Is Ethereum a Good Investment?
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Ether (ETH), the native token on the blockchain network Ethereum and the second-largest cryptocurrency by market cap, is a risky and volatile investment. It should only be considered if you have a high risk tolerance, are in a strong financial position and can afford to lose whatever you invest in it.
Ethereum’s capacity to serve as a platform for other technologies and services is one reason some investors are upbeat about its future. Ethereum, unlike Bitcoin, plays a vital role in NFTs (digital assets tied to unique tokens), decentralized applications, decentralized finance and the creation of other cryptocurrencies. Whereas Bitcoin is sometimes called a distributed ledger, Ethereum co-founder Vitalik Buterin and others sometimes describe Ethereum as a distributed computer. It also allows owners to stake Ethereum, earning additional ETH in return.
Investors in Ethereum should also be aware of its potential downsides. Cryptocurrencies generally are highly volatile. Ethereum’s price has significantly jumped, but it has also seen major dips. Its price in November 2022 was less than a quarter of what it was one year earlier. Compared to other cryptocurrencies, using Ethereum can be slower and more expensive.
Ethereum is also in the midst of a multi-year upgrade. It passed a major hurdle in September 2021, switching from the energy-intensive proof-of-work system to the more sustainable proof-of-stake system in an event called “the merge.” Still, the long-term viability of this and future changes are not certain.
Ethereum is an established name in crypto. Ethereum’s whitepaper, which outlined its technical details, was released in 2013, and the first Ether sale took place in 2014. It was a top-five crypto within a year, measured by the total value of its circulating supply, and in early 2016 it was second only to Bitcoin, a position it still holds today.
Ethereum’s use case goes beyond crypto. Unlike Bitcoin, which “is pretty much like cash for the Internet,” according to Bitcoin.org, Ethereum has grander ambitions. Ethereum’s 2014 white paper states that it “moves far beyond just currency” and will be “a foundational layer for a very large number of both financial and non-financial protocols in the years to come.” Among other things, this means developers can build applications and anyone can write a smart contract, which is code that is stored and executed on Ethereum’s network. Many of those applications have cryptocurrencies of their own. If Ethereum were to disappear overnight, a much larger swath of the crypto world would also vanish.
You can earn additional Ethereum by staking. Following the Ethereum merge, blocks of transactions would be verified using a consensus mechanism called proof-of-stake. It works like this: A user can commit Ethereum they already own in exchange for the chance to approve a new block of transactions, earning a reward if they perform this task well and putting their stake at risk if they don’t. While technically, this is not an interest rate or a company dividend, the chance to earn passive income is a plus for Ethereum owners who plan to have it long term.
Transaction fees can be a drag. The cost to use Ethereum’s network is based on supply and demand — if the network is busy, you’ll pay more. Also, the network can only process about a dozen transactions per second, regardless of demand. Historically, this has resulted in periods of frustratingly high prices, exceeding $190 at one point. There are plans to indirectly lower prices through higher transaction throughput, but that will require implementing unproven technology that isn’t yet available.
Funds are volatile, and transactions are irreversible. Don’t mistake Ethereum’s name recognition for stability or growth guarantees. Cryptocurrencies are still a new kind of asset, and they have been highly volatile. Ethereum has seen tremendous growth, but its price has also fallen by 50% or more on many occasions. Transactions are also irreversible, and it’s possible to lose funds by making a typo when attempting to make a transfer.
Storing ETH and other crypto carries risks. Multiple crypto platforms where you can buy or sell Ethereum and other coins have crashed or been hacked, leaving users without access to funds. In addition, FTX, FTX.US and BlockFi filed for bankruptcy in 2022. And while a hardware wallet can give you additional protection against crashes and hacks, it’s still possible to lose your wallet, and with it, your assets.
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What kind of investment is Ethereum?
Cryptocurrencies like Ethereum are unlike any other kind of investment. Unlike stocks, owning crypto doesn’t give you ownership of a company. Unlike a bond, you aren’t promised payments in the future. Crypto isn’t something you can physically own, like real estate.
Government regulators don’t always agree about crypto or how to treat it. In September, Securities and Exchange Commission Chair Gary Gensler suggested that cryptocurrencies such as Ethereum could be considered a security, which would make them subject to SEC regulations. In October, Rostin Behnam, the chair of the Commodity Futures Trading Commission, said that Ethereum is a commodity and should fall under CFTC regulation. Uncertainty, even about government regulation, leads to a murkier investment environment.
Risky investments such as cryptocurrency can affect an investor’s total portfolio. The upside could be rewarding, but you should also be prepared for significant downturns, including a complete loss. As a result, risky investments should make up just one part of your asset allocation.
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