Ethereum is not a cryptocurrency — it’s a global computer for running decentralized apps (dApps). Ether (ETH) is the cryptocurrency that powers the Ethereum network, and it's the required form of payment for running your app or processing your transaction on the highly-desired Ethereum blockchain.
While Bitcoin is really good as a store of value, it doesn't support smart contracts like Ethereum does. Arguably, Ethereum is equally capable as a store of value. This being said, many prefer bitcoin to store value because of its hard-capped supply. While both the supply of Bitcoin and Ether are increasing, there will never be more than 21 million bitcoin in circulation. With Ethereum 2.0 and EIP-1559 however, Ether may become deflationary, that is, the supply of the token will actually decrease with time.
Ether has been competing with Bitcoin for the top spot as the largest cryptocurrency by market capitalization since its release in 2015 and came close to overtaking Bitcoin in February 2018. Both of these coins have hit new all-time highs since then, and there appears to be more room for both to grow in 2021. Some experts predict Ethereum will "flip" Bitcoin this market cycle to become the dominant cryptocurrency in the industry.
Investing in Ethereum vs. Bitcoin
Bitcoin and Ethereum have completely different use cases. Bitcoin acts as a store of value, similarly to gold. Ether acts as a store of value too, while the Ethereum Virtual Machine enables a host of innovative applications such as DeFi, NFTs and the metaverse.
The Ethereum Virtual Machine allows coders to write programs called “smart contracts.” Ethereum smart contracts can automate thousands of financial products and are the building blocks of non-fungible tokens (NFTs). These smart contracts enable full-fledged applications like decentralized exchanges (DEXs) and automated market makers (AMMs).
While very basic smart contracts are technically possible on Bitcoin's blockchain, Ethereum's custom programming language and huge team of developers make it the likely long-term settlement layer. Bitcoin's blockchain acts as a decentralized ledger for processing payments. Ethereum is a ledger with a full computer attached, allowing much, much more than just processing payments.
As far as which of the 2 is a better investment, it's impossible to say for sure. It’s likely that both Bitcoin and Ethereum will stand the test of time and coexist peacefully in the future. At the end of the day, your investment decisions must be made by you (or an investment advisor). The best thing you can do is to educate yourself as much as possible before risking any of your hard-earned money, and never invest money you aren’t willing to lose entirely. You don't want to end up on the front page of Wall Street Bets, after all.
Where to Buy Ethereum
Decided you want in on the Ethereum action? Listed below are a handful of exchanges where you can purchase Ether. If you're new to crypto, jump to our guide on How to Buy Ethereum or compare exchanges with the Best Cryptocurrency Exchanges guide.
Advantages of Ethereum
The overwhelming performance of Ethereum has attracted traditional and institutional investors alike. Ethereum and other cryptocurrencies provide you with the following advantages over traditional investments:
- Volatility. While this was previously seen as a negative, smart investors have realized market cycle patterns and are able to capitalize on the parabolic gains produced by market bubbles.
- Liquidity. Ethereum is arguably 1 of the most liquid investment assets due to the worldwide establishment of trading platforms, exchanges and online brokerages. You can easily trade Ethereum for cash or assets like gold instantly with incredibly low fees. The high liquidity associated with bitcoin makes it a great investment vessel if you’re looking for short-term profit. Digital currencies may also be a long-term investment due to their high market demand.
- Lower inflation risk. Unlike world currencies — which are regulated by their governments — Ethereum has a transparent inflation plan that is subject to less meddling. The blockchain system is infinite, and there’s no need to worry about your crypto being deflated.
- Decentralized Finance. Ethereum and DeFi are relatively young — NFTs and many other new applications are becoming more mainstream on a daily basis. This newness brings unpredictable swings in price and volatility, which may create opportunities for massive gains.
Disadvantages of Ethereum
Ethereum may play a part in the future of monetary exchange and global computing systems, but it is equally important that you are aware of the concerns surrounding cryptocurrency investing.
Risks associated with investing in Ethereum:
- Volatility. If you happened to buy Bitcoin on December 17, 2017, the price was $20,000. Weeks later, you couldn’t sell your investment for more than $7,051. Although you would be doing great now, to avoid painful losses in the short term, keep a close eye on the market.
- High transaction fees. Arguably Ethereum's largest drawback, transaction fees, hold back the network from reaching mainstream adoption. Using Ethereum's blockchain can cost hundreds of dollars, so retail investors with smaller amounts of capital are priced out from using the network. While other smart contract blockchains have cheaper fees, Ethereum has the most applications and use cases built on its blockchain.
- New regulation. The government is unlikely to let cryptocurrencies remain completely unregulated for long. New regulations could interfere with business models, and cause crashes that are entirely out of your control.
- Threat of online hacking. Hacks are a threat facing many cryptocurrency investors. Most exchanges let you buy and sell your cryptos using a mobile app or website. However many users also store their crypto on exchange wallets. This leaves them susceptible to losing their investments should the exchange get hacked, and their private keys being stolen. Cryptocurrency held on most exchanges isn’t insured by the FDIC.
- Competition: There are a ton of emerging smart contract platforms giving Ethereum a run for its money, namely Binance Smart Chain, Cardano and Polkadot. While these cryptocurrencies offer better scalability than ETH, they lack decentralization and the robust DeFi ecosystem that Ethereum has on its network.
- Proof of Work Consensus: Although Bitcoin also uses proof of work consensus, this is more of a con for Ethereum. Transactions on bitcoin are only necessary to transfer the crypto, while Ethereum's network is used for a variety of functions. Proof of work is more expensive and slower than proof of stake, which is currently being used by many ETH competitors.
Investing in Blockchain Tech
Unlike speculative stock investments, there are some additional storage risks to be aware of when investing in cryptocurrency specifically. It’s wise to understand the fundamentals of cryptocurrency, the blockchain and Ethereum before placing large sums of money into the technology.
So, is Ether a good investment? It can be if you do your research, manage your coins properly and keep an eye on the market. Crypto investing is not as simple as calling a broker and buying or selling. You are actively involved in the process, and that means you need a wallet. Cryptocurrency wallets are a fundamental part of the ecosystem, giving you the ability to easily send and receive money.
Crypto wallets use a computer science concept called public key cryptography. Public key cryptography uses the factorization of really big prime numbers to keep your money secure. Cryptocurrency wallets have 2 “keys”: 1 public key and 1 private key. The public key can be though of as the slot at the top of a mailbox, while the private key is the one needed to extract the mail from the bottom.
Your public key, or wallet address, is needed to send money to your wallet. Data must be encrypted before being sent over the network for privacy reasons. As the name suggests, your private key must never be shared with anyone. This is because your private key can be used to decrypt, or unlock, any data that was locked by your public key.
Crypto wallets don't store cryptocurrency, they store your private key. Cryptocurrencies are stored on the blockchain, and your private key proves ownership.
There are 2 types of wallets: digital and hardware. MetaMask and Coinbase Wallet are typically the best route to go for digital wallets, and the Ledger Nano X is the best hardware wallet. If you get logged out of these wallets, you’ll need a recovery tool called a “seed phrase” to log back in. A seed phrase is a set of randomly generated and secret words that will allow you to recover your private key in a worst-case scenario.
A key driver for Ethereum's blockchain is the rise of NFTs. Almost every high-value NFT is secured by Ethereum's blockchain, including CryptoPunks, Bored Ape Yacht Club, and Art Blocks. Many new users on Ethereum were drawn to its network to invest in NFTs, so if NFTs continue to breach into the mainstream, it's likely Ethereum will continue to gain adoption. While other platforms like Solana and Avalanche have NFTs, the market for non-fungible tokens on these blockchains is magnitudes smaller than that of Ethereum.
If you lose access to your wallet’s private key, whatever cryptocurrency was associated with the wallet is now lost forever. The best way to prevent this, is to handle your private key and seed phrase with extreme care. A forgotten seed phrase can remove currency from circulation forever. A memorized seed phrase can carry billions of dollars across borders with 0 physical evidence.
Disclaimer: Do not take out a loan to invest in cryptocurrencies like Ethereum. Do not purchase them with credit. Do not do anything that could endanger you or jeopardize your financial future. If you aren’t sure how much risk you are capable of handling, consult a financial advisor who is trained for this.
Frequently Asked Questions
Ethereum is a global computing platform for decentralized apps (dApps). Ethereum smart contracts enable the automation of financial products and more, all peer-to-peer on the Ethereum blockchain.
Ethereum is an unregulated digital currency that can be mined effectively by most modern graphics cards (GPUs). Mining Ethereum is actually quite simple, and can generate passive income for people with low electricity costs.
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