Are you wondering what Ethereum is and whether or not you should buy into the network? Ethereum is the second biggest cryptocurrency by market cap and makes it an attractive choice for both investors and believers in cryptocurrencies.
But with Ethereum already reaching over $2,500, is it too late to get in, or is it still on the rise?
Here is everything you need to know about investing in Ethereum and whether you can handle the crypto market.
What Is Ethereum?
Ethereum is a cryptocurrency that focuses more on the development of a decentralized network, rather than a decentralized currency like Bitcoin. Ethereum uses Ether (ETH) as its source of transaction fees and rewards for processing transactions on its blockchain.
The Ethereum network’s purpose is to allow other users to build upon it. Rather than needing to build a separate blockchain for potential users, different cryptocurrencies can develop in parallel to the Ethereum one.
For instance, say you wanted to create your own crypto token. Rather than having to build your own blockchain to process transactions, you can instead build upon Ethereum and make your coin an ERC-20 token. This means users will use ETH to process transactions.
To learn more about Ethereum and everything it brings to the table, be sure to check out the link.
What Is Ethereum Mining?
Ethereum currently runs on a Proof of Work network. This means it needs computing power to process transactions. This is why people buy gaming graphics processing units (GPUs), as these provide the computing power needing to run the network.
When people mine, they have two ways to make a profit.
The first is through block rewards. The Ethereum developers reward those that successfully process a block on the blockchain first with more ETH. The current reward per block is 2 ETH.
The second is through gas fees. Whenever you process a transaction, whether that be sending ETH to someone, adding liquidity to a decentralized exchange, or approving a transaction, you pay a transaction fee. As a tip to miners for helping secure the network, miners take a cut of the fees paid.
While it may seem annoying that you have to pay per transaction, this happens in everyday life as well. The cost to buy something at a retailer gets added to the cost to buy something, making it seem like you never experience a transaction fee.
Ethereums Role In Decentralized Finance
Ethereum has been the leader when it comes to decentralized finance (DeFi). Rather than relying on governments, financial institutions, or other money services, decentralized finance has no home location to control the money moving in and out.
Because there are so many different ERC-20 tokens, Ethereum has paved the way for decentralized exchanges like UniSwap or SushiSwap.
At these decentralized exchanges, you can provide pairs of tokens, like an ETH-UNI token to their liquidity pool. You then get paid in fees that occur on the network that requires people to swap ETH for UNI or vice versa.
Who Should Invest In Ethereum
To invest in Ethereum, you should have a strong stomach. While the stock market itself is volatile, cryptocurrency investing is even more so. There is no downtime for cryptocurrency, meaning you may need to watch investments around the clock.
If you’re comfortable with that volatility, then now might be a good time to invest in Ethereum.
Cryptocurrency is still in its infancy. Even Bitcoin has only been around since 2009.
If you believe in the platform of Ethereum, then it will feel the same as if you were investing in a company that you believe in on the stock market. Even if there are ups and downs, if you believe that it will prevail, then you can take that risk.
Holding long-term will be beneficial for those that are planning on staking when ETH 2.0 comes around. ETH 2.0 will allow users to stake their ETH, which will move the network from a PoW method to a Proof of Stake method.
Who Shouldn’t Invest In Ethereum
Now if you panic any time that there is a drop above 5% in the stock market, you won’t fare well when it comes to crypto. It is not unusual to suddenly see 15% drops in the entire market over the course of an hour.
If you’re asking yourself whether you should invest in Bitcoin or Ethereum for a store of value, Bitcoin might be the better option for you. Bitcoin works more like a currency and you can actually buy things with it. Recently, Tesla added an option to buy one of their cars with Bitcoin.
It also wouldn’t be smart to invest in Ethereum if you plan to utilize DeFi and you only have a little bit of money. The gas fees for transactions are out of control currently. To send someone $10 USD in ETH, you might end up paying around $16 in transaction fees.
Those looking to get involved with DeFi should look into the Binance Smart Chain instead. The lower fees and introductory costs allow those with smaller amounts of money to get started.
How Can You Use Ethereum
Currently, retailers are still adapting to the cryptocurrency space. With PayPal now offering to store your crypto, this is a good sign that more merchants are going to start offering the option to pay with Ether and other cryptos.
For now, you can use it to process transactions on the network or “HODL” it away until the gas fees calm down.
Investing In Ethereum: Not for the Faint of Heart
When it comes to investing in Ethereum, you’re going to need a strong stomach. The crypto market can be rough some days. Always remember that most governments treat ETH like an asset, so familiarize yourself with your government’s taxes when it comes to assets.
If you want to learn more about Ethereum and other cryptocurrencies, then be sure to check out the rest of the blog. Know someone interested in investing in ETH? Share this article with them so they know what they’re getting themselves into.