When it comes to cryptocurrency, Bitcoin (BTC 1.19%) is the big name in town. But Ethereum (ETH 0.84%) has had an incredible year.
Since the beginning of the year, Ethereum's price has soared by 435%. Over the last 12 months, it's increased by more than 1,700%. The price of Bitcoin, by comparison, has increased about 100% so far this year, and 518% over the past 12 months.
Run-ups like these can be difficult to ignore, and some experts believe Ethereum has a promising future. But is it time to buy?
Image source: Getty Images.
What is Ethereum?
First, it's important to distinguish the difference between Ethereum and Ether. Ether is a type of cryptocurrency, similar to Bitcoin. Ethereum is the blockchain technology behind Ether.
Ether and Bitcoin share many similarities. They're both digital currencies that can be used to make transactions. Like Bitcoin, you can invest directly in Ether by purchasing coins. Ether is significantly more affordable than Bitcoin, however. Ether costs around $4,100 per coin, as of this writing, while Bitcoin costs around $57,400 per coin.
It's also possible to invest in the Ethereum technology. Some of your options include:
- Investing in Ether directly: By purchasing Ether coins, you're also supporting the Ethereum technology behind the cryptocurrency.
- Investing in a managed fund: Funds like Grayscale Ethereum Trust (ETHE 3.84%) allow you to gain exposure to Ether and Ethereum without having to buy coins directly.
- Investing in certain stocks: Buying stocks that have some connection to Ethereum technology is another option. Companies like NVIDIA and AMD, for example, build computer chips that are often used during the coin mining process.
Ethereum is a widely used technology that has a variety of applications. But before you invest, it's important to understand the advantages and disadvantages.
Considering the advantages
One of the biggest advantages of the Ethereum blockchain is its flexibility. While it's mostly known for hosting Ether, it's also used for nun-fungible tokens (NFTs), decentralized finance, and enterprise blockchain solutions.
In other words, it has applications outside the cryptocurrency world. Even if cryptocurrency itself doesn't succeed over the long run, Ethereum could still be used in other ways.
In addition, one major criticism of cryptocurrency, specifically Bitcoin, is how energy-intensive it is. In fact, researchers from the University of Cambridge estimate that the Bitcoin mining process uses more electricity than the entire country of Sweden.
Ethereum, however, aims to be more environmentally friendly. Developers of the technology are currently working to shift how coins are mined to make the process more energy-efficient. This could give Ethereum an advantage over Bitcoin, especially among environmentally conscious investors.
Also, as the Ethereum network undergoes changes, some of the Ether coins could be destroyed in the process. This could actually be a good thing for investors, however, because a smaller supply of Ether could make it more valuable and drive up its price.
Image source: Getty Images.
Understanding the risks
Despite its flexibility and wide range of applications, there are still risks involved in investing in Ethereum and Ether.
For one, you're almost guaranteed to experience significant volatility -- especially if you invest directly in Ether. Cryptocurrency is a risky investment in general because it's highly speculative at this point. Some experts also believe we're in a crypto bubble and that digital currencies like Bitcoin and Ether are overvalued. If that's the case, prices could plummet when the bubble bursts.
Also, new laws and regulations could pose a threat to Ethereum's future. Investing in cryptocurrency can come with hefty taxes, which could limit the number of people willing to invest. In addition, lawmakers are still figuring out how to regulate the crypto market. This could result in more volatility and greater risk.
Before you invest in Ethereum, think about your tolerance for risk. Would you be able to sleep at night if your investment fell by 20%? What about 50%? Ethereum is a volatile investment, so be sure you're comfortable with risk before you buy.
Finally, if you do choose to invest in Ethereum, make sure you have a well-diversified portfolio, and only invest money you can afford to lose. By keeping most of your money in safer investments, you can limit your risk in the event that Ethereum takes a turn for the worse.
Ethereum could end up being a smart investment, but it's not right for everyone. Be sure to weigh the pros and cons as well as consider your own tolerance for risk. Whether you choose to invest or not, be sure you're making this decision carefully.
