Should I buy Ethereum?
This is the question that many ask themselves when they learn that ETH has rallied from $0.25 to an all-time-high of over $1,400 per coin in just 3 years.
This means that an investment of just $100 would have netted you $560,000 in just a few years.
In this guide, we analyze the advantages of Ethereum, its massive potential, and also its risks, so that you can decide if you should buy Ethereum, or not.
At the end of the guide, we will also show you how you can invest in Ethereum safely.
What competitive advantages does Ethereum have?
Buying ETH and making that investment requires an understanding of the advantages that Ethereum as a cryptocurrency and platform provides to the crypto markets.
Ethereum is the first smart contract platform to have ever been created, enabling decentralized applications to become a reality.
The initial idea to create Ethereum was born in the mind of Vitalik Buterin in 2013, who at the time pushed the proposal to be included in Bitcoin. Failing to gather support for his proposal, Buterin changed the scope to create a platform independent of Bitcoin.
Operational since 2015, the Ethereum platform has facilitated the creation of 1853 decentralized applications, many of which are platforms with their own tokens.
In fact, there is a total of 170,076 tokens issued on the platform. All of them use ETH tokens to facilitate transactions on their blockchains, enabling a steady demand for ETH, a fact which is appealing for the interested investor.
Replicating this level of activity is difficult with the only real contender in dApp space being EOS, a platform which attracted $4 billion USD in investments.
The lack of user adoption has been one of the most pressing issues that blockchain-based projects have faced, excluding ones dealing primarily with the money transmission and pure currency use cases.
IMPORTANT: Easiest ways to buy Ethereum
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The game-changing potential of Ethereum
What started with Bitcoin is being taken to the next level by platforms such as Ethereum. The ability to create decentralized applications and to share these capabilities with the world means that anyone can create products on top of Ethereum.
These products share Ethereum’s qualities, such as immutability, the ability to produce tokens, global and verifiable transparent data, and as mentioned in the first section has attracted developers to create a significant number of decentralized applications.
Let’s get a little bit deeper in the unique aspects of Ethereum and what are the real benefits of the platform’s existence.
A computer to run uncensorable apps
Censorship is a real issue in the modern world, with many of the major social media players having full control over which posts get widest amount of reach, while at the same time “shadow banning” or outright deleting content that is deemed against the terms of service.
In fact, all of these companies reserve the right to delete, modify, or “hide” content from specific countries upon receiving a request from a government official, a company, or any legitimate third party.
In most cases, far-right, neo-nazi propaganda and accounts are the targets of censorship, due to their proclivity for hate speech. Other times it’s whistleblowers sharing secrets the U.S. government wants to keep hidden from you.
Ethereum can help resolve the censorship issue, by making social media networks that are uncensorable.
Such is the case with Cent, a social network based on Ethereum which enables users to create and share any content.
Censorship in Cent is limited to the users ability to block other users, and therefore self-censor, a right we should all reserve for ourselves.
Other use cases involve securing payments data, ownership of digital and physical assets, providing oversight to public enterprise expenditures and more.
Beyond transactions, you can record essentially any type of information on the blockchain. Text is light enough to upload directly, but images and videos can also be permanently hashed into the blockchain through the use of systems such as the Interplanetary File System (IPFS).
Remove rent-seeking third parties from the finance world
Many facets of our life are connected to the prospect of money, and the institutions that operate within finances have positioned themselves to be intermediaries and to earn because of their enabling capabilities.
Mastercard earned $14.950 USD billion in 2018 in revenue, while VISA had $21.253 USD Billion in revenue in the same year. Lender bank JP Morgan made $32.5 USD Billion in net income in 2018 and a lot of this comes from interest rates on loans.
Paypal processed a total of $578 USD Billion in transactions, which results in approximately $16.72 USD Billion in revenue for the company.
These companies are making a lot of money just for helping people move their money around or get access to loans. Ethereum’s smart contract functionalities enable it to provide the same capabilities, while also getting rid of rent-seeking intermediaries.
Projects like MakerDAO have leveraged the power of Ethereum smart contracts to create a decentralized lending platform using ETH as collateral and pays the borrower in DAI, a stablecoin created by the decentralized organization.
While interest fees do still apply, they are just 2.5% low. That interest rate is appealing when compared to traditional banking rates of anywhere between 4-30% for secured personal loans.
Tokenization of assets
Tokenized assets are one of the game-changing innovations that are brought to life through the use of blockchain technology. There are predictions that by the year 2027, the total value of tokenized assets will reach $24 trillion USD.
Ethereum can be used to tokenize physical assets through the use of smart contracts and traditional legal contracts.
As a result, the assets become more liquid, easily transferable, and open for smaller investors who are not able to commit millions of dollars into an investment.
Ethereum is a great tool for tokenization due to its elaborate smart contract capabilities and high network security. This is why investors and projects are already utilizing Ethereum to tokenize physical assets.
Harbor and Inveniam Capital are working on tokenizing real estate in the USA, while startups like Smart Valor are working on building up an exchange for security tokens.
Global and transparent data verification
The nature of blockchain technology is primarily for use in decentralized and transparent systems. Secure and transparent data storage which can’t be altered by a third party, with a verifiable smart contract can be used in various use cases, and there have been successful implementations already.
While not directly related to an Ethereum-based project, West Virginia recently approved a blockchain-powered mobile app to enable overseas citizens to participate in the state-level elections.
The app in question is called Voatz and it enables the state to verify the identity of the users and provides them with the ability to cast their votes.
In the future, blockchain-powered elections are expected to be the norm because of the transparency and security of data, as well as the inability for any fraudulent activities to be undertaken.
Digital identity is another important use case for blockchain and Ethereum. Civic, a startup built on top of Ethereum is enabling the secure transference of identity from documents to a pure digital certificate.
Why now could be a good time to buy Ethereum
There is no quick and easy answer to the question “Should I buy Ethereum now?”.
Investment decisions are best made in the head of the individual investor (or investor group) after carefully analyzing the potential and risks of making an investment in this cryptocurrency.
In this section we will take a look at the good, the positive signs that Ethereum is showing, which promise to make ETH a good investment. Later on, we will also look at risks associated with investing in Ethereum.
Scalability issues are being solved
As mentioned before, Ethereum and other cryptocurrencies are plagued by one very big problem: they are hard to scale.
Decentralized systems are very difficult to scales, and if the demand for making transaction passes a certain threshold, operational problems start to appear.
Transaction costs start to rise, due to the nature of transaction fees in cryptocurrency, and waiting time goes through the roof.
At the moment, Ethereum can process about 15 transactions per second. To illustrate the problems mentioned above we touch upon a decentralized app called “Crypto Kitties” which was launched in November 2017.
By January 4th next year, this Tamagotchi-like application got so popular that the Ethereum network broke a new daily transaction all-time high.
This record number of transactions, which totals a staggering 1,349,890*, clogged the network, caused transaction fees to rise, and slowed down the processing of transactions significantly.
Since then, developers have understood the gravity of the situation and the necessity for a solution. The process of creating the solution started with two proposals, one related to sharding and another one to payment channels, otherwise known as “Plasma”.
These updates are expected to be implemented after the Ethereum network switches to the “Proof of Stake” consensus algorithm, for which the first step has already been taken on February 28th, 2019 in the form of the Constantinople Ethereum update.
A lot of ETH is being locked up
Supply and demand are the driving forces behind the value of assets on any market. Fortunately for Ethereum, and also for the prospective investor such as yourself, a lot of ETH is being used as collateral.
Crypto loan providers, such as the MakerDAO project we mentioned earlier, requires ETH deposits in order to release a DAI amount to the loan requestor.
MakerDAO holds a total of 1,952,710 ETH as collateral at the time of writing, which is almost equal to 2% of the entire ETH supply.
But that’s not all, there are countless more applications on Ethereum that require its users to lock-up ETH. These applications are collectively called “Open Finance”.
Consider this together with the fact that the entire Ethereum network is slowly transitioning to Proof of Stake (POS), a consensus algorithm which requires users to lock up their ETH in order to validate transactions, and you will understand that the ETH supply in circulation is set to diminish in the future.
As the ETH supply on the open market keeps decreasing, if demand stays constant or even increases, then by definition the ETH price will increase.
Institutional money is getting interested in Ethereum
One core part of human behavior is the fact that we are willing to follow those that we believe are more knowledgeable, stronger, or better than we are. This is why large institutions entering the cryptocurrency scene is so exciting for the ecosystem.
These organizations are trusted by thousands of investors in traditional markets. Therefore their interest in crypto adds credibility to the industry, something which digital assets have been lacking.
Fidelity, an $2.4 Trillion titan, is breaking the ice forward for others from the corporate world by establishing an investment platform for Bitcoin and Ethereum.
At the same time, the New York Stock Exchange is getting ready to write their own crypto future though their subsidiary called Bakkt. The offer is for physically settled Bitcoin initially, but there are rumors that Ethereum contracts are in the works as well.
There is a lot of legal ground to cover before these contract find themselves in the hand of retail investors, as the U.S. Securities and Exchange Commission has yet to give approval for any one of the investment instruments being proposed by these institutions.
Once approved though, these contracts, could have a powerful impact on crypto markets..
Risks of buying Ethereum
To make this guide as valuable as possible, we need to address the various risks that may influence your decision making when considering whether you should invest in Ethereum.
Knowledgeable decisions are key to making sure that your investments will not lead to regret in the future, regardless of how Ethereum’s price may turn out.
Another major bug could make people stop trusting Ethereum
Ethereum’s history is not entirely clean. Since its inception in 2015 the platform has had two major negative events that are being discussed even today. These scandals have contributed to the security of the network, but at great costs.
We are talking about two exploits, one called the DAO Hack, and another the Parity bug. In the first case the total damage amounted to 3.6 Million ETH, while in the latter case the damage was approximately 1 million ETH.
The consequences have been critical, but Ethereum has survived, as it was not the platform that was responsible for the exploits.
Which brings us to smart contracts, code which is designed to automatically perform specific operations. In essence smart contracts are not that different from any regular old piece of software, but the consequences of a bug are incredibly different.
Both cases above are a result of lack of oversight or code testing on behalf of developers creating on top of the Ethereum network.
Another bug or exploit causing damage in the future may damage Ethereum’s reputation and demand among developers, who might switch towards developing applications on platform which they deem are more secure, or provide them with better development conditions.
A better platform could gain traction
Beyond hacks and exploits, Ethereum has its fair share of issues that prevent any serious commitment by developers and users alike.
Ethereum’s scalability limitations combined with the difficulty of developing a secure smart contract, and the wasteful Proof of Work (POW) consensus algorithm may open way for other platforms to overtake Ethereum’s place at the top.
In recent years Ethereum’s success has led to the creation of similar platforms such as Zilliqa and EOS. These new competitors promise an easier learning curve, safer environment, lower energy footprint, and better GUI for the end users.
The majority of attention is still directed at Ethereum, but before investing in ETH it’s important to keep in mind that this may change.
Bitcoin, Ethereum, Litecoin and any other cryptocurrencies which rely on the original “Nakamoto Consensus”, i.e. Proof of Work are susceptible to a 51% attack.
Due to the nature of the consensus algorithm, this vulnerability enables anyone with enough hardware and mining power to create a shadow blockchain and once it becomes the longest chain, push it to the public, and have it compete for acceptance.
To perform this kind of an attack, the malevolent actor needs to have at least 51% of the mining power on the target blockchain. As a result, the attacker can modify the data on the blockchain, spend their cryptocurrency twice , and prevent others from successfully obtaining the rewards from their mining efforts.
In 2018, attackers earned more than $20 million USD by attacking five different cryptocurrencies, according to a report by The Next Web and Group-IB.
The same thing could happen for Ethereum as well, especially considering the desire of the Ethereum community to switch to a Proof-Of-Stake algorithm, which would make miners obsolete.
In light of this change, miners may self-organize to perform a 51% attack on the network in that critical stage of the transformation to take control and prevent the switch.
Critical development goals could continue getting postponed
On February 28th, an update was finally implemented after two failed attempts.
It’s understandable that the technical challenges involved when improving Ethereum are far from simple, but if its core developers constantly miss deadlines with critical updates like Sharding, then that can be dangerous for the network’s long-term viability.
Which Ethereum investment strategy should you follow?
Investing is both an art and a science, and there are multiple strategies that traders/investors to manage their digital assets portfolio. In this section we will introduce you to three separate strategies, which will appeal to different types of individuals.
Buy and Hold (HODL)
Unlike traditional investments, buying into cryptocurrency is not a complicated and arduous process. All you need is a platform to buy ETH, a wallet capable of storing it, and the iron will to HODL when all hell breaks loose.
HODL is one of the biggest “memes” in the crypto community, a play-on-words from the word “Hold”.
Cryptocurrencies are notoriously volatile, and the price can sometimes swing by 20% (up or down) in just hours. HODLing is an investors protection to this volatility, by committing to not selling even if the price drops sharply.
HODLers are crypto investors that believe in the technology, and that are planning to hold their coins for the long-term.
Dollar cost average
This strategy consists of setting a budget for yourself, and purchasing the asset class of your choice on a monthly basis, for that set amount of dollars regardless of the actual price of the asset.
This strategy is a great way to minimize the risk of buying an asset at the top.
Further, although you are only buying small amounts (like $100), it quickly adds up if you are consistent with the approach.
Active swing trading
Swing trading is a short-term strategy that involves utilizing technical analysis and news events to form precise Ethereum trading decisions. With this strategy you are hoping to generate profit while speculating on Ethereum’s short-term price swings.
Due to the complexity and risk of this strategy, swing trading should only be reserved for people that are experienced traders.
When is the right time to buy Ethereum?
Ethereum was launched in an ICO (Initial Coin Offering), where investors sent BTC in exchange for ETH. In Ethereum’s ICO, 60 million ETH were issued at a price per coin of just $0.26. Investors that held their coins until now are obviously in significant profit.
Since then, Ethereum has been on a consistent uptrend that pushed its price to over $1,400 per coin in January of 2018.
That being said, much like other cryptocurrencies, Ethereum’s price does not follow a straight line. The ETH price moves in significant expansive and contractive moves, often rallying 250%+ before correcting -60%.
Since Ethereum closely tracks the Bitcoin price trend, it can be a good idea to keep BTC’s seasonality in mind before investing in ETH.
To wrap up this section, if you are planning to hold your ETH for multiple years and expect it to gain significant traction, then it doesn’t really matter when exactly you buy in. The only important point in that case is that you are indeed involved.
How much money should you invest in Ethereum?
The decision of how much money you should invest in Ethereum needs to be made by yourself. However, there are a few things that you should keep in mind.
First of all, never invest more than you can afford to lose. Don’t be like reddit user /u/Cryptohomie who took a $147,000 loan to invest in cryptocurrency, and is now down -85%.
Cryptocurrencies (Ethereum included) have an innate tendency towards volatility, meaning that they rapidly gain and lose value. While Ethereum has some long-term prospects, the risks of losing all of your invested capital are definitely there.
A good way to think about this is to imagine that ALL the money you invest in Ethereum is gone forever.
Does that thought make you uncomfortable? Then you were planning to invest too much.
Should you buy Ethereum or Bitcoin?
Ethereum is a platform, while Bitcoin is a pure cryptocurrency. Developers use ETH to write up new smart contracts and to execute operations within said smart contracts.
That being said, Bitcoin is currently significantly more adopted in its niche than Ethereum is. This is the reason why most people feel safer investing in Bitcoin than they do with Ethereum.
However, with greater risk often comes greater opportunity. Ethereum’s market capitalization is magnitudes lower than Bitcoin’s, which means that if may offer a higher return than Bitcoin will.
Should you buy Ethereum or Ethereum Classic?
Earlier in this article we mentioned network security as a potential risk of investing in Ethereum.
The biggest fiasco that Ethereum suffered in that regard so far was “The DAO Hack”, where 3.6 Million ETH were stolen.
This resulted in a “hard fork” which split the Ethereum network in two, resulting in two coins: Ethereum (ETH) and Ethereum Classic (ETC).
The main difference between ETH and ETC is that ETC stored the record of TheDAO theft and exploit, because according to them immutability is what blockchains are all about and “code is law”.
However, ETC hasn’t really gained much traction and most developers moved forward with ETH. Having a quick look at the Github page of both projects, we can see that ETH has 200 repositories vs 39 on ETC, which shows the massive difference in development activity.
Ethereum Classic is at large deemed as a risky investment by the wider community. The cryptocurrency has since also experienced a 51% attack which led to the double spending of $1.1 million USD worth of ETC.
Unless you are open to taking significant risk, you should likely stay away from ETC for now.
How can you buy Ethereum? (3 simple steps)
Buying Ethereum is a lot simpler than most people think. Let’s outline how you can buy ETH in 3 simple steps.
1. Create an account on Coinbase
So the first step to buy some Ethereum is to create an account on Coinbase, this just takes a few minutes and the exchange will initially only ask you for your name and email.
After you click on the verification email to confirm your email address, you have the option to complete a basic identity verification where you submit your ID or Passport.
You may only have to do this if you are planning to buy a large amount of Ethereum.
Note: This is practice is common in cryptocurrency exchanges and Coinbase needs to do so to stay compliant.
2. Deposit some USD/EUR/GBP on Coinbase
In step 2, it’s now time to deposit your fiat currency of choice that you will use to buy Ethereum. At the time of writing, Coinbase supports USD, EUR, and GBP.
This, again, is also very straightforward and only requires you to input your bank name, your own name, and the amount in USD/EUR/GBP that you will deposit.
Then just click “continue” and you will be brought to a page that gives you the bank account details of Coinbase where you have to send your funds.
Easy peasy right?
Buy some Ethereum in just 1 click
The final step is the easiest and quickest of all.
After your funds arrived, which depending on your bank may take up to 2-3 days, you are now ready to buy ETH.
To do so you simply need to click on the “Buy/Sell” tab, and then you are brought to the following page:
On this page, all you have to do is select Ethereum (in the image above I already selected it), and then type in below the amount of USD/EUR/GBP worth of Ethereum that you want to buy.
Then you have to click “Buy Ethereum” and that’s it!
You are now a proud Ethereum owner and among the first people in the world to own some.
That being said, if you’re not a huge fan of Coinbase then make sure to check out this guide with the best Coinbase alternatives.
CoinDiligent Staff Writer