What Is Ethereum?
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As excitement builds around the future of cryptocurrency, the metaverse and innovations like NFTs, investors can’t get enough of a technology behind much of the changes: Ethereum.
Ethereum’s popularity in the cryptocurrency space has exploded since its inception in 2015, and it’s now just second to bitcoin in terms of market value as enthusiasts tout how it could change everything from banking to mortgages.
Ether, the native token of Ethereum’s blockchain network, can be bought alongside bitcoin on popular trading apps like Robinhood and well-known exchanges like Coinbase. The Ethereum network, meanwhile, is being used to power non-fungible tokens (NFTs) and create financial products that aim to cut out third parties, like banks and brokers.
While Ethereum may be bitcoin’s biggest rival, there are key differences between the two crypto assets, including their uses, prices and fees.
Here’s everything you need to know about Ethereum — from its cost to whether or not it’s a good investment.
What is Ethereum and how does it work?
Ether, the native token of the Ethereum network, is the second-largest cryptocurrency by market value after bitcoin. Introduced in a white paper by its co-founder, programmer Vitalik Buterin, Ethereum was launched in 2015. It runs on blockchain technology, a public ledger that records all of a particular cryptocurrency’s account balances and transactions. Since the ledger is public, it’s difficult for anyone to cheat the system. But because transactions are anonymous, investors can buy and sell cryptocurrency without having to divulge personal information, like they would have to if they were dealing with a bank.
Cryptocurrency proponents say that the Ethereum network is revolutionizing the financial industry via decentralized finance, or DeFi for short. DeFi uses digital agreements called smart contracts to execute a deal when certain conditions are met. Smart contracts enable loans, for example, which allow someone to earn interest from crypto they lend.
DeFi does come with risks, like hacks stemming from poor cybersecurity, inaccurate coding and the possibility of regulation that would change how these financial applications currently work.
Still, Ethereum has other uses as well. Smart contracts also power NFTs, which are pieces of digital art that are being sold for millions of dollars in some cases. And while it is not as popular of a cryptocurrency as bitcoin among retailers that accept crypto as a form of payment, Ethereum is accepted by some major retailers, like Shopify.
Ether, like bitcoin, has also seen a major price surge over the years, jumping from below $1,000 at the end of 2020 to more than $4,000 in 2021. That’s why in addition to its use as a means of payment, it’s seen as an investment.
How to buy Ethereum
Cryptocurrency exchanges have made buying and selling ether as easy as buying and selling stocks. Now that Ethereum is popular, ether offered on most of the exchanges and trading apps that bitcoin is, and all you’ll need to get started is a crypto wallet. But keep in mind that trading crypto on exchanges is not without risk. There were more than 20 hacks where criminals stole at least $10 million in digital currencies from a crypto exchange, according to an analysis by NBC.
Coinbase is a well-known option and one of the largest cryptocurrency exchanges in the U.S. Users can choose between two offerings: Coinbase, which is geared towards beginners and Coinbase Pro, the premium service for more avid and experienced traders.
Many online trading platforms that allow investors to trade stocks also have cryptocurrency offerings. Robinhood, for example, now offers Ethereum trading. You can even buy ether — along with several other cryptocurrencies, like bitcoin — via Venmo and Cash App.
Ethereum gets a lot of backlash for its high “gas fees,” which cover the reward paid to miners for verifying transactions on the network. The average Ethereum transaction fee got as high as $70 in 2021, according to bitinfocharts.com. Coinbase incurs and pays miners fees directly, then charges users a fee based on an estimation of what the transaction will cost them, according to its site.
Ethereum vs bitcoin
Ethereum’s popularity has soared in recent years, making it the second-largest cryptocurrency project; ether is also now the second-largest cryptocurrency by market value after bitcoin. But the bitcoin and Ethereum have some significant differences.
One of the biggest distinctions between bitcoin and Ethereum is how they’re used. Bitcoin is mainly seen as an alternative form of currency to government-issued currency and an investment. Ethereum has additional purposes, like powering DeFi applications and NFTs.
Bitcoin’s market capitalization, for example, is around $772 billion as of March 2022 and Ethereum’s is closer to $326 billion. And while Ethereum has cost as much $4,800 per coin, bitcoin’s price has gotten as high as $67,000.
Bitcoin also has a limited supply of 21 million coins. Once those coins are mined, no more can be created. Ethereum’s supply situation is different: There is no finite amount of coins that can be mined, but there is an 18 million per-year cap.
Ethereum transactions happen much much faster than those for bitcoin. New blocks are added to the bitcoin blockchain platform every 10 minutes and to the Ethereum network just every 15 seconds. (When new transactions occur, thousands of computers known as nodes rush to verify and record the transactions, storing the information on a new ledger entry known as a “block.”)
Then, there are the transaction fees. The average daily transaction fee on the bitcoin network over the last year has been as high as nearly $63 and as low as around $1.12, while on the Ethereum network, the average transaction fees have been as high as $70 and as low as $2.31, according to bitinfocharts.com.
Is Ethereum a good investment?
Cryptocurrency certainly comes with risks. Like all crypto assets, Ethereum has experienced volatile price movements since it was created in 2015. Between November of 2021 and January of 2022, ether’s price plummeted from $4,800 per coin to around $2,500, losing nearly half of its value. The lack of regulation by a central authority also makes crypto’s future uncertain.
But Ethereum does have some advantages over other cryptos. Some strategists say there could be an overall shift from bitcoin to altcoins like ether because of concerns over bitcoin’s energy consumption and relatively slow transaction speeds. Plus, while bitcoin’s blockchain is used only for recording transactions in the currency, Ethereum’s network is home to at least $100 billion of software applications and NFTs in addition to ether transactions, Money has previously reported.
“Ethereum is very similar to an ‘app store’ where any entrepreneur in the world can develop applications in anything,” Eli Ndinga, head of research at cryptocurrency exchange-traded product firm 21Shares, told Money in 2021. That includes financial services, but also art, gaming and music. The potential market cap is a lot bigger, Ndinga adds.
Plus, if you’re considering crypto assets, experts say those with strong underlying purposes, like Ethereum, are better investments for the long-term than coins and tokens that only skyrocket based on hype, like meme coins.
Financial advisors tend to recommend investing no more than 5% of your overall portfolio in risky assets like crypto.
Should I buy or mine Ethereum?
Mining cryptocurrency is the act of adding new blocks to a crypto network, like the Ethereum network.
While it may seem tempting to be able to create digital coins and tokens, “at-home mining is not economical," Hanna Halaburda, an associate professor at NYU Stern School of Business, previously told Money. That’s because it’s rare to actually earn a block reward needed to create a new coin, your equipment could become outdated and you could be hit with a huge electricity bill.
Ethereum is planning to transition from proof-of-work — the mechanism by which bitcoin is mined — to proof-of-stake via an upcoming upgrade called Ethereum 2.0. Like proof-of-work, proof-of-stake is a way to add new transactions to a blockchain to create tokens, but proof-of-stake advocates say it uses much less energy than proof-of-work.
Buying ether is, of course, much easier. But there are still risks, like price volatility, which you should consider before taking the plunge.