Ethereum is among the top cryptocurrencies and a profitable choice of investment. Perhaps you have noticed its incredible performance over the years and you are considering investing in cryptocurrency. Investing in Ethereum can be simpler then you anticipate. It involves converting U.S. dollars into Ether or ETH, the official token used on the Ethereum blockchain.
With the ETH tokens, you can purchase goods and services. What’s more, you can use Ether to pay for gas fees incurred while carrying out complex transactions in different fields like finance and computer science. Further, Ethereum owners use their tokens as an investment vehicle to earn interest when its prices increase.
However, it is crucial to understand the crypto market before investing, given its volatility. For instance, Ethereum reached a new all-time high in 2021 and is quickly gaining on Bitcoin in terms of the value of ETH coins in circulation. Note, its current value can also stagger backwards. And that is the nature of the cryptocurrency market; prices fluctuate significantly. Here are some hints on Ethereum investments and a few factors to consider.
How to buy Ethereum
You get started in just three steps:
- Choose a cryptocurrency exchange
- Choose how to pay for Ethereum
- Store your Ethereum
Choosing a crypto exchange
You cannot buy Ethereum directly from the bank, like in the case of stocks or bonds. Instead, you must create an account on a crypto exchange. There are many crypto exchanges to choose from in the market, all with varying storage, security and payment policies. Luckily, Ethereum is a popular currency and the majority of the crypto exchanges will allow you to buy ETH tokens.
Some of the trading platforms you can consider are:
Online stock brokers
Online brokers allow you to buy and sell cryptocurrencies. Arguably, it is the easiest and cheapest means of converting U.S dollars to crypto. However, it is not without its downside. Some online stock brokers limit investors from moving their ETC tokens in and out of brokerage accounts. In truth, this lack of freedom invalidates the aims of investing in cryptocurrency. Thus, be sure to check the fine print of the online broker of your choice and see if they allow in and out token movement.
Decentralised exchanges are peer-to-peer trading platforms, meaning you have total control of your cryptocurrency. Investors often use them for trading one cryptocurrency to another. With a DEX, you can trade directly with the buyer or seller without handling funds management over to an intermediary. In a way, it is the most authentic way of investing as you have total control of your funds. Even so, navigation on the decentralised exchange can be confusing. It may not be your best option to ETH for the first time as it is less beginner-friendly.
Centralised crypto exchanges
Centralised exchanges act as middlemen between sellers and buyers and such platforms offer more extensive selections than stock platforms. A significant number of transactions in the crypto market go through centralised exchanges. Reliability is one of the reasons centralised exchanges are so popular in the market. If you are looking for a user-friendly platform and aren’t new to cryptocurrencies, it can be an excellent trading platform choice. Nevertheless, critics feel that centralised platforms fail to meet desired blockchain technology, which is decentralised.
Choose how to pay for Ethereum
After opening an account on the cryptocurrency exchange, you have to fund it with cash to buy a specified amount of Ether. Besides, you can use a different cryptocurrency to purchase ETC. In brief detail, here is how to pay for ETC tokens.
Fiat currency is the official currency offered by a specific government. It used to buy cryptocurrency just like it buys items traditionally. U.S. dollar is the common fiat currency option on crypto exchanges. On some platforms, it’s the only option and you are forced to change your fiat currency to U.S. dollars first. You are likely to connect your bank account or debit card using a centralised exchange. However, credit card wire transfers when funding are discouraged because they attract higher fees.
In addition to cash, some cryptocurrencies exchange platforms allow crypto-to-crypto trading. You will pay for ETC using a different cryptocurrency. Investors with ownership of well-performing cryptocurrencies such as Bitcoin or Solana use this strategy to diversify their holdings. Using Bitcoin or other Altcoins to pay for Ethereum is advantageous because you do not have to exhaust your savings on costs incurred when purchasing ETH.
Even so, it would help if you were careful when using this strategy. Crypto market assets constantly fluctuate in value. Looking at its past trends would be of great help when determining if it is the right choice to place your funds. Besides, funding your investing using other cryptos can cause a complex tax situation. In short, the amount of crypto used to pay for Ether is a taxable income.
Store your Ethereum
Now you have your ETH tokens and there is a need to keep them in a secure place. Learning to stay safe is key here. If you invested in a small fraction of the Ethereum coin, you could keep the amount on the exchange platform. A digital wallet is a secure and better option to hold your funds for a larger amount. Digital wallets store your private and public keys required to access your cryptocurrencies or make transactions. However, be aware that some crypto exchanges do not allow investors to move Ethereum from their platform. In such cases, the exchange provides a digital wallet for you and does the storage on your behalf. Digital wallets can be classified as:
It is an advanced option of a digital wallet where you retain the sole responsibility of your private keys. No other individual can access your cryptocurrency without the private keys. Holding large amounts of ETH tokens on a non-custodial wallet for longer is highly discouraged. You see, non-custodial digital wallets require you to connect to the internet, where hackers lie in waiting.
You can either choose a hot wallet where you keep your keys online or a cold wallet that is a physical and an offline device. You can research beforehand to understand which digital wallet is right for your cryptocurrency. Of the two, hot wallets are less secure and have minimal costs. In contrast, cold wallets are more secure with slightly high costs. More than that, it is worth knowing that some crypto exchanges insures users’ investments and store them in offline assets to prevent massive theft. An absent option when using you are using a non-custodial wallet. Nonetheless, the choice of storage is in your hands; you select the best based on your needs.
On-platform wallets are provided by your crypto exchange or an online broker. This means you trust the custodian of your funds with the responsibility to keep your private keys. It lifts the personal burden and constant worry of forgetting your passwords or losing your private key. It is just like the bank holds and secures your funds against theft. The downside of using an on-platform wallet is losing some control over the cryptocurrency exchange that has your funds. Not only that, you also don’t benefit like you would when using a DEX.
Choosing the right way to buy and hold your tokens is significantly affected by the experience, comfort, and goal of owning ETH tokens. It is possible to hold funds on a combination of storage options above. For instance, you can hold currently trading cryptocurrency on an on-platform digital wallet. Simultaneously, you can hold long term investments on a cold wallet. You can further consider a crypto broker as a beginner until you gain experience to use more advanced options such as decentralised exchanges.
Should you invest in Ethereum?
Without knowing the value of Ethereum, it can be challenging to see if it’s the right investment. Activities run on a blockchain give it value and enable investors to earn. Though, you have to pay the transactions fee to carry out activities on the blockchain. On the Ethereum blockchain, you pay using ETH for transaction and gas fees.
What activities give Ethereum value?
Ethereum blockchain is still young and hundreds of developments are still underway. More popularly, people use the Ethereum blockchain to run decentralised apps. The use of decentralised apps (Dapps) has eliminated the need for third parties. Instead, investors use smart contracts to execute transactions. Running such Dapps consumes computing power known as gas and is paid using Ether. Gas costs on Ethereum blockchain have reduced since the launch of Eth2.
Ethereum blockchain plays a significant role in the creation of Nonfungible tokens. However, NFTs are not the only Dapps popular on the blockchain. Other Dapps are:
- Insurance in the absence of an insurance company
- Online gaming
- Decentralised server code collaboration
- Payment without a company
- Art auction
- Music streaming without a record label where the money goes directly to the artist.
- Direct peer lending
As earlier mentioned, hundreds of Dapps are yet to be launched on the Ethereum blockchain. Investors anticipate that people will continue adopting the existing decentralised apps and using new Dapps as they get launched. An increased number of users translates to higher demand. Consequently, higher ETH coins will be in circulation and its market cap may stagger upward.
What is your risk appetite?
Risk intolerance is vital when investing in cryptocurrencies. There is no way around it; cryptocurrencies prices are vulnerable to fluctuations. It’s volatile and speculative; you must treat it as such when investing in Ethereum. If you are not comfortable losing all the funds you place on the crypto exchange, investing them in a more stable alternative is wiser.
Take the case of ETH as an example. In 2016, Ethereum prices went as low as $5. However, the prices had soared to $1500 per Ether in early 2018. Sadly, the crypto assets value shrank later during 2018 and Ethereum prices dropped drastically to less than $100. In 2019, ETH still traded at lower prices and never got above $500. This means investors who purchased Ethereum in January 2018 had to watch their money go down the drain. Surprisingly, they never recovered their amount in two years until November 2020, when the price started soaring to new all-time highs.
Is it safe to invest in Ethereum?
Bitcoin and Ethereum attract more investors because they perform well on the market. Even so, such coins have some problems associated with them. High gas fees and transaction fees are primary issues related to the Ethereum blockchain. These increased costs make trading on the blockchain very expensive. It would help to do your due diligence on the cryptocurrencies before investing in any of them.
Ethereum developers do their best to make the blockchain energy efficient and eliminate gas and transaction issues. They previously launched Ethereum 2.0, which aims at moving away from proof-of-work way verifying transactions to a proof-of-stake method. Besides, developers have promised other upcoming projects to make the blockchain faster and affordable. Ethereum has to deliver on its promises soon as Solana and Cardano pose stiff competition with comparable capabilities.
How Ethereum fits into your portfolio diversification
Before buying Ethereum, you should look at your portfolio and see how stable your investments are. Risking all your savings on cryptocurrency can be disadvantageous. Instead, sharing your funds by placing varying percentages on stock, bonds, cryptocurrency and keeping some as cash is a better diversification. Finding the right ratio to invest in each item is called risk allocation and is influenced by your risk tolerance. Remember, you can lose all your currency if there is a market crash. In that case, a safer investment would ensure you endure difficult times.
However, if your portfolio is balanced, investing in Ethereum is a way of increasing your diversification. You see, crypto market profits are massive despite their volatility. It is arguably the fastest way to earn thousands of dollars within a short period. And that is not reason enough to place all your savings on crypto. Market trends in the crypto space can change within hours.
How much can you invest in Ethereum?
One of the secrets to investing in Ethereum is meeting your financial goals first. Then you should take a portion of your remaining funds and invest in crypto. This must be a percentage you are ultimately comfortable losing and one that you do not need soon, let’s say five years. Interestingly, you can purchase a fraction of Ethereum if you cannot buy a whole Ethereum.
Using a tried-and-true strategy of dollar averaging can help if you fear a crash after investing. In addition, the market situation can guide you on how many ETH tokens you can purchase. Consulting with a qualified professional before making an investment decision is also recommendable.
Value increase for cryptocurrencies such as Ethereum is unquestionable. However, increased price does not negate its volatility. Therefore, investors are advised to start small and add investments as you get a better understanding of the market. The lack of adequate data to prove how trends in the crypto space occur is yet another challenge. Beginners are thus advised to stick to reputable digital currencies such as Ether to avoid losses.