What if Bitcoin could not only be used as a distributed ledger on which to transact, but also a platform on which innovative, digital tools and solutions could be created and run? This is precisely what the creators of Ethereum had in mind when they designed their own blockchain network. Ethereum is much more than a digital currency; it is a revolutionary network of decentralized applications for every industry imaginable. As a result, Ethereum has become the second largest cryptocurrency, and one that many consider a good investment for a diversified portfolio.
What is Ethereum?
At its essence, Ethereum is a decentralized, public ledger on which transactional information is recorded. Ethereum is much more than a place to send and receive funds. On the Ethereum blockchain, developers can write and implement smart contracts to create an entirely new world of applications. Because the network is a decentralized blockchain, Ethereum is a peer-to-peer computing platform that provides privacy and censorship resistance compared to other networks. This is what might make Ethereum a good investment for you.
Say, for instance, you are looking to use cloud storage to store a file with sensitive information. If you use Dropbox or a similar centralized cloud storage solution, you are prone to a malicious attack that could compromise your data. The same applies for using a centralized cloud computing solution like Amazon Web Services, which has been known to go down for hours on end because of internal errors. If instead you were to use decentralized solutions on the Ethereum blockchain, you would not be prone to centralized hacks or errors causing network outages. Why not? Because the very decentralization at the heart of the Ethereum blockchain means no single point of failure can take the network offline.
Does Ethereum Use Blockchain Technology?
A blockchain is nothing more than a decentralized ledger on which transactions are posted. The founders of Ethereum recognized Bitcoin’s success using a blockchain architecture and decided to utilize the same structure, with some variations.
When Ethereum launched in 2015, it focused on using its blockchain network to allow developers to create infinitely new functions and applications, similar to how cloud computing works today. As a result, it implemented smart contract technology, which is used to automatically execute certain actions according to pre-written rules. For instance, a smart contract can release funds from escrow when a real estate deal is completed or produce medical records at a verified doctor’s request.
Ethereum Terminology
Unlike the Bitcoin blockchain, which is relatively straightforward, Ethereum is a much more complex network. With smart contract technology and the ability to develop new tokens, Ethereum is filled with technical jargon that is likely brand new to many people. Here is a quick overview of some commonly used Ethereum terms and their meanings:
- Decentralized Application (dApp) – A digital application that runs on a blockchain network.
- ERC-20 – The standard for fungible tokens on the Ethereum blockchain. This is the token standard most often used for companies when conducting an initial coin offering (ICO).
- ERC-223 – A recent protocol standard that seeks to improve upon ERC-20 by reducing energy consumption and eliminating any issues of lost tokens.
- ERC-721 – The standard for non-fungible tokens, where each token is completely unique. The most cited example of this is CryptoKitties.
- Ethereum Classic – A separate blockchain designed in July of 2016 when the Ethereum blockchain hard forked. This was the result of a community-wide disagreement on what to do after The DAO hack.
- Ethereum Virtual Machine (EVM) – The platform-layer on which smart contracts and applications are built.
- Gas – The amount (in ether) paid for a transaction to be processed on the Ethereum network.
- Proof-of-Stake (PoS) – A recently implemented consensus mechanism. Transactions are verified by nodes that stake their cryptocurrency to the network as collateral.
- Solidity – The programming language used to write smart contracts on Ethereum
Ethereum vs. Bitcoin: What’s the difference?
While headlines often pit the industry’s two most infamous cryptocurrencies against one another, in reality, Ethereum and Bitcoin serve widely different purposes. Bitcoin was created as a form of peer-to-peer currency and has since become viewed as a store-of-value asset (similar to gold) which investors value. But outside of its use in conducting financial transactions, Bitcoin is limited in what it can accomplish.
The Ethereum network, on the other hand, is both a network for conducting financial transactions and a decentralized cloud computing network. As a platform to run decentralized applications, there are infinite uses for the Ethereum blockchain.
| Ethereum | Bitcoin | |
| Founded | 2014 | 2000 |
| Founder | Vitalik Buterin and team | Satoshi Nakamoto |
| Block Time | 10-20 seconds | 10 minutes |
| Supply Limit | No fixed supply | 21 million |
| Consensus Mechanism | Proof-of-Stake (currently being implemented) | Proof-of-Work |
| Transaction Throughput | ~ 15 transactions per second | ~ 7 transactions per second |
| Programming Language | Solidity | C++ |
On the flipside, there are similarities in how the two operate for investors. Both Bitcoin and Ethereum trading take place on cryptocurrency exchanges. Investing in Ethereum or Bitcoin will require you to have a wallet to store the information needed to retrieve the cryptocurrency. These wallets can be housed on an exchange, via another internet-based service, or offline to ensure security.
What is Ether?
Ether is the cryptocurrency used to transact on the Ethereum blockchain and the network’s medium of exchange. In order to conduct any function on Ethereum, whether it’s to send tokens to another party or execute a smart contract, a transaction fee is paid in ether. Ether is the fuel on which the Ethereum blockchain runs. Any developer on the Ethereum blockchain must first buy ether to create their innovation.
Because the Ethereum network quickly became popular, so did the ether cryptocurrency. Ether trading occurs on almost any cryptocurrency exchange for fiat or other cryptocurrencies. Also, ether is valuable in its ability to be directly traded with any ERC-20 token, of which there are more than 200,000 in existence.
Ethereum Tokens
One of the key differentiating features of Ethereum is its network of tokens. Ethereum tokens are digital assets built on top of the Ethereum blockchain and require ether to power smart contracts.
Notable Ethereum tokens that currently use the ERC-20 standard include:
- Tether (USDT) – A price-stable cryptocurrency pegged to the US dollar
- ChainLink (LINK) – Connects smart contracts with real-world data
- Compound (COMP) – A decentralized finance lending protocol that lets users earn interest on deposited cryptocurrency
- Uniswap (UNI) – A decentralized cryptocurrency exchange
- Aragon (ANT) – A platform for creating decentralized autonomous organizations (DAOs)
While these tokens are investments in and of themselves, they are all built on top of the Ethereum network, meaning they all require Ethereum to operate and function. Tokens like those mentioned above only add value to the Ethereum blockchain, making it a better investment as these projects grow.
Is Ethereum a Good Investment?
Pros
- As the industry’s second largest cryptocurrency, there is a significant amount of trading liquidity for Ethereum
- Investing in Ethereum is investing in the thousands of tokens created on its blockchain
- Decentralized Finance (DeFi) has proven to be a solid use case for the Ethereum network
- The upgrade to Ethereum 2.0 brings the blockchain to proof-of-stake (PoS), a more sustainable consensus mechanism to scale the network
Cons
- It still trails Bitcoin as the go-to cryptocurrency for most investors
- There has been an increase in competition from other blockchain networks like EOS, Tezos, Cardano, etc. which could take market share away from Ethereum
- A previous hard fork of the network created two cryptocurrencies: Ethereum and Ethereum Classic, splitting the community and its resources
How to get exposure to Ethereum
Trading
You can trade Ethereum with fiat or other cryptocurrencies using a cryptocurrency exchange. Trading requires knowledge of Ethereum’s past performance compared to other assets, technical analysis of charting patterns, and price movements. Ethereum traders looking to take advantage of short-term price movements can buy and sell the cryptocurrency multiple times in one day. In short, trading can be highly lucrative, but is also a risky way to invest in Ethereum.
Investing
Instead of trading, you could invest in Ethereum for long term gains, instead of frequently buying and selling. Investing in Ethereum simply requires making a purchase on an exchange and holding the cryptocurrency in a safe and secure manner. Using cold storage such as a hardware wallet is one way to ensure your Ethereum stays secure. Then, when you are ready, you can send the Ethereum back to the exchange and sell at a profit or loss. Just be sure to understand the tax implications of investing in Ethereum before you begin.
Ethereum IRA
For those who want to invest in Ethereum while also taking advantage of the tax benefits that an IRA has to offer, investing in an Ethereum IRA is the best choice. With an Ethereum IRA, you get the advantage of tax-deferred returns while investing in an alternative investment class.
For choosing an Ethereum IRA, BitIRA is an excellent option. Investors can choose from a Traditional IRA, Roth IRA, SEP IRA, or SIMPLE IRA account. All Ethereum are held in cold storage with multi-signature authentication, greatly reducing any risk of theft or fraud. Additionally, BitIRA provides its users with dedicated IRA specialists to assist with any questions or concerns.