Founded in 2015 and relatively new to the crypto world, Ethereum is the second most popular cryptocurrency. (opens in new tab) After Bitcoin. And depending on how Ethereum performs, it could continue to dominate the cryptocurrency market in the near future.
If you are considering investing in Ethereum, it is important to understand how this cryptocurrency works to make the best investment decisions. Here’s what you should know:
What is Ethereum?
Ethereum is a platform for exchanging digital currencies that have no physical counterpart. The currency unit of the Ethereum platform is called Ether (ETH).
Ethereum operates on the blockchain, a distributed ledger that records all cryptographic transactions. Think of blockchain as a never-ending receipt. New transactions can be added to the blockchain “receipt” at any time, but old transactions remain on the blockchain and are virtually impossible to change.
One of the attractive features of Ethereum (or any other cryptocurrency on the blockchain) is the fact that there are no individuals, companies, or governments in charge of the blockchain.
This makes Ether a decentralized currency without the need to use a central intermediary (such as a bank or exchange). In addition, transactions can be made anonymous as blockchain records only the details of the transaction and not the personal information of the buyer and seller.
What is the difference between Ether and Ethereum?
Ethereum is the name of the platform and Ether is the currency unit of that platform. However, understanding exactly what you can do with Ether or Ethereum is helpful, as the platform offers users more than access to currencies.
First, there are several potential ways to use ether.
- As a digital currency: It can process financial transactions where both buyers and sellers accept Ether as a valid currency.
- As a store of value: If you believe that Ether will retain its value in the future (i.e., it will maintain the same purchasing power for years as inflation reduces the purchasing power of the dollar), buy Ether now as a store of value. can do.
- As an investment: If you think Ether will go up in value, you can buy it now and resell it later for a profit.
But Ethereum is more than just Ether. The platform also allows users to store data and run applications. Ethereum’s decentralized network means users have complete control over their information and applications, without having to follow the rules and guidelines of servers owned and operated by a central authority.
NFTs, or non-fungible tokens (opens in new tab)is one of the most popular ways for Ethereum users to take advantage of this aspect of the platform.
Another Ethereum innovation is self-executing or “smart” contracts. It is an agreement between two parties on the details of the future provision of goods or services when certain conditions are met.
Contracts are encoded on the Ethereum blockchain and self-executing when the conditions are met.
How does Ethereum work?
Instead of a single centralized server (or network of connected servers maintained by a central authority), Ethereum is housed on thousands of computers called “nodes.” This extensive network maintains a single “computer” that Ethereum calls the “Ethereum Virtual Machine” (EVM).
Each node maintains a copy of EVM and all interactions on Ethereum are validated so that nodes can update their copy of EVM.
Ethereum is currently using a consensus mechanism called “proof of work” to validate blocks of data with new interactions. Proof of work requires miners to verify blocks before adding them to the blockchain.
Miners receive Ether coins in return for proof of work verification. However, mining requires a large amount of computer power and can be costly both economically and environmentally.
What is Ethereum 2.0?
At some point in late 2022, Ethereum will transition from Proof of Work to Proof of Stake consensus mechanism and the platform will be called Ethereum 2.0.
Proof of work allows anyone to mine data and validate blocks of information before adding them to the blockchain. Proof of Stake, on the other hand, uses randomly selected validators to ensure that new data is trustworthy before it is added to the blockchain.
To have a chance to become a validator, a user must be committed to purchasing and locking a certain amount of Ethercoin. In other words, by investing in cryptocurrencies, users may be selected as validators and given tokens to perform verification work.
Ethereum calculates that the move to Proof of Stake in Ethereum 2.0 will reduce the energy usage of the platform by 99.95%. (opens in new tab).
Can Ethereum be converted into cash?
Like any other currency, Ether can be exchanged or converted into another currency. The easiest way to do this is through a crypto exchange platform.
Such platforms allow you to sell Ether against your preferred currency, such as the US dollar. To cash out your sales, simply connect your existing bank account.
Be careful when choosing a reputable crypto exchange platform. Also, be aware of fees and other costs associated with cashing out Ether.
Advantages and disadvantages of Ethereum
Before diving in, make sure you are aware of both the pros and cons of Ethereum.
- Liquidity: Despite being a digital-only asset, the popularity and adoption of the Ethereum platform makes Ether easily exchangeable for cash and other currencies.
- Inflation protection: Ethereum has several strategies (opens in new tab) Hedging Ether against inflation, including the implementation of Ethereum 2.0.
- Anonymous: Users can be confident that their transactions, apps, data, and other interactions on Ethereum are anonymous.
- Decentralization: Users who want to process transactions, operate applications, and store data outside a central authority can do all three with Ethereum.
- Additional non-cryptocurrency uses: Ethereum is not just an Ethercoin. You can also build applications, create self-executing contracts, create and trade NFTs.
- Volatility: Like all cryptocurrencies, Ether is not asset-backed and has no intrinsic value. In other words, its value depends on the enthusiasm and whims of other investors.
- Scalability issues: Ethereum is more complex than currency-only platforms like Bitcoin because it deals with more than the Ether currency. This can lead to malfunctions, computer bugs, hacks, and other problems.
- Not beginner friendly: The complexity of the platform also means that Ethereum newbies who want to join the Ethereum virtual machine or create apps on top of the platform may find it difficult to get started.
- Rules: One of the attractions of cryptocurrencies is that they are decentralized and not dependent on any particular government. This is slowly changing.US is working to enforce additional laws and regulations (opens in new tab) for cryptocurrency trading. This may help you in some ways (by providing a legal framework for handling disputes). Even so, some of the benefits of anonymity and other benefits of crypto can be compromised.
Is Ethereum Worth Investing In?
Whether Ethereum is a healthy part of an investment portfolio depends on several factors. First, you need to make sure that you fully understand what you are investing in and how it works. Since Ethereum is not backed by other assets and has no intrinsic value, casual investors should be cautious before throwing cold cash.
Additionally, you should consider your risk tolerance and how much you want to invest. If you are fed up with sudden fluctuations in value and cannot tolerate sharp declines, Ethereum is not the right investment for you.
On the other hand, if you only invest what you can afford to lose and go into Ethereum purchases with your eyes wide open, this investment can be an exciting addition to your portfolio.
Remember, nothing is certain. Not even when the investment is an amazing new innovation.