Ethereum has produced millionaires across the globe. Are you keen on taking your bite out of the ETH pie?
Cryptocurrencies are complex. They’re a grey area even for some seasoned investors. However, understanding cryptocurrencies isn’t difficult if one tries. So, let’s double down on Ethereum and see if or not it’s a good addition to investor portfolios in 2021 and beyond.
What is Ethereum?
Unlike how most believe, Ethereum is not a cryptocurrency. Ethereum is a global, open-source, decentralized blockchain with smart contract functionality. Most people are referring to Ether (ETH) when they talk about Ethereum, which is Ethereum’s native cryptocurrency.
BTC vs. ETH
Buying ETH is easier than ever. Investors can buy ETH on Moonpay in less than 60 seconds. Before you pull out your credit card, though, let’s talk about what makes ETH a better investment than BTC.
BTC is an excellent store of value. Think of BTC as the gold of the crypto-verse. ETH is a decent store of value too, but there’s a lot more to it.
Ethereum enables programmers to code smart contracts with Solidity, its programming language. Solidity is a potent tool. Smart contracts coded using Solidity can automate most financial transactions. They even form the basis for NFTs, and can also be used for building comprehensive programs like decentralized exchanges (DEXs).
Granted, it’s possible to execute basic smart contracts on BTC’s blockchain. However, Solidity clearly provides ETH with an edge over the long term.
Crypto investors swear by BTC as a store of value. However, ETH is just as good, if not better. The two cryptocurrencies have been racing each other in terms of market capitalization ever since ETH saw the light of the day in 2015.
There’s still plenty of room for growth for ETH. Before diving into the nitty-gritty, it’s important to highlight that cryptocurrencies are a parabolically volatile asset class. Therefore, the risk-averse are better off with other assets.
However, ones who don’t cringe over short-term losses can generate massive wealth with ETH.
Why ETH Is Still Worth Investing in
Before investing, investors may want to educate themselves to see if they should buy ETH given it has already touched new highs this year. Here’s the rationale for why ETH is still a worthy investment.
1. ETH’s basic characteristics
ETH’s basic characteristics make it an inherently worthy investment for some investors. Let’s look at what these are.
- Liquidity: ETH is one of the most commonly traded cryptocurrencies. It can be bought and sold within seconds through exchanges or online brokerages. Investors can trade ETH for fiat or even gold. Liquidity is a critical factor that investors look at before investing. What good is an asset that can’t be liquidated when the investor wants out?
- Volatility: This sounds counterintuitive. Smart investors know exactly why volatility is a good thing, though. When investors become well-versed with the market’s behavior, they can see a swing coming and capitalize on it. They analyze a deep fall looking for an opportunity to buy, and large outbreaks looking for a cue to sell.
- DeFi’s scalability: Decentralized Finance and ETH both are still in an infant stage. This infancy can induce volatility, which offers opportunities for shrewd investors. Also, in the very long term, DeFi will become an integral part of life, thereby contributing to ETH’s growth.
- Immune to inflation: Fiat currencies depreciate because of inflation. Governments set targets for inflation and intervene to correct any deviations. These factors weigh in on a fiat’s value. On the contrary, Ethereum’s inflation plan involves minimal intervention. Plus, the blockchain universe is endless, so the chances of a cryptocurrency being deflated are non-existent.
2. ETH’s past performance
Past performance is not a good indicator of future performance. That’s finance 101. However, past performance gives an insight into several factors like volatility and trend. Past performance is empirical evidence that can provide some reassuring (or unnerving) data about the prospects of an asset.
Let’s say an investor had invested money in ETH sometime in February. Here’s how this investment would have performed:
That’s over 100% return. Perhaps, some may feel BTC has done better. Sure, it has. However, ETH is doing pretty well for itself. Here are the historical returns ETH produced for investors:
Had an investor invested in ETH exactly a year ago, they’d have made about 1,869% return. To put this into context, investing $1,000 last year would have returned $18,690. See how investing smart can build wealth quicker?
Coming back to volatility and trend. Undeniably, investors can lose money too. This is, however, truer in the short term. The probability of a loss diminishes as the time horizon of the investment lengthens, provided the asset is fundamentally strong. Note that probability is not an assurance, it’s just that—a probable scenario.
As the trend suggests, ETH is reaching for the sky. The fundamentals show that ETH has a long growth phase coming. Its wide acceptance and promising technology are leading indicators of how quickly ETH’s value may rise.
3. Ethereum 2.0
The roll-out of Ethereum 2.0 is currently one of the most exciting things keeping ETH investors on their toes. Ethereum’s change from proof of work to proof of stake is massive and risky.
However, most seem to agree that it’s one of the best calls Ethereum has taken and will bring plenty of improvements. In particular, the transaction throughput will see significant improvement and allow more cryptocurrencies to be built on Ethereum.
Participants of the staking mechanism also stand to benefit from an opportunity to earn above-average returns. Ethereum 2.0 network has been witnessing a consistent increase in the number of users. As of this writing, there are 139,431 validators earning a 7.3% APR.
A long-term investment in Ethereum 2.0 effectively translates to a bet on DeFi and proof of stake blockchain’s scalability and viability.
Making the switch to a proof of stake model also benefits the environment. Bitcoin uses a proof of work model. Its annual consumption clocks in at 130+ terawatt-hours (TWh)—equivalent to the energy consumption of Argentina. Ethereum’s consumption is about 20% of Bitcoin’s, but Ethereum 2.0 will reduce this further by 99%.
While Ether’s use cases go beyond dApps and staking Ethereum 2.0, these are the two most prominent factors that could drive ETH investments in the short to medium term.
4. Interest from institutions
Lately, more institutions are joining the league of cryptocurrency holders, says a CoinShares report. These aren’t just any institutions, they are industry-leading corporations that don’t play around. They don’t purchase a few thousands’ worth of ETH either, they buy in bulk.
As of May 10, 2021, Greyscale holds over $43bn digital assets. In 2020, Grayscale Investments, DCG’s investment arm, added over 750,000 ETH to their wallet. As of today, however, Greyscale’s ETH holding has increased to 3.18mn, which is roughly worth $5.5bn.
These amounts are nothing to sneeze at. These are serious investors putting in some serious money in ETH. It’s evident that ETH has support from institutional investors. ETH will not only stick around for the foreseeable future but even grow to dominate the crypto-verse.
Risks of investing in ETH
As has been repeatedly highlighted, cryptocurrency investments are highly risky. Investors must know what these risks are before they buy ETH.
- Regulation: There’s still a lot of ground to cover before cryptocurrencies become regulated around the world. However, when this eventually happens, it could disrupt business models and cause the prices to tumble significantly.
- Theft: Most investors tend to store crypto on the exchange’s wallets. Should these wallets be hacked, your private keys will be stolen and you’ll lose that money forever. The crypto held in your wallet isn’t insured by FDIC either, so there’s literally no way to recover those funds.
- Volatility: This could be both a good and bad thing, depending on how an investor thinks about it. For instance, imagine buying ETH in Jan of 2018. A year later, selling those would’ve fetched less than 20% of the original value.
Sure, if the investor hadn’t sold it and held it until today, they’d be in their mansion smoking cigars. The point is, crypto investing requires thick skin—which many investors don’t have.
Should I invest in ETH?
So, it has been established why ETH is still worth investing in. There are risks, of course, but they can be managed. Now, how does an investor decide if they should invest in ETH?
Well, the answer lies in the investor’s portfolio. The core of a diversified portfolio features assets such as mutual funds, debt funds, ETFs, among others. If an investor already has an optimum asset allocation, they should check how adding a cryptocurrency like ETH would affect their portfolio.
Adding ETH to a balanced portfolio would actually help further diversify it given the low correlation between cryptocurrencies and other asset classes.
It’s worth reiterating that when it’s all said and done, cryptocurrencies are risky. Investors that expect crypto to always remain in the green are headed for disappointment. ETH has great fundamentals and can offer a great opportunity to investors that can stomach its volatility and manage the associated risks.