With all the buzz surrounding cryptocurrency, many investors might be ready to take the plunge. The fantastic gains don't hurt, either. Bitcoin, the original cryptocurrency, is up more than 200% this year alone. Shiba Inu, the 2021 cryptocurrency breakout story, is up a mind-boggling 60,000,000% over the past year. It's enough to whet any potential investor's appetite.
But between Bitcoin and Shiba Inu, there's a whole slew of cryptocurrencies growing in market cap. It can be confusing, since many of them offer similar benefits. That's why if you're new to cryptocurrency, I recommend getting your feet wet in a cryptocurrency that's easy to understand but also offers high potential for gains. That's why I'd start with Ethereum (ETH -5.31%).
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What is Ethereum?
Ethereum is a platform that uses blockchain to facilitate transactions, and developers use its native token, Ether, for payments. Because it's a platform, not just a digital token, it has intrinsic value that could make it a more secure investment than cryptocurrencies that are strictly currency. Blockchain, in short, is a digital database of transactions, like an online ledger where records of transactions are sealed and kept.
The platform is a hub for Defi, or decentralized finance. That indicates transactions that are performed peer to peer without a central authority. It makes it simpler and faster for two parties to shake digital hands, so to speak, without interference or regulations. This extends beyond financial transactions to all sorts of programs, or smart contracts, that are replicated across all computers tied to the Ethereum network. That makes it a scalable model that can be used for many purposes.
While that has positive implications in terms of the democratic nature of the beast, as well as simplicity, it also needs extra protocol to maintain its security. For now, it does that in the form of proof of work, or POW, the same protocol as Bitcoin. It involves mining, or users who validate transactions by solving complex math puzzles and earning Ether in the process.
What is Ethereum's future?
Ethereum is practically a crypto dinosaur compared to newer tokens. That gives it some stability and security that hyped-up crypto tokens with limited utility don't yet possess, but it also means that Ethereum, which launched in 2015, may be behind the curve with its older technology. The three main issues that need to be addressed are energy consumption in the mining process, limited disk space as the blockchain grows, and limited capacity, or speed, as more people use the platform.
That's why developers are working on a big upgrade, called Eth2. The main way they want to solve this "trilemma" is by expanding the block on the chain, allowing for more and faster transactions. The upgrade is meant to speed up transaction time from about 30 per second to an industry-leading more than 100,000 TPS. The platform is also moving from a proof-of-work validation system to a proof-of-stake validation, where miners stake their Ether to transact instead of solving puzzles. These upgrades, which should take place in 2022, make the platform more scalable and less energy-guzzling and bring it into the modern crypto world. Users get the best of both worlds: a tried-and-true system with state-of-the-art technology.
Why Ethereum is a good place to start
Investing in cryptocurrency is a whole new system to understand for investors. There are similarities to the stock market, but it requires a new set of ideas and fundamentals. Ethereum gives investors some stability while they're learning the ropes, as opposed to some of the newer and more speculative cryptocurrencies. It also still provides room for growth as the system expands and improves.
That's not to say that I recommend investing in cryptocurrency altogether. There's a lot of potential for gains, but cryptocurrency is still a relatively new phenomenon with a short track record and huge market caps. Investors should only put in what they can afford to lose.
