Ethereum, which is second only to Bitcoin in terms of global market capitalization, has seen its share of surges and crashes since its launch in 2015. But the cryptocurrency has been turning heads recently amid a rush of interest in the crypto space in general, hitting new highs in April 2021.
So 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?
Here are a few things to consider regarding Ethereum, and — if you decide it’s something you’re interested in — some common ways to buy, hold or trade the cryptocurrency.
Ethereum’s investment potential
What gives Ethereum value?
When you’re buying Ethereum, technically you’re converting your U.S. dollars into “ether,” or ETH, which is the currency of the Ethereum blockchain. In order to use the Ethereum blockchain (which includes sending ETH as a form of payment or using an application that runs on Ethereum), you’ll need ETH to 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 — people can use Ethereum to run “decentralized applications,” or dapps. Dapps essentially cut out the middleman in industries where middlemen have for the most part always existed, relying instead on “smart contracts” that run on Ethereum. To use these applications, you’ll need ETH to pay for the cost of “gas” — a measurement of how much computing power is needed to run the application. Examples of dapps include:
Direct peer lending that earns interest.
Insurance without the insurance company.
Payments without the payment processing company.
Music streaming in which the money goes directly to the artist, not a streaming platform or record label.
Art auctions without an auctioneer.
Marketplaces for nonfungible tokens, or NFTs.
Code collaboration without a central server.
This is all extremely complex, so if you’re confused, don’t worry. That’s normal. But put very simply, when you’re investing in Ethereum, you’re betting that people are going to keep adopting and using new Ethereum-based technologies like the ones listed above, which could possibly drive demand for ETH — and its market value — higher.
Are you comfortable with Ethereum’s volatility?
Cryptocurrencies are dominating the headlines, but the truth is if you’re viewing them strictly as an investment, they’re still a highly volatile alternative asset. It’s generally wise to treat them as such in your portfolio.
In ETH’s case, we’ve seen enormous price swings: In 2016, it bounced around between roughly $5 and $15. By the early days of 2018, the price had soared to nearly $1,500, but after that, ETH began a bumpy downhill road, dropping to less than $100 by December 2018.
And the kicker? The price of ETH never got back above $500 until November 2020, bringing a thaw to what many referred to as the “crypto winter.”
So, imagine this: You bought ETH during the January 2018 hype only to see your investment’s value crater throughout the year. 2019 comes and goes, and you still haven’t made your money back. After two years, would you have cut your losses and taken whatever cash you could get? If so, Ethereum’s volatility may mean it’s a bit risky for you.
Are there any red flags?
Just as you would heavily research a company to look for any red flags before investing, you can do the same for cryptocurrencies. And since the launch of Ethereum, issues have arisen.
It gets a bit complicated, but currently, one pressing issue is that gas — that transaction fee that keeps the system up and running — is more expensive than it used to be. A lot more expensive.
In early 2019, it would have cost you around 10 cents to perform a transaction on Ethereum. And today? That fee is around $20.
How Ethereum fits into your portfolio
Before you consider buying Ethereum, take a look at your portfolio to determine if cryptocurrency has a place in it. Generally, a combination of stock mutual funds (such as index funds and exchange-traded funds), bonds or bond funds and cash make up the core of a highly diversified portfolio. Finding the right mix of these assets based on your personal risk tolerance, timeline and investment goals is known as asset allocation. Before diving into an alternative asset like crypto, it may be a good idea to make sure the fundamentals of a long-term portfolio are in place.
But if you already have a highly diversified, balanced portfolio, a cryptocurrency like ETH could give you even more diversification. Because the performance of cryptocurrencies generally doesn’t correlate with the performance of the stock market, adding crypto into the mix could theoretically act as a cushion if the stock market dips but the crypto market remains steady.
That said, the volatility of cryptocurrencies is still a huge factor to consider, despite the potential advantages. What’s more, we only have a few years of data to find correlations between cryptocurrencies and traditional markets; it’s possible the current trend could shift.
How much ETH you can afford
Before putting cash into any investment (including stocks), it’s wise to make sure you have adequate emergency cash savings. You should be comfortable living without the money you plan to invest for the foreseeable future — say, the next five years. Remember the “crypto winter” referenced above? There’s always a chance there will be another one, and you should have a plan in place to endure it.
One way to determine the right amount of ETH for your portfolio is to think of it as any other risky alternative asset. From this lens, you could decide to allocate a small portion of your portfolio — some experts might refer to this as a “casino fund” — toward cryptocurrencies.
And if you’re not sure how much to invest, or are nervous about a price crash shortly after purchasing, you could always borrow a tried-and-true strategy from traditional investing: dollar-cost averaging. Like any investment, it may be a good idea to start small to learn the mechanics of buying ETH (which we’ll explain below).
Where to buy ETH, and how to store it
Once you’ve done your research and found there’s a place for ETH in your portfolio, you’ll need to decide where — and how — you’ll buy and store the cryptocurrency. On a basic level, there are two requirements for buying and holding ETH:
An exchange: This is where you can buy crypto with U.S. dollars or trade one cryptocurrency for another.
An ETH wallet: This is where the currency is digitally stored. A wallet also has a public address you use to send or receive ETH.
Here are a few options for buying ETH, and how exchanges and wallets are involved in each method.
Online stock brokers
Buying cryptocurrency from an online brokerage that offers it is one of the easiest ways, but it can come with serious drawbacks. While online brokers have made it easy and cheap to turn your cash into crypto and vice versa, check the fine print to see if the brokerage gives you access to your wallet or lets you move coins in and out of the account — some brokers don’t. In the eyes of crypto purists, this essentially nullifies the entire point of owning a digital currency.
Crypto brokerages with hosted wallets
Crypto brokers with hosted wallets let you buy ETH and other coins with U.S. dollars and store them safely in a wallet hosted by the brokerage. For investors new to cryptocurrency, this makes the buying process simple and streamlined, and you have the ability to send and receive coins.
With a hosted wallet, you don’t 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’s like a bank holding and securing your funds for you. But you likely won’t get the full benefits of cryptocurrency, such as using the dapps listed above, nor will you have complete control over your wallet and the crypto it holds.
Centralized exchanges and non-custodial wallets
This is a more advanced way to buy, hold and trade crypto, and gives you more control over your funds and wallet.
One way to do this is to set up your own ETH wallet for storage and purchase ETH with cash on a centralized exchange (such as Binance.US or Coinbase Pro). However, for security purposes, it’s generally not a good idea to hold large sums for extended periods on exchanges; while security has come a long way, historically, exchanges have been big targets for hackers. This is why you’ll want your own wallet where you can send your ETH after buying it on an exchange.
There are a ton of wallets out there to choose from, ranging from online “hot” wallets to physical, offline devices known as “cold” wallets. One of the best places to start is the Find a Wallet feature on Ethereum.org, which 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. Centralized exchanges are relatively straightforward; if you’ve used an intermediate-level stock trading platform before, these will look familiar. And considering the popularity of ETH, you’ll likely be able to buy ETH with U.S. dollars on most centralized exchanges. However, if you’re looking to trade one cryptocurrency for another, you’ll want to do a bit more research to see what pairings are available and what’s listed on the exchange.
» Nerdy tip: Here’s a directory of exchanges that allow trading fiat money (such as U.S. dollars) for ETH.
If you have your own wallet, you can trade your ETH in a decentralized exchange, or DEX. In a sense, a DEX is the truest way to trade cryptocurrencies in that there is no third party whatsoever. Centralized exchanges require you to deposit the coins or dollars you want to trade on the market into a trading account. But with DEXs, you retain full control over your funds and trade directly with a buyer or seller.
However, DEXs can be confusing to navigate and are mostly used for trading one cryptocurrency for another, rather than buying ETH with cash. In short, they’re not beginner-friendly.
Choosing what’s best for you
Choosing the right way to buy and hold ETH comes down to experience, comfort, what you want to accomplish with your ETH, and how much you plan to buy or hold. It’s entirely possible to use a combination of the methods above; perhaps using one platform for convenient trading and another for long-term holding. For beginners, it may be best to start with a crypto brokerage or stock broker. Then you could consider working your way up to the more advanced, decentralized platforms.