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You have heard about Ethereum and you think it might be a good investment. On this page I will explain
- What is Ethereum?
- How to invest in it
- What are the potential risks.
- Ethereum Alternatives
What is Ethereum? (The Network)
Ethereum is a software that allows developers to create tokens and run software (contracts) on a decentralized computer network. These contracts are able to transact with each other and human users using either ETH, Ethereum’s main net token or any sub token created on the network. Each transaction uses the ETH token as gas, this gas is given to the miners to process transactions. It is credited to Vitalik Buterin and was launched in 2015.
What is ETH? (The Token)
ETH is the utility token that is used to execute transactions on the Ethereum network. This works like laundromat tokens or pumping car tokens, you put your token in and you have the right to use the resource for a period of time.
The ETH token is created through a process of mining, each ETH created devalues all the ETH in existence. Inflation is not an investors friend. On the other hand, if the value of ETH goes up too high then developers and users will find it more expensive to use the network, which in turn will decrease usage and the value of ETH.
You might want to invest in Ethereum because of its long term potential, because of the 1000x some other cryptocurrencies have gained or because you think that Ethereum will be the base layer of DeFi (Decentralised Finance). You could also want to invest in Ethereum because of FOMO (Fear of missing out). This is a perfectly natural and is ok as long as you understand what it is and how to deal with it.
Investing in Ethereum is not like investing in Google or in Apple. Ethereum is a cryptocurrency platform with a fluid and yet unproven business model. It has a lot of competition from other similar platforms and has a number of key challenges that it needs to solve before it becomes a long term mainstay of the crypto infrastructure.
Ethereum is not a currency, (even though it is called a cryptocurrency). ETH is a utility token, it is an access token to the ETH network. The value of Ethereum is tied to
- The success of the Ethereum mainnet
- No of real users
- No of Bots
- No of dApps
- No of developers
- Ethereum’s comparative utility to developers.
- Upgrading the ETH network
- Inflation rate
- Regulatory challenges
- The price of Bitcoin.
- The position of ETH in the coinmarketcap list, currently it ranks no 2.
Ethereum vs Bitcoin
Ethereum and Bitcoin are not the same, although they use the same concepts of decentralization, censorship resistance and trustless ness to run their networks. Bitcoin is a currency its main objective is to be a store of value. Ethereum, is more like a software that enables people from around the globe to create new digital tokens, securities and contracts. Bitcoin has the ability to create sub tokens like Ethereum through colored coins and Rootstock . ETH has 1000s of actively used sub-tokens also called ERC 20 tokens while Bitcoin does not. This might change with the implantation of root stock, an Ethereum like platform which will run on Bitcoin.
Different kinds of Ethereum
There are different Ethereums.
- Ethereum (ETH) Was the first token to be created and used in the beginning of Ethereum development.
- Ethereum Classic(ETC) – Was forked from Ethereum during the DAO hacking incident.
- There are more projects which have Forked Ethereum, modified the code and created a new network. Tron is one of them.
ETH was created during the DAO incident, during this event the community splintered. One group of who hold the principle of immutability as sacrosanct forked ETH and created ETC. What this means is that there are 2 platforms doing who have the same code base.
For investors this is an added risk as part of the value of ETH lies in the network effect, and when a fork occurs, the network effect dilutes. This is because part of the community working on the project will now pour its resources in another one.
Next steps for Ethereum in 2019 and 2020
Ethereum will be introducing several updates. Proof of Stake will be the most important change, followed by Beacon Chain and then followed by Sharding, a new execution engine and then by Ethereum WebAssembly (eWASM).
PoS will move the blockchain from a Proof of Work to a Proof of Stake consensus system. This changes the way blocks are mined and will also reduce inflation. Beacon chain is a necessary foundation needed for the implementation of Sharding.
Sharding will dramatically increase the speed of transactions; TPS (Transactions per second). This speed is achieved by reducing the number of validators and individual shards will be responsible for the state of the ledger. You can think of sharding as a load balancing system where several servers can update the same database. The execution engine of Ethereum will be updated to eWASM (Ethereum WebAssembly) this will improve the execution of smart contracts.
Tron, Cardano, Cosmos, Neo, EOS, Ontology, Ethereum Classic, Waves, IOST, VeChain, WaltonChain, Tezos , NEM and Bitcoin (through Root Stock) all offer smart contract services. They offer a platform on which smart contracts can be executed. Each provider have strnegths and weaknesses. Some are structural and are very hard to change others are problems with solutions.
Structural problems are hard to change because changing them would strengthen parts of the network but weaken others. The trilemma of consensus is a balance between decentralization, security, and scalability. These problems are hard to solve because if you shift one lever up, the other lever goes automatically down unless some radical new system is invented. Sharding promises to keep the same level of decentralization but also increase the speed of the chain.
The softer problems, the ones with solutions, hover around adoption, user friendliness, corporate outreach, developer education, marketing and creating global projects with wide interest. These problems can be solved with good management and money. Lots of money.
When investing in Ethereum, it is important to understand its strengths and also those of its competitors. Looking at Ethereum in isolation is like investing in MacDonalds without comparing it to Burger King. The objective of this section is to give you a comparative idea on the different platforms and as an introduction to your own research. We will briefly cover EOS and Tron.
EOS, was launched by B1 as an ICO. The ICO collected $4 billion, all these funds were clocked as profits by B1. They have no fiduciary responsibility to use these funds for the benefit of EOS. $1 Billion is being invested in a venture fund focused on EOS based projects. B1 have no official road map and as a private company they do not share their financial situation or information. EOS is the fastest smart contract platform with an all-time high of 3996 TPS (Source: https://eosnetworkmonitor.io/)
EOS was co-created by Dan Larimer, who has previously created Bit shares and Steemit. EOS transactions are probably the cheapest on any smart contract platform. EOS tokens are more like digital property than a utility token. The Rex system allows token holders to stake their tokens and allows developers to rent tokens without any third party risk. This gives EOS a passive income mechanisim.
B1 have recently announced that EOS software will be upgraded to version 2.0, new VM designed from the ground up has also been created. On June 1 they have announced the creation of a competitor to Twitter, Reddit and FB called Voice. This is a good example of how a well-funded organization can address some of the markers that indicate success for a block chain project.
Tron is a fork (copy) of Ethereum, it differs from Ethereum on the basis of its consensus model which is Dpos while Ethereum is currently PoW. Tron was launched in 2018 and was founded by Justin Sun. It collected $70 million during the ICO. Tron wills. It has also invested in 114 projects focused on creating apps in the Tron ecosystem. Tron will also be implementation new functionality to improve its scalability and spend. The Sun Network scalability solution
How to compare smart contract platforms between each other.
On the one hand the investor needs to understand what will be the main use of smart contracts in the future. Will they be used for the DeFi, SupplyChain, Decentralized Apps, Online Gaming, Accountability of content online? There are many possible use cases and each platform can address these separate challenges differently. Some more efficiently than others. These traits allow you to base your research as a comparative exercise.
- History of founders / creators / anonymity of creators
- Ability to interact with other blockchains
- Cost of user onboarding
- Ecosystem focus and use
- Funding of miners, developers, community. Cashlfow is king
- Ease of use – Functionality, Programming languages supported
- Cost to launch – Cost of use – Cost per transaction
- Marketing – Developer outreach
- Governance and potential for forks / breakups
- The flavor of Consensus
- Balance between Security, Speed, Decentralization and Scalability
- Expert, Market and Community sentiment for the platform.
Some enterpeises have adopted some contract platforms, but what many of them do is run their own fork of the platform rather than using the mainnet. Learn more: Enterprise Ethereum
Some Comparative metrics between smart contact platforms.
For a deeper dive on comparing smart contracts these 2 podcasts :
Investment options in Ethereum
- Long-term strategy – HODL
- Short-term strategy
- Passive income from Ethereum
Long term investing options with Ethereum
Long term investing in ETH is about accumulation of the ETH token. Holding not selling. This can be done either by buying in bulk dollar cost averaging your position into the token or timing the time of entry with dips in the price
The intention of this accumulation is to use the token or to sell it at a higher price later. In order for a higher price to be sustainable there needs to be either a great demand for Ethereum coins or one coin will be able to do more than it can do today (i.e. the scaling solutions work)
Possible advantages of long-term investing in Ethereum include:
- ETH is among the top three crypto currencies in the market today. It has the first mover advantage, launched in 2015, on smart contracts and a great number of programmers and projects are using the system. This is called the network effect. See Also : Metcalfe’s law on measuring value of networks.
- ETH is a well-established platform and the stats show it.
- ETH has an important number of applications
- The number of ETH transactions on ETH has topped 750,000
- The number of address is also growing
- Number of decentralized exchanges
- Ethereum is placing itself to be the platform for the next financial revolution :
Ethereum is becoming an important platform for DeFi. Decentralized finance applications
Possible disadvantages of long-term investing in Ethereum include:
- The price of ETH depends on demand and utility. In both cases there are risks mainly because of the competition and the legitimate use of Block chain in applications.
- ETH based projects could migrate to other smart contract platforms.
- Compared to other smart contract platforms Ethereum is the highest valued, what this could mean is that Tron and EOS have a higher chance of doubling then Ethereum does. Doubling Ethereum means that the market cap of ETH needs to go up by $24 billion, while for EOS to double its marketcap needs to increase by $5.5 billion.
- Governments may interfere with the crypto market.
- The markets are unregulated and potentially manipulated to the benefit of some and not others, this probably has more impact in the short term than in the long term.
- Bitcoin and other Altcoins can increase in value faster than Ethereum can.
Short-term investing options in Ethereum
The idea of short term investing is to buy low and sell high within a short period of time, over and over again.
- With short-term investing, there is an opportunity to buy low and sell high within a short space of opportunity.
- Short term trading / investing means that you need to keep funds on exchanges. This is a risk because exchanges can be hacked and you can lose your coins.
- Short term investing in ETH can create tax liabilities.
- The markets are very volatile, unregulated and the market statistics cannot be relied upon, reporting fake volume is a common occurrence.
- Technical analysis is dismissed by some as being an art rather than a science.
- To invest in Ethereum, ensure that your gains will be worth your time. This kind of investment requires a lot of time that will be channeled to watching the market closely for the appropriate time to sell.
- According to Chainalysis just 3 individuals hold 33% of the ETH, which could lead to strong market fluctuations if any one of them decides to dump or accumulate.
Passive income from Ethereum
Lending your cryptos is risky. Very risky. This is because the institutions you lend to are not FDIC insured and can be hacked. They can also default. You can end up loosing all your coins and interest earned. I have seen lending rates for ETH hover between 1% and 6%. In times of crisis the lending rates can have huge spikes up. There are 2 primary ways of lending one is to margin traders and the other is to crypto lenders. Both have different risk profiles.
Learn more: Lending Crypto currencies
When Ethereum switches to PoW, it will be possible to stake using 32 ETH. Stakers will earn a percentage of the Ethereum transaction fees. This will add both utility and scarcity to the Ethereum tokens. This scarcity will increase ETH prices, this is a positive for investors but a negative for developers and users. Ultimately it is adoption and use that drive sustainable price increases. ETH Staking pools will allow investors with less than 32 ETH to stake.
It is also possible to invest in Ethereum through mining. Mining takes place when new blocks are created (hence the term blockchain). Ethereum miners create blocks, in turn each block creates new coins which are the reward for miners.
Read this manual on Bitcoin mining, which is a good primer on block chain mining.
How to invest in Ethereum
The first thing you need to invest in Ethereum is a wallet. An Ethereum wallet is simply a key, which opens the wallet. This key could be stored as text or in hardware wallet. Text keys should be avoided for security reasons. Hardware wallets make it harder to steal this key, because the private key is never saved on your computer. Trezor and Ledger are the two most popular hardware wallets. There are also software wallets, these do not require any physical hardware, installing them is easy and straightforward. Verification that any downloaded software is the real one and is virus free is important.
In any wallet you have make sure you have a
- Backup system
- Access to private keys
- Possibility of signing of private keys
The next thing you need to do once you have a software wallet is to acquire Ethereum. Acquiring Ethereum can be done through a broker an exchange. A broker is simply someone who either sells you Ethereum directly or someone who connects buyers and sellers. When choosing a broker it is essential to understand some basic facts about them. Always compare the price of your brokers with that of coinmarketcap.com this will help you unveil any fees hidden in the price difference between the market price and your buying price.
What to understand when choosing a brooker
- Exchange Rates
- Withdrawl fees
- Withdrawl limits
- KYC Requirements
- Coins available
- Exchange History
- Where is the exchange located, in which jurisdiction
- What does the internet think of the exchange
- How did the exchange / broker react when it was hacked and suffered losses
Potential exchanges where you can buy Ethereum
Check the exchange rate on coinmarketcap.com then compare all the charges and fees, inducing any withdrawal fees. Some exchanges hide their fees in the exchange rate. Any link on the site including the ones below are not endorsements.
- Bitpanda, focused on European countries, there are no transaction fees because the fees are hidden in the exchange rate.
- CoinBase there are some limitations on using credit cards in the USA and it is not available in all countries. CoinBase has an easy to use interface and a long history in the business which so far is good. The fees could be as high as 4% but can be lower of cheap payment methods are used.
- Coinmamma available worldwide, available since 2014.
- Cex.io accepts credit cards and accounts.
- Changelly accept credit cards and other cryptocurrencies
An alternative to buying only Ethereum
If you are new to block chain investing, you could feel lost on what cryptocurrency to invest in. It is natural to consider investing in multiple cryptocurrencies and this can be easily done via Triaconta . Triaconta provides a hands off approach you do the bank transfer and Triaconta holds the coins on your behalf. NYKNYC means not your key not your coins, i.e. there is a risk of loosing all your coins if Triaconta flip. However Triaconta have a business to maintain and a strong interest in this not happening. In addition the advantage is that you can invest in many more coins and have the protection of diversification.
Moving your Ethereum from exchanges to your wallet
Once you have bought Ethereum, from a broker or an exchange it is important to move it to your wallet. This will ensure that you are the sole owner of your coins. In order to do so safely
- Backup your Ethereum wallet
- Move a small amount from your broker to your wallet.
- Delete your wallet
- Test your backup system
- Transfer a test amount from your broker/exchange to your Wallet
- Delete your wallet
- Test your backup system. (Make sure you keep backups off site)
- If all works transfer all the value.
In order to invest in Ethereum, you need to understand where Ethereum stands in the blockchain ecosystem and what are its future prospects. Secondly one should find a suitable wallet, for small amounts a software wallet might do for higher amounts a hardware wallet is safer. Third is to find an honest and fair broker or exchange from where to buy your Ethereum , the easiest way to do this is compare the exchange rate offered on your exchange with the one on coinmarketcap.
Once you buy the Ethereum you can invest in lending to generate passive income, this is a risk because you can loose all your stack of coins, on the other hand lending ETH generates a passive income.