Ethereum: Is it a good investment?

The native token of the Ethereum blockchain network, Ether (ETH), is a volatile and risky investment. You should not consider it unless you are able to take on high-risk investments, have strong financial resources and can afford to lose everything you invest.

Some investors are optimistic about Ethereum’s future because of its ability to be used as a platform for other technologies. Ethereum plays an important role, and is not like Bitcoin, in NFTs (digital assets tied with unique tokens), decentralized finance, and the creation or other cryptocurrencies. While Bitcoin is often called a distributed ledger (or Bitcoin), Vitalik Buterin, the Ethereum co-founder, and others refer to Ethereum as a distributed computing system. You can also stake Ethereum and earn additional ETH.

Ethereum investors should be aware of the potential negatives. Cryptocurrencies are generally volatile. Although Ethereum’s price has risen significantly, it has also experienced major drops. Its November 2022 price was only 25% of the one-year earlier. Ethereum is slower and more costly than other cryptocurrency.

Ethereum is also undergoing a multi-year upgrade. It cleared a major hurdle in September 2021 when it switched from the energy-intensive proof of work system to the more sustainable, proof-of stake system. This event is known as “the merge”. However, future changes and the viability for Ethereum are uncertain.

• Ethereum is a well-known crypto name. Its whitepaper, outlining its technical details, was published in 2013. The first Ether sale took places in 2014. It was a top five crypto within one year. This was measured by its total value. In early 2016, it was second to Bitcoin.

• Ethereum’s use cases go beyond cryptocurrency. According to Bitcoin.org, Ethereum is more than just a currency. In its 2014 whitepaper, Ethereum states that it is “moving far beyond currency” and will “be a foundational layer to a very large number both financial protocols and non-financial protocol in the years ahead.” This means that developers can create applications and anyone can write smart contracts, which are code stored on Ethereum’s network and executed by that code. Many of these applications also have their own cryptocurrency. A larger portion of the crypto world would be affected if Ethereum disappeared overnight.

• Staking can help you earn more Ethereum. The process works as follows: Users can use Ethereum they already have to commit Ethereum in exchange for the opportunity to approve new blocks of transactions. If they do this well, they will earn a reward and risk their stake if not. Although technically this isn’t an interest rate or a company payout, it is an opportunity to make passive income for Ethereum owners who intend to keep it.

• Transaction fees can be costly. The network can only process around 12 transactions per second, regardless how much demand. This has historically led to frustratingly high prices. One instance was $190. Although there are plans to lower prices indirectly through increased transaction throughput, this will require the implementation of unproven technology that isn’t yet available.

• Funds can be volatile and transactions cannot be reversed. Although cryptocurrencies are a new type of asset, they are highly volatile. Although Ethereum has experienced tremendous growth, its price has fallen by as much as 50% on numerous occasions. Transactions can’t be reversed and funds could be lost if you make a mistake when trying to transfer funds.

• Storing ETH or other crypto carries risk. Many crypto platforms that allow you to buy and sell Ethereum or other coins have been hacked or crashed, leaving users without funds. BlockFi, FTX.US, and FTX.US filed for bankruptcy in 2022. While a hardware wallet may offer additional protection from hacks and crashes, it is still possible for your wallet and assets to be lost.

Cryptocurrencies such as Ethereum are different from any other type of investment. Cryptocurrencies are not like stocks. You don’t own a company. You aren’t guaranteed future payments, unlike a bond. Crypto is not something you can own physically, unlike real estate.

The government regulators aren’t always in agreement about crypto and how to deal with it. Gary Gensler, Chair of the Securities and Exchange Commission, suggested that cryptocurrency like Ethereum be treated as a security and would fall under the purview of SEC regulations. Rostin Behnam (chair of the Commodity Futures Trading Commission) stated that Ethereum was a commodity and should be subject to CFTC regulation in October. Investment environments can be more difficult because of uncertainty, even regarding government regulation.

An investor’s portfolio can be affected by risky investments like cryptocurrency. While the upsides could be lucrative, you need to be ready for major downturns and even a total loss. Risky investments should not be part of your asset allocation.