Table of Contents: Is Ethereum a good Investment?
Over the past years, cryptocurrencies have become one of the most popular investment tools in the world. Originally limited to cypherpunk, crypto-anarchists, and hardcore technology circles, the digital asset envisioned by Satoshi Nakamoto was a far cry from what cryptocurrencies are now. Is Ethereum a good investment today?
Today, not only is crypto widely known and available, but its capabilities as a technology tool and investment asset have also grown exponentially.
Hundreds of thousands of people have become millionaires thanks to crypto, which has resulted in increasing interest from investors all around the world. Chances that you are familiar with names like Bitcoin, Dogecoin, Shiba Inu, Terra, and, of course, Ethereum.
Ethereum’s potential is well-known to investors, tech experts, entrepreneurs, and investors like Mark Cuban. In an interview with CNBC, Cuban expressed believes Ethereum “has the most upside” as an investment tool when comparing it to other cryptocurrencies, despite Bitcoin being “better than gold”.
He further elaborates on this by tweeting:
“I like [Ethereum] more [than Bitcoin] because I can see an unlimited number of applications that will change the biz/consumer world forever.”
With Ethereum’s relevance in the global economy being likely to increase, the time is ripe for investors to learn more about the tool. Is Ethereum a good investment? Let’s talk about that.
Ethereum 101: Understanding the Second-Largest Cryptocurrency
To understand what Ethereum is, we first need to make a clarification: Ethereum is not a cryptocurrency. While we have referred to it as such and most people do the same on a regular basis, this is not really the case.
Ethereum is the name of a blockchain network that works similarly to a decentralized global computer to allow for the creation of applications and the sharing of information.
For investors and developers to make use of such a network, a currency was created: Ether (ETH). This currency is the cryptocurrency that everybody knows as Ethereum today and is used to run all sorts of transactions in the network.
The distinction might seem superficial but understanding it from the get-go is essential for any investor looking to put money in this cryptocurrency.
That being said, investing in Ether is equivalent to investing in the Ethereum network as the performance of the cryptocurrency is linked directly to the network. The better the network, the more applications make use of it. The more applications that make use of it, the more demand for Ether.
The more the demand for Ether, the higher its price gets. This is similar to the way stocks work in the sense that they are reflective of a company’s performance.
Cryptocurrencies like Ethereum have been compared to hybrids between commodities and currency, as they share properties of both. However, as they are decentralized and global, no arbitrary decisions can be made by a single centralized entity.
What Sets Ethereum Apart?
You should now have an idea of what Ethereum (and Ether) are. However, you might be wondering what exactly sets Ethereum apart from other cryptocurrencies like Bitcoin. Well, the answer to this can be quite technical and extensive, which is why we will focus on the practical applications that make Ethereum stand out.
Smart Contracts: The Heart and Soul of Ethereum
We said before that Ethereum operates like a decentralized global computer that allows applications to run, a concept known as a blockchain network. Ethereum and other blockchain networks operate by bringing multiple users together, who allow the network to use their devices to perform transactions, store data, validate information, and more.
However, Ethereum went a step further by introducing a tool called “smart contract”. This is a program that basically operates in the same way as a real-life contract but with a huge plus: there is no need for an enforcing party.
Transactions can be automated by having the network take care of enforcing a given output once conditions are met.
By automating and ensuring the “if this, then that” process takes place as stipulated every time, Ethereum can be used to create complex applications that require no trust in a third party. Any given user can access a smart contract and check the conditions, ensuring that they are valid and correctly programmed.
As networks like Bitcoin lack smart contracts, their capabilities are highly diminished when compared to Ethereum, making the latter seem more attractive and versatile.
Tokens: Bringing Powerful Diversity to The Crypto Space
Ethereum also allows developers to create new tokens to use in their own platforms or ecosystems, which further enhances its capabilities. These tokens come mainly in 2 flavors known as “ERC20” and “ERC721”. Don’t let these technical-sounding names scare you, they are pretty easy to understand.
ERC20 can be used to create new tokens that operate as currencies inside the Ethereum network. If you were to create a cryptocurrency using “X” using ERC20, one unit of “X” would be indistinguishable from another unit of “X”, meaning that “X” is fungible.
You can think of the ERC 20 as Disney’s Disney Dollars of old, which could be used in the Disney ecosystem to acquire goods while also existing in a larger USD-based economy.
ERC721 tokens, on the other hand, are “non-fungible”, meaning that all of them are different from one another. This means these tokens can be used to represent more than just a currency, they could be used as an ID or represent any other asset that needs to be unique.
No matter which of these 2 token standards a developer uses, they can be traded freely using the Ethereum network. This, combined with smart contracts and other benefits like high security, high user base, easy deployment, high throughput, incentives, and great stability, are some of the reasons Ethereum is so popular.
Is Ethereum Perfect, Then?
Ethereum, just like any other cryptocurrency or financial tool, is not perfect. While Ethereum (and Ether) certainly are one of the best networks and best cryptocurrencies out there, there are many elements that need to be considered before investing in Ethereum.
Some of the things you need to consider are the criticism around Ethereum’s high energy use, high transaction fees, and increasing congestion, all of which were addressed in 2022 with an update known as “The merge”.
While the update was seen as positive by experts and investors, it took place during a bear market that saw the crypto market drop considerably, making the evaluation of its success difficult.
This being said, there are other aspects of Ethereum that are clearer than these updates. Let’s take a look.
Competition Is On The Rise
Remember we said investing in Ether was investing in Ethereum? Well, this is similar to investing in a company: There are many companies trying to do the same in a better way.
This means that as the crypto and blockchain spaces have grown, new projects have emerged and started to challenge Ethereum’s reign. For now, Ethereum continues to be king among networks offering smart contracts and while this is likely to continue in the short term, it could change.
Now, this doesn’t mean Ethereum will not be a good investment if it becomes the third or fourth-largest crypto. While many new crypto investors tend to think so, market capitalization, while important, is not everything. Think about it: Does the fact that Alphabet’s stock has a higher market capitalization than Amazon’s make it a better investment? Not really.
As a Cryptocurrency, Ethereum is Highly Volatile
Cryptocurrencies are still in their infancy, which means that not only are they more susceptible to speculation but also to technical challenges.
If you were alive during the internet boom of the 90s or have read about it, you are probably aware of how speculation was rampant around everything related to it. This is the case with crypto today, which means that prices can change faster and at a bigger rate than those of other assets.
As cryptocurrency shares characteristics with other financial assets, this also means that there are many other factors affecting their performance. One of the most important to consider is the effects that supply and demand can have on them.
In the case of Ethereum, the fact that there can be an unlimited supply of Ether means many investors are wary of it. Compare this to Ethereum, which is widely considered a better store of value due to its limited supply.
Now, while Ethereum is certainly susceptible to the same volatility as other cryptocurrencies, it has proven to be more resilient. With the blockchain and crypto ecosystems seeing a 92% fail rate resulting from their infancy, the fact that Ethereum has been around for almost a decade should be telling.
The project has strong fundamentals, a dedicated user base, and support from experts/investors all around the world.
Blockchain and crypto have been living in a legal limbo of sorts ever since they were launched. The fact that they are not dependent on any given organization or government means that there is no way to effectively regulate them. As such, governments all around the world have taken different stances on how to deal with cryptocurrency.
Regulatory efforts are often limited to determining how citizens and institutions can operate with crypto and blockchain in a territory. However, this doesn’t stop people from accessing services via anonymous services, VPNs, and other platforms. As such, there is constant uncertainty about what to expect when it comes to what the legal future of crypto will look like.
Now, given that Ethereum has been around for quite a while, you could assume the status of Ether is a bit clearer than those of other cryptocurrencies. Unfortunately, despite having determined that Ether wouldn’t be considered a security back in 2018, the Securities and Exchange Commission (SEC) could be reconsidering this position.
In the words of Cryptocurrency investor and expert O Ruadhan:
“This move does show an intent to regulate, and it would cause a major disruption to the economy if Ethereum were to be classified as a security. Centralized exchanges would need to de-list Ethereum. The world economy is currently very vulnerable, and Ethereum’s market cap is so large that an event like this could have spillover effects and even cause an economic crisis.”
Should I Invest In Ethereum?
All of these bring us to the question you might be asking yourself now: “Should I invest in Ethereum”?
The answer here, as usual, depends entirely on your investing style. As you should be aware now, Ethereum is a high-risk high-reward investment that is not for the faint of heart. The high volatility of the crypto market means that big drops are a given at any point, which can be especially scary for new investors.
The benefits of investing in Ethereum are many, especially given the industry’s potential to grow in the future as new use cases appear, legal frameworks are established, adoption increases, and the industry matures.
By adding crypto to your portfolio not only will you be further diversifying it (which is always a good thing) but also greatly improving the potential gains you can generate.
While Ethereum has historically shown that the rewards outweigh the risks of investing in it, this depends on the period you are looking at. As such, investing in Ethereum is better done in the long term if you are prioritizing the safety of your investment.
While we never recommend day trading or other short-term investments, we believe that avoiding these activities is especially important with Ethereum and any crypto.