re going to focus on how to buy it on your own, without external assistance here.
For this, we’ll use Coinbase, one of the largest cryptocurrency exchanges, as our example.
You’ll be asked for an email and password. Do note that you’ll need to verify your account later on if you want to use the exchange to its fullest.
Proceed with verification – it’s a three-step process, although many people will find it enough with just completing the first two, which will allow you to buy and sell cryptocurrencies and withdraw your fiat.
The requirements for level 2 are phone number and personal information, including proof of residence. For level 3, a photo ID is also required.
Once you’re done with this, you’ll need to deposit fiat currency into your account. First, add your account to the system (Payment Method > Add new Account,) then proceed to verify it and order the deposit.
If you’re intending to make the purchase via debit or credit card, which aren’t supported everywhere, add the credit card on the Payment Method option.
The “Buy/Sell” option is where all trading happens. Look for ETH among the trading pairs offered and select the one that’s paired with your fiat currency.
Input the amount of ETH you want to purchase and check the price, then proceed with the transaction.
Credit and debit card transactions are instant, while bank transfers can take a few days – either way, the price is locked when you authorize the purchase.
If you want to sell later on, go to your dashboard and select the crypto you own that you wish to sell.
You’ll be sent to a page where you can sell it in the same way you bought it.
Should You Invest in Ethereum?
When it comes to cryptocurrencies, you could certainly do much worse than Ethereum. Unlike other tokens, Ethereum is relatively stable while also being well valued.
It's blockchain being one of the biggest blockchains in the world also helps, since it guarantees that, at least for now, there’s a market for the token. On that score, Ethereum is among the safer choices that anyone explore in the crypto sphere.
However, the crypto market is known for being extremely volatile, and since mass adoption of cryptocurrencies isn’t here yet, it’s difficult to know just what will happen in the future.
It’s quite likely that, once mass adoption happens, a few tokens will be widely accepted, with the rest relegated to niche operations. There’s no way to predict which ones will be.
Ethereum certainly has a good shot, both because of the blockchain itself, and because of how many more tokens use the blockchain, but nothing is assured here.
In other words, Ethereum is relatively safe – for a cryptocurrency. It’s certainly a better investment for those who don’t like rollercoasters, but it’s not wholly safe.
Is it good? Yes, or as good as a cryptocurrency can be. It is not immune from unpredictability, however, because no investment ever is.
Since the market is relatively stable currently, buying ETH isn’t a bad idea – however, once you do, it’s your duty to keep an eye on the market, the news, and token values.
Knowing when to jump out is important when dealing with cryptocurrencies.
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Asif is a cryptocurrency enthusiast and journalist who’s been writing on the subject since 2014. He also has a keen interest in social engineering and cybersecurity. When not busy writing about cryptocurrency, he can be found reading books and listening to music. He holds an M.Sc in Life Science and an MBA in Finance & Banking.