Are you considering diversifying your cryptocurrency investment portfolio or looking for an alternative to Bitcoin? Consider Ethereum! It is the second in line after Bitcoin when it comes to the cryptocurrency market cap, and it has indicated better stability than Bitcoin over the years, albeit at a lower price per token.
Here is a quick guide on all you need to know about investing in Ethereum. But first, let’s discuss the basics of Ethereum.
The Basics of Ethereum
Ethereum is not a cryptocurrency like Bitcoin. Instead, it is a decentralized open-source network upon which most cryptocurrency technologies depend. It supports non-fungible tokens (NFTs), enterprise blockchain solutions, and decentralized finance, DeFi solutions.
As a decentralized network, it protects users from governments and other third-party interferences that are common in centralized systems. As a network, therefore, Ethereum is one of the key technologies propelling the next internet evolution, Web 3.
The native cryptocurrency on the Ethereum network is ETH. In September 2022, ETH received a demand boost after “the Ethereum Merge” turned out to be a success. It involved merging the Beacon Chain to the Ethereum blockchain network, hence upgrading Ethereum from a proof-of-work to a proof-of-stake mechanism.
It reduced the energy consumption of Ethereum by 99.95% and put a cap on the number of mineable ETH, playing perfectly into the demand and supply factors that interest investors. Therefore, expect most investors in crypto to have an increased preference for Ethereum.
With all that said, bear in mind that investing in Ethereum simply means owning ETH — the currency that runs this network. Note that, as the value of the network increases, so does the value of the native token!
Ways to Invest in Ethereum
The basic principle of investing is buying at a lower price and cashing out when the value has significantly increased. Depending on your financial plan, this can be within the day or after a decade. Fortunately, with Ethereum, you can achieve this in several ways, including the below methods.
Investing Through a Crypto Exchange Platform
Cryptocurrency exchanges provide one of the easiest ways to invest in crypto. They offer a combination of crypto-based banking and the features of a currency exchange platform. Consequently, you can buy Ethereum, keep them, and then sell them on the same exchange platforms.
The operation of most exchange platforms is straightforward; you create an account, fund your account from your bank account, PayPal, or debit card, and then use the fiat currency to buy your altcoin of choice, which, in this case, is Ethereum. After the purchase, you can store them in your account on the exchange platform or in your personal crypto wallet.
Selling cryptos is similarly straightforward on most platforms. It involves exchanging your altcoins for the fiat currency of your choice or another crypto.
Due to the ever-rising crypto theft cases, most exchanges have put in place a rigorous user verification process to ensure the safety and security of your tokens. You will be required to send a picture of the original ID, driver’s license, and sometimes your passport photo. You should secure your account further by adding two-factor authentication, 2FA.
Check out this video below to see how to purchase Ethereum on Binance:
Speculative Trading
If you have the time and the desire, you can take daily control of your ETH investment through trading. The basic principle of crypto trading is like that of ordinary stocks; buy low and sell high. Given the high volatility of the crypto industry, it is possible to earn large margins using this option.
You can make a number of purchases and sales throughout the day using technical analysis and price charts. This process is called day trading. Alternatively, you can be a swing trader and opt to hold the ETH for a few days or weeks before selling or buying.
Platforms offering speculative trading on cryptos are increasing, but you must do your homework well to help find the right one. If you are a beginner, take one of the many online courses. Otherwise, take advantage of day trading platforms that offer dummy money that you can use to learn how to trade before you invest your money.
Buying and Selling Through P2P Platforms
Another way to invest in Ethereum is to buy or sell through peer-to-peer platforms. In this option, you buy directly from an individual instead of through the cryptocurrency exchange. Some exchange platforms also link those who wish to sell their ETH for fiat currency and possible buyers. Often, you can buy at a price lower than the market price.
The other advantage of P2P-based investment is that you can sell any amount of ETH whenever you need to cash out and receive your money instantly. For most trading platforms, you can only withdraw your profits or risk losing a percentage of the ETH you have invested when you withdraw all your crypto.
Nonetheless, this option has its risks, the first being that you can only deal with a trusted person, which is difficult if you are a newbie in the industry. The workaround is to use established P2P platforms. You can exploit the P2P options within some crypto exchanges. But still, you need to ensure the person on the other end of the transaction is verified and trustworthy.
If you choose not to go through a platform, go for an escrow service provider. This neutral party holds money for the two parties until one confirms receipt of the items purchased, in this case, crypto. It then releases money to the seller. That way, a person will not make away with your ETH after you have confirmed payment for the same and vice versa.
Investing Through Exchange Trade Funds (ETF)
This is a good alternative for those with experience investing in traditional stocks. Investing in cryptos through ETFs offer several advantages over the ways already discussed. First, it is regulated, unlike crypto exchanges and P2P platforms.
Like traditional stocks, there are managers for ETF assets who ensure that investors get the highest possible returns on investment. Even better, you can invest in crypto ETFs through your retirement account. With this option, you can get a higher return when you finally cash out your retirement benefits than when you leave the money in fiat currency.
HODL
Holding on for Dear Life is a strategy for those considering ETH as a long-term investment. You buy and hold Ethereum for two or three years before selling when the price is high. Patience often pays. For example, in July 2015, one ETH was $0.75; it had increased to $1,360 by January 2018, and, after taking a few crashes, it reached over $4,800 by November 2021.
The primary risk with this strategy is the storage of the tokens. It is advisable to store them in a dedicated crypto wallet to avoid losing the coins during a system hack or if the exchange closes operations.
It is essential at this point to offer guidelines on the key factors to consider when choosing a crypto wallet, including:
- Security: Often, paper backup wallets, cold wallets, and hardware wallets are more secure than hot (online) wallets and mobile wallets.
- Cost: Most hot wallets and those connected to exchange platforms are free and only charge for transaction costs or a percentage of the total amount saved or transacted. Cold crypto wallets, on the other hand, are often premium priced, costing between $100 to $200.
- Incorporated Exchanges: Often, crypto wallets are connected to a limited number of exchange platforms. The best practice is to go for a wallet that incorporates the exchanges you plan to use when selling or buying ETH. Otherwise, you will have to transfer your cryptos to the platform’s account each time you need to make a transaction, thereby incurring an additional cost.
- The Currencies Supported: While some support fiat and cryptos, certain wallets only store specific altcoins.
- Your Investment Plan: Do you plan to hold onto the Ether for a protracted duration, or do you want to take part in day trading, buying when prices are low and selling when the prices are high? In the latter case, having a hot wallet is a better option due to lower transaction charges. You can also opt for mobile wallets, as they allow you to transact on the go.
Risks of Investing in Ethereum
High Volatility
As a cryptocurrency, Ethereum has the same risk as other cryptos, with high volatility and price unpredictability topping the list. Fortunately for Ethereum, the prices have so far shown a general stability compared to the crypto which affects the value of all the others — Bitcoin.
Unregulated Industry
The cryptocurrency industry is generally unregulated. This implies little legal protection of the interests and investments of its users outside the integrity of the network. If you are worried about this, you can opt to invest in Ethereum through ETFs, as those are run based on federal regulations.
Irreversible Transactions
The transactions on the blockchain are not reversible, which means you cannot get back your money or tokens sent to the wrong destination address. Therefore, you should crosscheck all account details before authorizing a transaction.
Most of these risks can be mitigated by opting for an investment strategy you are conversant with or undergoing training on crypto investing. Using trustworthy platforms, wallets, and investment procedures will also help protect your investment.
Take Away
Despite the risks, Ethereum is performing well in the industry, with its price increasing consistently despite intermittent crashes. It is because, as the native smart contract blockchain, it has been the launching pad for several crypto projects.
Due to its decentralization and extensive open-source programming tools, it has become the go-to choice for developers of building dApps, which are also becoming popular. Also, it is compatible with other competing networks, which gives it a major boost as an investment option.
Finally, upgrading to the proof-of-stake mechanism almost eliminated power consumption by Ethereum. And, with the increasing quest for eco-friendly investments, this move makes the network a worthwhile investment choice for investors seeking “green cryptos.”
The image featured at the top of this post is ©Photo by Kanchanara on Unsplash.
