An investor’s guide to cryptocurrencies: Ethereum

24 Jan 2019
Getting Started

Looking for a cryptocurrency investment that’s not Bitcoin? Ethereum is a leading crypto alternative that’s a bit different from other altcoins.

First conceived of in a white paper by developer Vitalik Buterin, Ethereum was launched with a pre-sale in mid-2014 and went live in July 2015. Unlike Bitcoin, Ethereum was created not as a digital currency, but as a decentralised computing platform for enabling smart contracts. Smart contract transactions on Ethereum are paid for using a platform-based token called Ether.

“Ether is a necessary element — a fuel — for operating the distributed application platform Ethereum,” states the Ethereum website’s guide to Ether. “It is a form of payment made by the clients of the platform to the machines executing the requested operations. To put it another way, Eether is the incentive ensuring that developers write quality applications (wasteful code costs more), and that the network remains healthy (people are compensated for their contributed resources).”

While Ethereum “would never be possible without Bitcoin”, Ether is more of a “‘crypto-fuel’, a token whose purpose is to pay for computation” rather than just another cryptocurrency. However, it’s also currently the crypto-asset with the third-highest market cap after Bitcoin and Ripple’s XRP, and can be traded just like other cryptocurrencies using digital exchanges and wallets.

“Currently, the EVM [Ethereum Virtual Machine] is in its infancy, and running smart contracts is both ‘expensive’ in terms of Ether consumed, as well as limited in its processing power,” says Investopedia. “According to its developers, the system is currently about as powerful as a late 1990s-era mobile phone. This, however, is likely to change as the protocol is developed further.”

Here’s what else you should know if you want to invest in Ethereum/Ether:

It’s blockchain-based, but with different fundamentals
While Bitcoin has an ultimate limit of 21 million, there’s no hard cap for Ether, but there won’t be an infinite supply either. Instead, Ether is designed to be a disinflationary currency in which “the amount of inflation shrinks over time”. Mining generated about 9.2 million new Ether in 2017, and there were about 100 million Ether in total by mid-2018. The rate of Ether issued is expected to change when the platform switches to a new consensus algorithm, which is expected sometime in the coming year. Ether block times are also shorter, while transaction fees are generally lower than those for Bitcoin.

Different factors affect Ether’s value
Because Ether is designed as a “fuel” to power smart-contract transactions on the Ethereum platform, its value is affected by different factors to Bitcoin’s. “In the cryptocurrency wars, I like to view Ethereum like the diamond of the currencies – it has both a[n] intrinsic value and an industrial value,” reports The College Investor. “Compare this to Bitcoin, which operates like gold – not much industrial value, but people buy it and sell it based on [its] intrinsic value to the holder.” And while Ether has been feeling the effects of the current crypto bear market just like other currencies such as Bitcoin, Ethereum is also competing with rival DApps platforms like EOS and Tron.

User habits and adoption also vary
As of mid-December, there are more than 50 million unique Ethereum addresses. There’s also a small but growing number of live, Ethereum-based DApps, although only a handful had more than 300 daily active users as of August. And, according to Octoverse, Ethereum is currently the fifth-fastest-growing open-source project. Beyond treating Ethereum as an investment unto itself, investors can also use it in Bitcoin trading: “Ethereum is a great tool for creating complex trading between multiple parties,” the Ethereum website states. “If you have a source for the price of Bitcoin that all parties trust, then it’s possible to create an Ethereum-based currency whose value is pegged to the market value of Bitcoin. This means that you could trade Bitcoins to a token that is guaranteed to always trade back to the same amount of Bitcoins while still being fully compatible with other Ethereum contracts.”

The usual investment advice applies

As with any other kind of investment – especially in the crypto space – it pays for Ethereum investors to heed common-sense advice: don’t invest more than you can afford to lose, do your homework before choosing an exchange for your Ether transactions, and listen to reliable and proven market sources rather than hype.
Above all, be realistic in your expectations. “Ethereum has an incredible talent pool of developers,” Hidden Hand Capital’s Timothy Young told Forbes recently. “In the long term, I think they’ll solve a lot of scaling challenges. But in the short term, there’s a disconnect between the price and underlying technology.”

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