Is Ethereum a good investment?

You’re probably not new to Cryptocurrencies, but to recap: Ethereum and Bitcoin are pure digital assets that exist to provide an alternative to traditional finance. Bitcoin (BTC) is primarily a digital ledger, designed as an alternative currency, and Ethereum (ETH) was designed as a giant virtual computer to allow other financial systems to exist: and boy, do they exist!

You can buy, sell and store both of these assets using wallets and exchanges that normally let you buy with anything from bank transfers, other digital assets, or even debit cards. At the time of writing (April 2022), one BTC is worth $43,000 and one ETH is worth $3,180. You can check the current prices at CoinMarketCap – that should give you an idea about how much the price changes.

There are two very big questions to answer in this blog:

1. Is any Cryptocurrency a good investment compared to traditional finance investment options?
2. How does Ethereum compare as an investment vehicle compared to other digital assets such as Bitcoin?

And one sub-question only you can answer, but we’re sure you’re on it already since you’re smart:

1. “Is Ethereum a good investment vehicle for you?”

We can’t advise you, but we can point out some things.

Is Ethereum a good investment compared to regular financial instruments?

Investment opportunities in traditional finance to retail investors tend to be anaemic at best. Savings accounts are all but worthless, for instance. Investment funds that use the stock market tend to underperform, and most of the gain is had by the fund managers, not regular folk.

It’s certainly true that developing markets offer better returns and more risk. Cryptocurrency is the ultimate developing market: Ethereum has been around since 2015 and is still going in 2022 with an amazing rate of return for early investors who got in and out at the right time (not so good for people who bought into the hype and sold in depression).

The reason Ethereum is worth anything at all is that the Ethereum “Blockchain” (which is a digital ledger and a huge virtual computer) requires users to use ETH (the native “currency”) to interact with “Smart Contracts” (bits of code stored in the Blockchain that do stuff).

So, users have to buy ETH and use it to pay “gas fees” (the fees required by Smart Contracts to run). ETH is used at a higher rate than it’s generated, and supply and demand do the rest. The fact that ETH is bought and sold on the open market means that people also buy/sell/borrow and lend it, this activity adding to the value.

How does this compare with Bitcoin?

People buy and sell Bitcoin primarily to use as a virtual currency or, more likely, a store of value. Rather than seeing them as competing investment options, the sensible option from an investing point of view is to see ETH and BTC as options in a diversified approach. ETH may have more upside than BTC because there’s a distinct possibility that usage will explode over time compared to Bitcoin. Bitcoin also has less risk attached than Ethereum at the time of writing because ETH has more direct competitors and its future depends on the success of an upgrade.

Advantages of investing in Ethereum

At the time of writing, Ethereum is hugely successful and is the second biggest digital asset by market capitalisation. Some are predicting it will “flip” with Bitcoin to become the biggest.

This fundamental is persuasive in itself: the use cases and network effects of Ethereum increase every day.

In fact, Ethereum has become too successful for its own good. So many companies and people use it for so many things that transmission fees have become unreasonably expensive, and the speed of transaction processing has decreased. These things render it unsuitable (at the moment) for much further expansion.

But an upgrade is in progress: ETH 2.0. If ETH 2.0 delivers what’s promised, then it will combine massive new capabilities with trusted technology: a killer combination that could open the floodgates to traditional finance migrating to Ethereum.

For instance, stock markets could migrate companies to digital security tokens: there’s a whole host of practical money-saving reasons for doing that.

Ethereum has also survived the onslaught of regulators relatively unscathed, despite a lot of fear, uncertainty, and doubt (FUD).

Of course, like any investment, you’d pick your time to buy. Ethereum (like other digital assets) has good days and bad days, and you can keep an eye on sites such as CoinMarketCap to see which is which: this is useful even if you aren’t trading.

Risks of investing in Ethereum – Asset Value

In terms of asset value, Cryptocurrency is unregulated and volatile: and there are regular predictions from “experts” that it could crash to zero at any moment (all of which have been proved wrong for major Cryptos).

Also, bear markets with depressed pricing can be prolonged, and there’s no safety net – Crypto can (and has) dropped by 92% of its value (though incredibly picking it back up again a couple of years later).

In the long-term (with sensible entry and exit points), the major Cryptocurrency has generally gone up in price reflecting increased usage and (sometimes) increasing scarcity.

One other risk you can’t guard against is political/legislative risk. For much of its life, Crypto has been under attack from the traditional banking sector and the politicians they influence. In some countries, using it was banned (but no country could stop it from working!).

These days the main risk comes from regulators making Crypto laws that adversely affect activities on a Blockchain. But the days of fearing Cryptocurrency was going to be globally banned seem to be over.

Risks of investing in Ethereum – Asset Safety

When you buy Ethereum, you have effectively two choices of where to put it: (1) keep it local to you, or (2) trust someone else to hold it (such as an exchange, or a company offering Crypto financial services).

If you follow good practice, then you can minimise any risks that your funds are lost or hacked. The biggest risk being that of leaving your coins at an exchange, because exchanges are the biggest target for hackers.

If you have custody of your assets, make sure that it’s in a reliable wallet and that you have kept a record of any “key phrases” that the wallet gave you.

If you’re giving custody of your assets to another company, make sure they’re trustworthy and secure. Are they an authorised virtual assets provider? Who does their security? Have they been hacked before? What’s their trading history? The danger here is if companies crash.

OK, Ethereum sounds good, now what?

First of all, heed the warnings of the disclaimers: don’t borrow money to invest in Crypto. Don’t invest money you can’t afford to lose. Do your own research to see if investing in Crypto is right for you. Invest for as long a time period as you can: that gives you the maximum opportunity to judge your exit point.

Now, if you’re still here, how about checking out an easy option that allows you to buy and hold ETH with a trustworthy and reliable company with a long trading record? You might as well make your ETH work for you while you’re waiting for it to go to the moon!