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Investing in Ethereum Stock

Updated: May 3, 2021, 4:49 p.m.

Ethereum is the decentralized, open-source technology that powers much of the crypto world. Applications ranging from decentralized finance to non-fungible tokens (NFTs) to enterprise blockchain solutions rely on Ethereum blockchain technology. Ethereum's native token, Ether (CRYPTO: ETH), is the second-largest coin after Bitcoin (CRYPTO: BTC) by market size and value.

Top Ethereum stocks

Investors wishing to profit from the growing use of Ethereum technology and Ether coin have several ways to deploy their money. The most obvious and direct way is to buy Ether itself, but the value of Ether is extremely volatile. You can mitigate some risk by purchasing shares in managed funds that invest in Ether for you, with the value of your shares still directly linked to Ether. If you have little appetite for volatility, then you can buy shares of companies with significant exposure to Ethereum technology.

The following is a list of the best stocks to buy if you want to add Ether or Ethereum exposure to your portfolio.

1. Grayscale Ethereum Trust

The Grayscale Ethereum Trust (OTC: ETHE) is a managed fund that makes it easy for investors to gain direct exposure to Ether in their brokerage accounts. Each share of the fund is backed by a fixed amount of Ether tokens (on the order of 0.01 Ether tokens per share). While the fund's share price is often lower than the value of Ether each share represents at the prevailing conversion rate, Grayscale charges a not-insignificant annual management fee of 2.5%. Grayscale shareholders cannot exchange their shares for Ether, so there's no price arbitrage opportunity.

2. Bitwise Ethereum Fund

Bitwise is a managed fund that invests in Ether on behalf of accredited investors. The minimum investment in the fund is $25,000. The fund's managers seek to minimize transaction costs and also hold the fund's Ether in cold storage, making this investment option a cost-efficient and secure way to access the Ether market. The company charges an annual management fee of 1.5%.

Investors can also buy shares of the Bitwise 10 Crypto Index Fund (OTC: BITW), although Ether accounts for less than 20% of that fund’s assets.

3. HIVE Blockchain

Unlike most other publicly traded cryptocurrency miners, which specialize in just one coin, HIVE Blockchain (TSXV: HIVE) mines both Ether and Bitcoin. The company has historically focused on Ether, and, at the end of 2020, 65% of its digital assets were held in Ether. However, after acquiring a Bitcoin mining operation in 2020, the cryptocurrency miner now has more capacity to mine Bitcoin than Ether.

4. NVIDIA and 5. AMD

NVIDIA (NASDAQ: NVDA) and AMD (NASDAQ: AMD) make graphics processing units (GPUs) for PCs, but these two chipmakers' GPUs are also well suited for mining Ether and other coins that use Ethereum technology. Hobbyist cryptocurrency miners have long been buying the graphics cards of NVIDIA and AMD to use in their mining rigs, and NVIDIA has started to design GPUs specifically for Ethereum-based coin mining. AMD is expected to soon develop a similar offering.

NVIDIA and AMD have been significantly benefiting from the growth of Ethereum technology. But it's important to mention that the Ethereum platform, and by extension all of the coins that use its technology, is moving away from the method of cryptocurrency mining that requires sophisticated computer processing units. Ethereum 2.0, the next-generation technology the platform is incrementally transitioning toward using, uses proof-of-stake rather than proof-of-work as the method by which distributed consensus is achieved. Proof-of-stake enables those with the largest coin holdings, not the most computing power, to validate cryptocurrency transactions.

6. Coinbase

Coinbase (NASDAQ: COIN) is the largest cryptocurrency exchange in the U.S. The company charges transaction fees to buyers and sellers of a wide range of cryptocurrencies, including Ether. Coinbase stands to increase its revenue as more people develop interest in cryptocurrencies. In addition, high cryptocurrency prices tend to drive increased trading activity. Investing in Coinbase adds portfolio exposure to both Ether and Ethereum technology since many of the cryptocurrencies traded on Coinbase use the Ethereum blockchain.

7. CME Group

CME Group (NASDAQ: CME) sponsors the world's largest exchange for derivatives such as options and futures contracts. In early 2021, the company launched an Ether futures exchange, which enables investors -- many of them institutional -- to speculate on Ether price movements and reduce their portfolio risks. The exchange also increases the price stability of Ether. Investors can buy shares in CME Group to benefit from the institutional adoption of Ether, but doing so is not a pure play on the cryptocurrency.

What is Ethereum?

Originally proposed in a 2013 white paper by software developer Vitalik Buterin, Ethereum is a blockchain technology in the form of software. As an open-source technology, it is available to any developer building an application that can benefit from the blockchain method of validation. While Ether and other cryptocurrencies are what Ethereum is mostly associated with, the Ethereum technology is enabling widespread innovation in industries as diverse as insurance, logistics, and healthcare.

Developers using Ethereum technology write programs called “smart contracts,” which are deployed to Ethereum-powered blockchains. The blockchain's network of computers executes the contract, smartly, by performing certain actions only when the conditions specified by the contract are completely met. The immutable nature of the blockchain -- the structural and logistical impossibility of altering blockchain data after it is created -- is what gives users confidence in the blockchain technology itself.

While Bitcoin is merely a value store that can be transferred to others, the Ethereum blockchain and Ether are two parts of a blockchain ecosystem. You can think of Bitcoin as an app on your smartphone, while Ethereum technology is more like the device maker, providing a platform for a wide range of software developers. Ether benefits significantly from the ubiquity of Ethereum technology because companies using smart contracts are obligated to pay, in Ether, for the network computing power they use to execute their contracts.

How to invest in Ethereum

Investing in some of the above companies is the best way to gain portfolio exposure to Ethereum technology, but if you would rather buy Ether directly you can do so on any of the cryptocurrency exchanges. These exchanges provide users with accounts, known as wallets, and the ability to trade fiat money for cryptocurrencies, including Ether. The exchanges earn money via transaction fees and by capturing the spreads between cryptocurrency bid and ask prices.

Once you have Ether or other cryptocurrency in your wallet hosted by an exchange, you can either hold the cryptocurrency in that same wallet or transfer it to a wallet that you fully control. If you plan to own your cryptocurrency tokens for a long period of time, transferring them to your own wallet is a wise move. If the exchange gets hacked, your private cryptocurrency keys could be exposed, and you could lose all your cryptocurrency holdings.

Should you invest in Ethereum?

Ethereum technology is at the core of most blockchain applications. Many believe blockchain will play a significant role in the future of finance and many other industries, making exposure to Ethereum technology a potentially very profitable addition to your investment portfolio.

The value of Ether itself is much more volatile and unpredictable than the growth of Ethereum technology. You can mitigate some of that risk and should take steps to guard against hacking, but ultimately the value of any investment directly linked to Ether is likely to fluctuate.

Any of the above investment recommendations deserves consideration, especially if you believe the advent of blockchain technology is only just beginning.