5 Things to Know Before Investing in Ethereum
“Blockchain is the tech. Bitcoin is merely the first manifestation of its potential,” says Marc Kenigsberg.
A lot of investors who are yet to invest their first dollar in crypto have this notion that Bitcoin makes up the entire blockchain. This is wrong on many levels. Blockchain is a technology; a digital ledger that stores and distributes transactions to the entire network of systems on a blockchain.
To that point, it’s also important to note that Bitcoin isn’t the only blockchain around, though it was the first one. Over the last few years, other blockchains have emerged that seem just as promising, if not more, as Bitcoin.
One of the strongest contenders in the crypto-verse is Ethereum, an open-source decentralized blockchain network with smart contract functionality. Ether, the cryptocurrency native to the Ethereum blockchain, stands to gain from Ethereum’s strong value proposition over the long term.
This article covers ETH’s value prop and several other aspects of Ethereum that investors should know before investing.
5 Ethereum Facts Every Investor Should Know
Ethereum is now one of the most recognized blockchains around. Many investors still don’t know a lot about Ethereum except the fact that they can trade it or invest in it. Investors, though, put their money in grave danger when they invest in an asset they know little about. Following are five things that every Ethereum investor should know.
Ethereum vs Ether
Ethereum, as mentioned earlier, is a blockchain network. When investors refer to investing in Ethereum, they’re actually referring to buying Ether, the native cryptocurrency of the Ethereum blockchain. This is an important distinction to recognize because the Ethereum blockchain cannot be owned by anyone.
Ethereum blockchain supports the development of a range of programs and services. These require computing power, which requires power and costs money. Ether provides a solution to this problem. Anybody that wants to use the programs or services on the Ethereum blockchain will need to pay for it using Ether.
For instance, consider a simple program that allows users to store passwords. When the user uses the app, it will need processing power from Ethereum’s network. Since this consumes power, the user will need to pay a small fee each time they make changes to their passwords.
The users will need to buy ETH for making these payments. Think of Ether as a digital fuel that the network needs to execute the processes initiated by a user. The more fuel a user’s request consumes (i.e., the more power it consumes), the higher the fee will be.
This fee is called “gas” and has been termed as one of the biggest hindrances for Ethereum’s growth. Fortunately, Ethereum 2.0 (more on that later) will resolve this issue and make the blockchain far more cost-effective.
As a rule of thumb, investors should only invest money in Ethereum that they can afford to lose. Simulate a situation where the entire invested amount has been eroded. If that’s a nightmarish experience, think about what that could lead to if it actually happens.
Taking cognizance of risk appetite is key to all investments, but more so for cryptocurrencies, because the risks are extremely high. Let’s consider Ethereum’s price for instance. Over the past one month from this writing, Ethereum’s price movement remained in a $1,000 range.
Investors that invested in mid-August would have gained over 30% in a month, while those who invested in the first week of September would have lost close to 15%.
Now, the thing to note is that this fluctuation is rather humble. Let’s change the timeframe to the past one year and see investors fared with Ethereum.
Investors that had purchased Ethereum before the start of 2021 are probably smiling their way to the bank or busy vacationing in Hawaii after having made a 350%+ gain on their Ethereum investment. On the contrary, investors that bought Ethereum at its peak in May 2021 were probably dreading their decision halfway through July when they lost about 50% of their invested capital.
Granted, volatility works both ways. Investors don’t need to worry about the upside though, because it’s the downside that can be taxing on an investor’s mental, and in worst cases, even physical health. This is why it’s strongly recommended that investors only buy crypto using money they can afford to lose entirely.
Ethereum Use Cases
Ethereum has a long line-up of use cases, in addition to what’s been discussed already. Similar to several other cryptos, Ethereum too, was built on the principles of DeFi (decentralized finance). This means the applications and services on the Ethereum blockchain are accessible to anybody that has an internet connection.
One of the most useful features of the Ethereum blockchain is its ability to execute smart contracts. Smart contracts enable the creation of dApps (decentralized applications) that have a ton of use cases.
All crypto exchanges, for instance, are an example of a dApp. dApps can also, of course, be used for non-financial purposes such as the purchase and sale of digital artwork or even gaming.
Ethereum even allows building new cryptocurrencies. Developers use the open-source network and introduce a new coin without building a new blockchain. A few common examples of such tokens are Ripple Chainlink, USDC, and USDT.
Lately, Ethereum has been in the news for yet another unique use case – NFTs (non-fungible tokens). NFTs are tokens that represent ownership of pieces of digital artwork created using the Ethereum blockchain. Notice that they aren’t the artwork, but tokens that represent the ownership of such unique items.
Learn Best Security Practices
Investors that are about to buy Ethereum but have never had experience buying crypto should identify an exchange that has been around for some time. Scammers are a common concern in the crypto-verse. Any exchange that looks even slightly shady is best avoided.
A dozen new exchanges emerge each year. Investors that aren’t aware of good, established exchanges could reach out to fellow crypto investors in the family or at the office to ask about the platform they use. Once an exchange has been identified, it’s time to decide on a wallet.
The private keys that represent an investor’s crypto coins are stored on wallets, generally on an exchange-based wallet. These are called hot wallets. Hot wallets are more prone to hackers since they’re accessible online.
Investors that want to only invest and not trade crypto frequently should consider cold wallets. A cold wallet could be a flash drive or a piece of paper where the private keys are stored. Cold wallets are inherently safer because they’re disconnected from the web. Only those who have physical access to the cold wallets can steal a holder’s coins.
Cold wallets, of course, don’t make a lot of sense for those who trade crypto very frequently. Most investors or traders will be better off finding the right balance between the two to find the sweet spot between security and convenience.
Ethereum 2.0, also known as Serenity, is a major upgrade to the current Ethereum blockchain. The upgrade will improve the blockchain’s speed and efficiency, and make the network more scalable enabling it to process a much larger volume of transactions.
Since it’s a major upgrade, Ethereum 2.0 is being rolled out in phases. The first upgrade, called the Beacon Chain, went live in December 2020. The phased rollout is expected to complete by the end of the current year or the beginning of the next year.
The key difference between the current blockchain and Ethereum 2.0 is that the consensus mechanism will be changed from Proof-of-Work (PoW) to Proof-of-Stake (PoS).
The PoW mechanism requires miners to solve complex mathematical problems for verifying new transactions, which consumes a lot of power. Miners are rewarded for the power and their efforts through the blockchain’s native cryptocurrency, Ether.
However, the PoS system eliminates the need for miners by enabling the users to become validators. The consensus algorithm doesn’t require high-power computer processing, and therefore, PoS is much less energy-intensive and environment-friendly.
This is important for investors to know and understand because it makes Ethereum more sustainable and scalable. Ethereum 2.0 is about to make the blockchain much more powerful than it has been since its inception, and this will likely factor into Ether’s price over time.
Feeling Confident About ETH?
Investing in Ethereum could be a lucrative proposition. However, it’s always prudent to understand the ins and outs of an asset before investing in it, especially when the asset has been around for a short while.
Cryptocurrencies in general have the potential to return quadruple-digit returns. However, such returns may tend to be a result of staying invested for the long term. Investors that can’t weather through the periods of volatility may want to stay away from crypto altogether. Investors that can ride the storm out may want to take a closer look and learn more about cryptos in general.
Ethereum is one of the most popular blockchain networks, and it’s about to be revolutionized. There are some investors who may consider buying themselves some Ether, because they might think that the prices will increase once the Ethereum 2.0 rollout completes.
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