Ethereum is a smart-contract capable decentralized blockchain network. Ethereum is the second most recognized cryptocurrency in the world after Bitcoin, and for good reason. After a weak phase through July 2021, the prices are back up. As per CoinMarketCap, Ethereum’s market cap as of this writing is $409.06 billion.
Investors who purchased the coin in May would have more than doubled their investment at today’s price. That’s a 100% return in less than 2 months. There’s hardly any asset capable of yielding as much as cryptos. However, investing in cryptocurrencies is a risky proposition. Being mindful is key to survival and capital preservation.
Investing in fundamentally strong coins at the right time generally yields the best returns. One of the safest bets, at least in the crypto-verse, is Ethereum. It has been around for long enough and has the desired level of fundamental strength that investors can seek comfort from. However, there are a few things investors should know before investing in Ethereum.
7 Things You Need to Know Before Investing in Ethereum
Anyone who invests in any asset without completely studying it is risking their capital. Rather than putting hard-earned money in assets that the investor doesn’t know much about, it’s best to learn about the associated risks beforehand. Also, it’s recommended that investors only invest money in crypto that they can afford to lose.
1. ETH vs BTC
Granted, both ETH and BTC are cryptocurrencies, but they have several fundamental differences. BTC is more widely accepted than ETH, which puts ETH at a disadvantage right off the bat. However, an investor’s priority is generating capital gains, and acceptance has little to contribute here.
BTC is also energy-intensive. This has regulators raising concerns about the long-term environmental impact of BTC. This is also a problem with ETH, but developers are working on Ethereum 2.0 which will consume 99.95% less energy.
Ethereum is also capable of running Turing-complete smart contracts. This is one of its biggest advantages over Bitcoin. Investors that invest in Ethereum will likely be able to capitalize on the potential of smart contracts as they become the norm among corporations over the next few years.
2. Soft Forks vs Hard Forks
Forks are a result of changes. As a coin’s blockchain evolves, forks occur, just like forks in the road. Ethereum blockchain has been changed multiple times in the past, and this has resulted in the occurrence of soft and hard forks.
Soft forks are small changes with backward compatibility. Ether’s node operators have the option to remain connected with the blockchain while being incentivized to switch to the latest version should they want to continue to earn Ether.
Hard forks, on the contrary, are major changes that result in tangible changes in the blockchain. They aren’t backward compatible like soft forks. They also compel node operators to upgrade to the latest version so the blockchain can keep functioning. However, a disagreement could lead to a split and result in the formation of two separate blockchains.
To avoid this, any proposed changes are first discussed at length instead of just implementing them on a whim. Consider the rollout of Ethereum 2.0, for instance. The rollout started back in 2020 and will complete sometime in early 2022. The phased rollout is aimed at ensuring that the node operators can keep up with the significantly different new systems.
3. How Are Ether and Ethereum Different?
Ethereum is a blockchain network, while Ether is the network’s native currency. When an investor refers to buying Ethereum, they’re effectively referring to Ether. Though these terms are used interchangeably, calling Ethereum a cryptocurrency is technically inaccurate.
When developers create new Ether tokens or dApps on the Ethereum network, they need to pay a fee. The fee, also called “gas,” must be paid using Ether. Think of gas as something similar to gas in a car or the toll that must be paid for using a road; it’s a price for using the Ethereum system.
The fee differs based on what action the operator performs, and the fees rise as the network continues to grow. The gas prices contribute to an increase in Ether’s value as developers continue to explore new use cases for the blockchain.
4. Practical Applications
A cryptocurrency’s practical applications are key to its survival in the long term. If it doesn’t add tangible value for users, it will likely wither as more competitive alternatives emerge.
While plenty of cryptocurrencies could witness a surge in market value, this will mostly be a result of new investors flocking to the cryptoverse. Without a solid value proposition, they’ll soon be a thing of the past.
Fortunately, Ether offers ample value for investors as well as enterprises. The Ethereum blockchain can support several varieties of cryptocurrencies and is also fundamental to emerging concepts in the cryptoverse such as DeFi and NFTs.
For this reason, Ethereum has an edge over its competitors. Plus, as discussed in a previous section, Ether’s use will also grow as Ethereum’s applications continue to increase. This offers investors a good opportunity to generate capital gains from Ethereum over the long run.
This doesn’t mean that investing in Ether isn’t risky. It’s still a cryptocurrency and is inherently risky. However, a technology that provides ample utility typically becomes widely accepted over time, which may result in reduced volatility in the future. Speaking of volatility…
5. ETH is Highly Volatile
Cryptocurrencies are inherently volatile. As a new asset class, there is a lot of uncertainty around cryptocurrencies regarding their applicability and regulation. As a result, Ethereum’s price tends to see massive swings. For instance, the following is how ETH’s price behaved over the past year.
Most people think of only downside risk when speaking of volatility. However, volatility works both ways. If a trader knows when to take a position in a crypto coin, volatility can work in their favor. In fact, volatility also provides plenty of arbitrage opportunities as well, if a trader chooses to go that route.
That said, investors must realize that Ethereum is volatile so they can avoid excessive exposure. Diversification is important to keep an investor’s portfolio’s overall risk under a predefined level. Investing a large amount in cryptocurrency can significantly increase a portfolio’s risk.
Ideally, an investor should never put money in crypto that they can’t afford to lose. As a rule of thumb, beginner investors should limit their portfolio’s crypto exposure to about 5%–10%. This way, if the prices drop, the investor’s net returns will be cushioned by other assets such as bonds or equities.
6. Alternative Ethereum Uses
Much like several other cryptocurrencies, Ethereum is founded on the principles of decentralized finance. The products or services native to the Ethereum blockchain are open for anyone with internet access.
Since Ethereum allows creating smart contracts, creators can build a range of decentralized applications, such as crypto exchanges, services such as Matcha that help search for the lowest prices of coins across crypto exchanges, and decentralized borrowing and lending platforms.
What’s more, Ethereum is an open-source network. This allows developers to build a new cryptocurrency from scratch using Ethereum’s network like Chainlink and Ripple. A few such names that are popular in the cryptoverse are USDC, USDT, and UNI.
That said, you can create more than just cryptocurrencies on the Ethereum blockchain. The network also allows the creation of NFTs (non-fungible tokens). NFTs are digital assets that represent ownership of a unique item.
7. Ethereum 2.0
Ethereum 2.0, also referred to as ETH 2.0 or Serenity, is a major upgrade to the Ethereum blockchain. The primary goals of ETH 2.0 are to multiply Ethereum’s transaction capacity, add sustainability to the network, and reduce the fees.
Ethereum hopes to achieve these goals by making the switch from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS). PoW is the original mechanism blockchains use and it requires that extremely powerful computers compete against each other in a bid to win rewards. In the process, computers end up consuming plenty of energy.
This has cautioned the newer cryptocurrency developers to take the alternative route–PoS. PoS saves energy because consensus can be reached through an algorithm that finds a node for winning a transaction block instead of having the nodes competing for winning a transaction block, thereby consuming a lot of power.
Once a node has been selected, it forms another transaction block in the chain. On a PoS blockchain, the nodes are typically referred to as stake pools.
Feel Confident About Ethereum?
This covers the most basic things that an investor should know about Ethereum before investing in it. However, this isn’t even a complete preview of what the entire blockchain is. Ethereum is a big concept and has a ton of applications.
That said, what’s discussed in this article should give investors some insight into why Ethereum could be a good investment. It is fundamentally strong, has real-life applicability, and allows plenty of flexibility. Plus, with the rollout of Ethereum 2.0, the network is set to upgrade its capacity by a broad margin.