Ethereum, which ranks second after Bitcoin in terms of global market capitalization, has seen spikes and falls since its inception in 2015. However, the cryptocurrency has been causing a stir recently amid huge interest in the crypto space in general, making new highs in April 2021.
What is Ethereum and why is everyone talking about it? Is it the same as “ether”? What gives it value and what is its long-term investment potential? And how do you actually buy it?
Below are some points to keep in mind regarding Ethereum and, once you decide something you’re interested in, some common ways to buy, hold, or trade the cryptocurrency.
The investment potential of Ethereum
What gives Ethereum value?
When you buy Ethereum, you are technically converting your US dollars into “Ether” or ETH, the currency on the Ethereum blockchain. In order to use the Ethereum blockchain (which includes sending ETH as a means of payment or using an application running on Ethereum), ETH must pay a transaction fee.
So what can you do on the Ethereum blockchain? While the technology is still very young – and frankly untested in many ways – Ethereum allows users to run “decentralized applications” or dapps. Dapps has essentially eliminated the middleman in industries where there have for the most part always been middlemen and instead relied on “smart contracts” that run on Ethereum. In order to be able to use these applications, ETH has to pay the costs for “gas” – a measure of how much computing power is required to run the application. Examples of dapps are:
Direct Peer Loans That Earn Interest.
Insurance without an insurance company.
Payments without the payment processing company.
Streaming music where the money goes directly to the artist, not a streaming platform or record label.
Art auctions without an auctioneer.
Marketplaces for non-fungible tokens or NFTs.
Code collaboration without a central server.
It’s all very complex. So if you are confused, don’t worry. That is normal. But, quite simply, when you invest in Ethereum, you are betting that people will continue to adopt and use new Ethereum-based technologies like the ones listed above that could potentially fuel the demand for ETH – and its market value. higher.
Are you satisfied with the volatility of Ethereum?
Cryptocurrencies are dominating the headlines, but the truth is, if you treat them strictly as an investment, they are still a very volatile alternative asset. It is generally advisable to treat them as such in your portfolio.
We noticed enormous price fluctuations at ETH: in 2016 it ranged between around 5 and 15 US dollars. By the beginning of 2018, the price had risen to nearly $ 1,500, but after that, ETH started a bumpy descent, falling to less than $ 100 by December 2018.
And the kicker? The price of ETH only rose above $ 500 again in November 2020 and thawed what many referred to as “crypto winter”.
Imagine this: you bought ETH during the January 2018 hype to see the value crater of your investment year round. 2019 comes and goes and you still haven’t made your money back. After two years, would you have reduced your losses and taken whatever money you could get? In this case, Ethereum’s volatility can mean it’s a bit risky for you.
Are there red flags?
Just as you would do extensive research on a company to look for red flags before investing, you can do the same for cryptocurrencies. And problems have arisen since the launch of Ethereum.
It’s getting a bit complicated, but right now a pressing issue is that gas – that transaction fee that keeps the system running – is more expensive than it used to be. Much more expensive.
At the beginning of 2019 it would have cost you around 10 cents to conduct a transaction with Ethereum. And today? This fee is around $ 20.
How Ethereum fits into your portfolio
Before thinking about buying Ethereum, check your portfolio to see if the cryptocurrency has a place in it. Generally a combination of equity funds (such as Index funds and exchange traded funds), Bonds or pension funds, and cash form the core of a highly diversified portfolio. Finding the right mix of these assets based on your personal risk tolerance, schedule, and investment goals is known as Asset allocation. Before getting into any alternative asset like crypto, make sure you have the fundamentals of a long-term portfolio in place.
However, if you already have a highly diversified, balanced portfolio, a cryptocurrency like ETH can offer you even more diversification. Since the performance of cryptocurrencies generally does not correlate with the performance of the stock market, adding crypto to the mix could theoretically act as a cushion if the stock market collapses but the crypto market remains stable.
Despite the potential benefits, cryptocurrency volatility is still an important factor. In addition, we only have a few years of data to find correlations between cryptocurrencies and traditional markets. It is possible that the current trend will change.
How much ETH can you afford?
Before putting money into any investment (including stocks), make sure you have adequate emergency money savings. You should make yourself comfortable living without the money that you want to invest in the foreseeable future – for example, in the next five years. Do you remember the “crypto winter” mentioned above? There is always a chance that there will be another and you should have a plan to put up with it.
One way to find the right amount of ETH for your portfolio is to think of it as another risky alternative asset. With that in mind, you might decide to allocate a small portion of your portfolio – some experts may refer to this as “casino funds” – to cryptocurrencies.
And if you are unsure of how much to invest, or if you are nervous about a drop in price shortly after you buy, there is always a tried and tested strategy to borrow from traditional investing: Averaging the dollar cost. As with any investment, it can be a good idea to start small to learn the mechanics of buying ETH (which we will explain below).
Where to buy ETH and how to store it
Once you’ve done your research and determined that there is a place for ETH in your portfolio, you need to decide where and how to buy and store the cryptocurrency. There are basically two prerequisites for buying and holding ETH:
An exchange: Here you can buy crypto with US dollars or exchange one cryptocurrency for another.
An ETH wallet: The currency is stored digitally here. A wallet also has a public address that you use to send or receive ETH.
Here are some options for buying ETH, and how exchanges and purses are involved in each method.
Online stock broker
Buying cryptocurrency from one Online brokerage That it offers is one of the easiest options, but it can have serious disadvantages. While online brokers have made it easy and inexpensive to convert your money to crypto and vice versa, check the fine print to see if the broker allows you access to your wallet or lets you move coins in and out of the account – some brokers do Not. t. In the eyes of crypto purists, this essentially nullifies the entire sense of owning a digital currency.
Crypto brokers with hosted wallets
Crypto brokers with hosted wallets allow you to buy ETH and other coins with US dollars and keep them safe in a wallet hosted by the broker. For investors new to cryptocurrency, the buying process is simple and streamlined, and you have the option to send and receive coins.
With a hosted wallet, you no longer have to worry about losing the private key to your wallet or forgetting a password – a real problem that has cost people millions of dollars. Rather, the host stores this information for you. A common analogy is that it is like a bank holding and securing your money for you. But you probably won’t be able to take full advantage of cryptocurrency, such as: B. the dapps listed above, and you also don’t have complete control over your wallet and the crypto it contains.
Centralized Exchanges and Unsecured Purses
This is a more advanced way of buying, holding, and trading crypto, and it gives you more control over your money and wallet.
One way to do this is to set up your own ETH wallet for safekeeping and buy ETH with cash on a central exchange (like Binance.US or Coinbase Pro). However, for security reasons, it is generally not a good idea to hold large sums on exchanges for long periods of time. While security has come a long way, sharing has been a big target for hackers in the past. This is why you need your own wallet to send your ETH to after buying it on an exchange.
There are a ton of wallets to choose from, ranging from “hot” online wallets to physical offline devices known as “cold” wallets. One of the best starting points is that Find a wallet Feature on Ethereum.org that filters wallets based on your specific preferences.
Once your wallet is set up and ready to receive ETH, you’ll want to choose an exchange. Central exchange is relatively straightforward; If you’ve used a mid-level stock trading platform before, these will look familiar to you. And given the popularity of ETH, you can likely buy ETH in US dollars on most centralized exchanges. However, if you want to swap one cryptocurrency for another, you should do a little more research into what pairings are available and what is listed on the exchange.
»Nerdy tip: Here is a Directory of Exchanges This means that fiat money (e.g. US dollars) can be traded for ETH.
If you have your own wallet, you can trade your ETH on a decentralized exchange or DEX. In a sense, a DEX is the truest way to trade cryptocurrencies as there is no third party at all. With centralized exchanges, you need to deposit the coins or dollars that you want to trade in the market into a trading account. However, with DEXs you stay in full control of your money and trade directly with a buyer or seller.
However, DEXs can be confusing to navigate and are mostly used to swap one cryptocurrency for another instead of buying ETH with cash. In short, they are not beginner friendly.
Choose what is best for you
Choosing the right way to buy and hold ETH depends on experience, comfort, what you want to achieve with your ETH, and how much you want to buy or hold. It is entirely possible to use a combination of the above methods. Perhaps one platform will be used for convenient trading and another for long term holding. For beginners, it may be best to start with a crypto broker or stockbroker. Then you could work your way up to the more advanced, more decentralized platforms.