Ethereum 101: everything you need to know about investing in ETH

What is Ethereum?

Ether (ETH) is powered by the Ethereum blockchain, a secure ledger of transactions that is maintained by a network of computers. This decentralized platform lets users run smart contracts. These are programs that are stored on the blockchain and run when certain conditions are met. They are secure and virtually impossible to hack, so users don't need to worry about fraud or interference from third-party sources.

Confused? Don't worry, I'll explain more below.

Remember that blockchain technology is still in its early stages. And ether has the potential to become a major player in the digital currency market. For now, ether remains second in size to bitcoin, but it's growing rapidly and has the potential to overtake bitcoin in the future.

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What is a decentralized platform?

In simple terms, a decentralized platform is a platform that runs on a number of computers instead of just one. In the tech world, an individual program or operating system running on top of other programs is also referred to as a “platform.” And a decentralized platform has different software applications that are written and run through it securely.

Ethereum is the blockchain that uses ether (ETH) for its digital currency. Ethereum's decentralized software operates because many people are involved in maintaining the blockchain and mining for coins. No one person controls this process.

And what is blockchain again?

A blockchain is a digitized and decentralized public ledger of all its cryptocurrency transactions. Blockchains can be programmed to record financial transactions for virtually anything of value.

Blockchain technology is relatively new, but implementing it can cut costs dramatically for businesses and governments, reduce fraud from hacking, increase operational efficiency and transparency in supply chains (from manufacturing to shipping), and prevent falsifying records. This is because blockchains are almost impossible to doctor once information has been written on them.

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So what exactly can I do with Ethereum?

As I said above, Ethereum is not just a digital currency. The platform also allows you to create and run smart contracts. A smart contract is like a digital agreement that self-executes when certain conditions are met. For example, you could use a smart contract to send money to someone if they provide you with a service.

Ethereum is also used to create decentralized autonomous organizations (DAOs). A DAO runs by a set of rules encoded on the Ethereum blockchain. The rules are enforced by the network of computers that maintain the blockchain, so there is no need for a central authority.

DAOs are still in their early stages, but they have the potential to revolutionize the way we do business. There's a lot more complexity here that I won't delve into for this article.

How do you invest in Ethereum?

Right now, there are a few ways to invest in ethereum. Here's a quick list.

Buy it directly

You can buy ETH directly with fiat currency (USD, EUR, GBP, etc.) on crypto exchanges like Crypto.com, Kraken and Bitstamp. You can compare our favorite exchanges for 2023 here.

Popular trading apps like Robinhood also let you trade Ethereum. You can also get started with $10 or less with all of these options, so the barrier to entry isn't high for investors. Just note that Ethereum gas fees, which are fees you pay when interacting with the ETH blockchain, can be high. This makes Ethereum a poor cryptocurrency for frequently sending to different wallet addresses.

Mine it

You can mine ETH with a computer that has a powerful graphics card. This process requires a lot of electricity and is not very profitable unless you have access to cheap energy. Find out more about mining in our article, “How to Start Mining in 60 Seconds.”

Join an Ethereum pool

If you don't want to go through the hassle of setting up your own mining rig, you can join an Ethereum mining pool. A mining pool is a group of people who combine their resources to mine ether more efficiently. Joining a pool gives you smaller rewards, but it's a lot easier and less risky than mining on your own.

Invest in an Ethereum fund

There are also a few funds that invest exclusively in ether. These funds allow you to buy shares in a pool of ETH managed by a professional. This is a more hands-off approach, and it's generally more expensive than buying ETH directly.

What are the risks of investing in Ethereum?

Ok, so we've touched on several of the ways that the Ethereum blockchain and currency could change the way we spend, borrow, and lend money. But what are the potential downsides that investors should be aware of? Here are four risks of investing in Ethereum that should be kept in mind.

1. Ethereum is a new technology, and there's no guarantee that it will be successful.

However, there are a few things that suggest that it has potential.

• First, blockchain technology is relatively new but has already shown promise in reducing costs and preventing fraud.
• Second, Ethereum allows you to create smart contracts that automate transactions, which could revolutionize the way we do business.
• Finally, Ethereum is also used to create DAOs, which have the potential to change the way organizations operate.

While there are risks associated with investing in ether, these risks may be worth taking in light of its potential benefits. Still, though, invest only what you can afford to lose. This brings me to my next point.

2. There's a risk of losing your investment if the Ethereum network fails.

This is because the Ethereum network is decentralized and relies on a network of computers to maintain its integrity. If the computers in this network fail or are taken down by a hacker, the Ethereum currency could collapse.

This is not a risk that should be taken lightly. Before investing in ether, understand the risks involved and only invest money you can afford to lose.

3. The value of ETH can go down, and you may not get back the amount you invested.

If you invest in ether and its value drops, you could lose your investment. Over the long haul, ether has provided tremendous positive returns for investors. However, there have been many huge ups and downs along the way.

If you had invested in ether in January 2020, you'd be sitting pretty right now. But if you had waited till November 2021 to jump in, then you'd currently be looking at a significant loss.

And, again, it bears mentioning that there's no guarantee that ether will ever return to its previous high, to say nothing of exceeding it.

4. There’s a risk of being scammed by someone who says they're investing in ether on your behalf.

When you invest in ether, there is always a risk that you could be scammed. This is happening a lot right now.

A scammer may promise to invest in ETH on your behalf, but they may not actually follow through with this promise. They may simply take your money and run.

Be sure to research any investment opportunity before you decide to invest. If something sounds too good to be true, it probably is.

More: How to spot a crypto scam

Important things to know before investing in ETH

In addition to blatant risks, there are a few other things you should keep in mind before investing in Ether.

• Ethereum is still a young technology and is subject to volatility. The value of ETH can go up or down rapidly. .
• Ether is not backed by any government or central bank. This means that there is a risk of losing your investment if the Ethereum network is attacked or hacked.
• Ether is not yet widely accepted. This means that you may have trouble finding places to spend your ETH.

Before investing in ETH, do your research and understand the risks involved. Ethereum is a promising technology with a lot of potential, but it's still in its early stages. Investing in ether can be a risky proposition, but it could also pay off handsomely in the future.

Legal and tax implications of cryptocurrency investment

It's important to understand that, for now, investing in cryptocurrencies like ETH is not regulated by the U.S. Securities and Exchange Commission (SEC). That could change in the future. But for now, this means that you're taking on additional risks when investing in this cryptocurrency.

You also need to report your cryptocurrency investments on your taxes. The IRS considers cryptocurrencies as property, not currency. This means that you need to report any gains or losses you make when investing in ether or any other cryptocurrency.

Find out more about the tax implications in our guide, “Tax Guide to Cryptocurrency Investments.”

The bottom line

Cryptocurrency is a digital or virtual currency that uses cryptography to protect its transactions and to control the creation of new units. Ether is a cryptocurrency that is built on the Ethereum blockchain.

Ethereum is a new and innovative platform that has a lot of potential. However, it's still in its early stages, so it's more risky than traditional investments like stocks.

We recommend capping your investments in alternative assets like crypto to a small percentage of your overall portfolio. In this way, you'll have an opportunity to participate in the growth of digital assets like ether while also limiting the negative impact to your portfolio if one or more cryptocurrencies that own crash and burn.