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Buying Ethereum involves converting your U.S. dollars into “ether,” or ETH, which is the currency of the Ethereum blockchain. People who own Ethereum can use it as payment for goods and services, or to cover fees for the processing power used to carry out complex transactions in fields such as finance, art and computer science.
Many owners of Ethereum have also used it as an investment vehicle in recent years amid a rush of interest in the crypto space. Ethereum hit an all-time high late in 2021, and it has been gaining on Bitcoin in terms of global market capitalization.
But before you make any decisions, remember that cryptocurrency can be a risky asset whose market value can fluctuate significantly.
Here are some pointers on how to buy Ethereum — and some factors to consider before you do.
How to buy Ethereum
There are three major steps that most people take in buying Ethereum:
Choose a cryptocurrency exchange.
Decide how to pay.
Store your Ethereum.
Choose a cryptocurrency exchange
Because Ethereum is one of the most widely-circulated cryptocurrencies, you have many options in selecting where to buy it. This decision will affect the choices available to you for payment and storage, however, so you should do your homework. There are several types of exchanges and marketplaces you can consider.
Online stock brokers: Buying cryptocurrency from an online brokerage that offers it is one of the easiest ways, but it can come with serious drawbacks. While online brokers have made it easy and cheap to turn your cash into crypto and vice versa, check the fine print to see if the brokerage lets you move cryptocurrency in and out of the account — some brokers don't. In the eyes of crypto purists, this essentially nullifies the entire point of owning a digital currency.
Centralized crypto exchanges: These are a common way for people to buy cryptocurrency. Centralized exchanges such as Coinbase act as middlemen in the buying and selling of cryptocurrencies, and tend to have larger selections than platforms that primarily deal in conventional assets such as stock. These can be a good choice if you're somewhat familiar with cryptocurrency, but are looking for a user-friendly experience. Some people, on the other hand, might feel that a centralized broker is contrary to the spirit of blockchain technology, which is supposed to be decentralized.
Decentralized exchanges: In a sense, a decentralized exchange, or DEX is the truest way to trade cryptocurrencies in that there is no third party whatsoever. Centralized exchanges require you to deposit the coins or dollars you want to trade on the market into a trading account. But with DEXs, you retain full control over your funds and trade directly with a buyer or seller. However, DEXs can be confusing to navigate and are mostly used for trading one cryptocurrency for another, rather than buying ETH with cash. In short, they’re not beginner-friendly.
» Ready to invest? Here are our picks for best Ethereum and cryptocurrency exchanges.
Decide how to pay
Depending on whether you already own cryptocurrency and are willing to part with it, you can decide to either pay with U.S. dollars or with another kind of crypto.
Fiat currency: Like most things in the world, you can buy cryptocurrency with traditional fiat currency such as U.S. dollars. On some exchanges, this is your only option. And if you don't already own cryptocurrency, you're going to have to use cash at some point. If you're using a centralized exchange, you will likely have to fund your account using a bank transfer, a credit card or a debit card, and these transactions can incur fees on some platforms.
Cryptocurrency: Some marketplaces allow crypto-to-crypto trading, which can be an advantage if you want to buy Ethereum without sinking more of your savings into the crypto space in general. This can also be a helpful strategy if you own another cryptocurrency, such as Bitcoin, that has increased in value and you want to diversify your holdings. Be aware, however, that the relative values of cryptocurrencies are constantly changing. It can be a good idea to look at historic price trends as you decide when to buy. One more thing to keep in mind: trading cryptocurrencies can create a complex tax situation.
» Nerdy tip: Here’s a directory of exchanges that allow trading fiat money for ETH.
Store your Ethereum
Even though Ethereum is a digital asset, you still need a way to securely store it. This is generally done through digital wallets, which store the private keys that you to access or spend your digital currencies. Some online marketplaces that sell Ethereum also will hold them for you. One thing to consider when choosing an exchange is how it handles storage. Some allow you to use your own digital wallet to move currency to and from their platforms, while others are more limited.
On-platform storage: With a wallet hosted by a broker or exchange, you don’t have to worry about losing the private key to your wallet or forgetting a password — a real problem that has cost people millions of dollars. Rather, the host stores this information for you. A common analogy is that it’s like a bank holding and securing your funds for you. But you likely won’t get the full benefits of cryptocurrency, such as using the decentralized applications listed below, nor will you have complete control over your wallet and the crypto it holds.
» Compare: Best exchanges to store your cryptocurrency
Non-custodial wallets: This is a more advanced option, but it has some benefits. It’s generally not a good idea to hold large sums for extended periods on exchanges; while security has come a long way, historically, exchanges have been big targets for hackers. There are a ton of wallets out there to choose from, ranging from online “hot” wallets to physical, offline devices known as “cold” wallets. One of the best places to start is the Find a Wallet feature on Ethereum.org, which filters wallets based on your specific preferences.
» Learn more: How to choose a crypto wallet
Choosing the right way to buy and hold ETH comes down to experience, comfort, what you want to accomplish with your ETH, and how much you plan to buy or hold. It’s entirely possible to use a combination of the methods above; perhaps using one platform for convenient trading and another for long-term holding. For beginners, it may be best to start with a crypto brokerage or stock broker. Then you could consider working your way up to the more advanced, decentralized platforms.
Your decisions may also be informed by whether you view Ethereum as a long-term investment, a short-term buy, or a speculative bet on a volatile asset.
Ethereum’s investment potential
What gives Ethereum value?
In order to use the Ethereum blockchain (which includes sending ETH as a form of payment or using an application that runs on Ethereum), you’ll need ETH to pay a transaction fee.
So what can you do on the Ethereum blockchain? While the technology is still very young — and frankly, untested in many ways — people can use Ethereum to run “decentralized applications,” or dapps. Dapps essentially cut out the middleman in industries where middlemen have for the most part always existed, relying instead on “smart contracts” that run on Ethereum. To use these applications, you’ll need ETH to pay for the cost of “gas” — a measurement of how much computing power is needed to run the application. Examples of dapps include:
Direct peer lending that earns interest.
Insurance without the insurance company.
Payments without the payment processing company.
Music streaming in which the money goes directly to the artist, not a streaming platform or record label.
Art auctions without an auctioneer.
Marketplaces for nonfungible tokens, or NFTs.
Code collaboration without a central server.
This is all extremely complex, so if you’re confused, don’t worry. That’s normal. But put very simply, when you’re investing in Ethereum, you’re betting that people are going to keep adopting and using new Ethereum-based technologies like the ones listed above, which could possibly drive demand for ETH — and its market value — higher.
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Are you comfortable with Ethereum’s volatility?
Cryptocurrencies are dominating the headlines, but the truth is if you’re viewing them strictly as an investment, they’re still a highly volatile alternative asset. It’s generally wise to treat them as such in your portfolio.
In ETH’s case, we’ve seen enormous price swings: In 2016, it bounced around between roughly $5 and $15. By the early days of 2018, the price had soared to nearly $1,500, but after that, ETH began a bumpy downhill road, dropping to less than $100 by December 2018.
And the kicker? The price of ETH never got back above $500 until November 2020, bringing a thaw to what many referred to as the “crypto winter.”
So, imagine this: You bought ETH during the January 2018 hype only to see your investment’s value crater throughout the year. 2019 comes and goes, and you still haven’t made your money back. After two years, would you have cut your losses and taken whatever cash you could get? If so, Ethereum’s volatility may mean it’s a bit risky for you.
Are there any red flags?
Just as you would heavily research a company to look for any red flags before investing, you can do the same for cryptocurrencies. And since the launch of Ethereum, issues have arisen.
It gets a bit complicated, but currently, one pressing issue is that gas — that transaction fee that keeps the system up and running — is more expensive than it used to be. A lot more expensive.
Ethereum’s developers are in the midst of making some changes they hope will improve its performance.
Known as Ethereum 2.0, the changes attempt to move away from the resource-intensive "proof-of-work" method of verifying transactions. The goal is to make Ethereum faster and cheaper to use.
How Ethereum fits into your portfolio
Before you consider buying Ethereum, take a look at your portfolio to determine if cryptocurrency has a place in it. Generally, a combination of stock mutual funds (such as index funds and exchange-traded funds), bonds or bond funds and cash make up the core of a highly diversified portfolio. Finding the right mix of these assets based on your personal risk tolerance, timeline and investment goals is known as asset allocation. Before diving into an alternative asset like crypto, it may be a good idea to make sure the fundamentals of a long-term portfolio are in place.
» Learn more: What is an ETF?
But if you already have a highly diversified, balanced portfolio, a cryptocurrency like ETH could give you even more diversification. Because the performance of cryptocurrencies generally doesn’t correlate with the performance of the stock market, adding crypto into the mix could theoretically act as a cushion if the stock market dips but the crypto market remains steady.
That said, the volatility of cryptocurrencies is still a huge factor to consider, despite the potential advantages. What’s more, we only have a few years of data to find correlations between cryptocurrencies and traditional markets; it’s possible the current trend could shift.
How much ETH you can afford
Before putting cash into any investment (including stocks), it’s wise to make sure you have adequate emergency cash savings. You should be comfortable living without the money you plan to invest for the foreseeable future — say, the next five years. Remember the “crypto winter” referenced above? There’s always a chance there will be another one, and you should have a plan in place to endure it.
One way to determine the right amount of ETH for your portfolio is to think of it as any other risky alternative asset. From this lens, you could decide to allocate a small portion of your portfolio — some experts might refer to this as a “casino fund” — toward cryptocurrencies.
And if you’re not sure how much to invest, or are nervous about a price crash shortly after purchasing, you could always borrow a tried-and-true strategy from traditional investing: dollar-cost averaging. Like any investment, it may be a good idea to start small.
Disclosure: Chris Davis owned ETH at the time of publication.