Ethereum What is Ethereum, how does it work and how to invest in it?
The concept of Ethereum wasn’t described until 2013, but it still makes it one of the oldest cryptocurrencies in the world. The creator of the project is the Russian-Canadian programmer Vitalik Buterin, and his sponsors are a group of investors who in 2014 through the so-called crowdfunding of a seed fund. A year later, the Ethereum network was launched, which significantly accelerated the development of the entire cryptocurrency market. Why did this happen? What is the Buterina project and what possibilities does it offer? Is it some kind of Bitcoin 2.0, or is it something completely different?
To better understand the essence of Ethereum and its operation, you should already be familiar with, among other things in what are cryptocurrencies, what is blockchain technology, why Bitcoin was created and why new altcoins are being created. We have discussed all these issues in separate articles and it is good to start exploring the world of cryptocurrency.
Ethereum – what is it and why?
Ethereum, like Bitcoin, is an open source and decentralized platform that is based on blockchain technology and has its own cryptocurrency. Its digital currency is ether (abbreviated as ETH), but investors often call it ethereum, which is the same network it operates in.
This article is aimed at novice and intermediate cryptocurrency investors, so we are not writing about the technical aspects of operation and the capabilities of the Ethereum network. However, there are issues that they themselves should know and understand as well. Chief among them is the fact that, unlike Bitcoin, which was meant to be used for quick and convenient payments (it has now become more of a speculative tool and perhaps a way to store the value of money over time), Ethereum is essentially a large-scale development platform. Today it is used to build decentralized applications and conclude smart contracts, that is, for the purposes that directed their creation.
The Ethereum network offers a wealth of opportunities, but the average investor is primarily focused solely on their cryptocurrency anyway. Most people buy ETH because they expect the price of the coin to continue rising. These types of investors do not use the capabilities of the development platform, but of course they support its development, as it may favor the growth of the price of Ethereum.
How is Ethereum different from Bitcoin?
For some time, Ethereum was called bitcoin 2.0, but it soon became clear that the project pursued other goals and would not be a direct competitor to the “king of cryptocurrencies.” The most important similarity between them is the fact that they have their own cryptocurrency and use blockchain technology, but here are some of the differences. What exactly makes these projects different?
Compared to Bitcoin, Ethereum:
- It is not only a speculative and virtual money tool , but also a blockchain platform with wide possibilities;
- It enables building decentralized applications (dApps) and concluding smart contracts;
- It allows you to create an unlimited number of tokens, which can also be a medium of exchange;
- It can serve as a kind of crowdfunding platform and enable fundraising for a specific project;
- has a more efficient and effective payment system – transactions can be made even in several seconds, while in the Bitcoin network it is usually several minutes;
- To build the block hash, Ethereum uses the modified Dagger-Hashimoto algorithm, while Bitcoin is based on the sha256 algorithm;
- It has a much larger supply, which is still unlimited at the moment (it is said, however, that it will be limited to about 150 million); There will be a total of 21 million bitcoins (there are currently approximately 19 million in circulation), while more than 117 million ETH has been mined so far, and their number is expected to grow at a rate of less than 2 million per year;
- It is a much cheaper network, but it must be emphasized that during the period of high interest in ETH, the average transaction fee already exceeded $20 and was temporarily higher than the Bitcoin network.
As you can see, Ethereum is much more diverse and offers a lot more than Bitcoin. However, this does not mean that it is a better investment than it and that the rate of ETH will definitely be better than the rate of BTC in the future. The cryptocurrency market is a complex environment in which project valuations are affected by a number of factors, sometimes not so obvious.
Ethereum – Blockchain, dApps and other technical issues
Ethereum, like Bitcoin and other cryptocurrencies, does not need intermediaries and is beyond the control of governments, central banks or other regulators. Its blockchain works thanks to network users who share the computing power of their computers to calculate complex mathematical operations. The blockchain is protected against unauthorized access, but at the same time it is open to everyone. This means that each user can view and check basic information about the transactions that take place in the ethereum network.
It is important that Ethereum is constantly evolving, as are most potential cryptocurrency projects. Comprehensive changes appear even in such a fundamental issue as how transactions in the network are approved and new ETH units are created.
Ethereum will turn into a Proof of Stake
Until now, there was mining in Ethereum, and subsequent blocks were created using the Proof of Work algorithm, which requires the use of expensive graphics cards and consumes a lot of computing power. Due to the desire to reduce energy consumption and negative environmental impact, there will be a shift to the Proof of Stake algorithm, which uses energy-efficient stacking instead of mining. In such a model, the network is served by users who have a certain minimum amount of cryptocurrency units and keep them in a wallet designated for this – the coins that are hoarded remain frozen and cannot be sold.
decentralized applications
Let’s take a look at the decentralized applications that are the greatest strength of ethereum. Let’s start with the fact that dApps are open space software that uses blockchain technology, operates on a peer-to-peer network and operates without intermediaries. Unlike traditional apps, they have no central control authority and are not censored.
Like classic applications, dApps can be for example payment methods, financial services (DeFi, i.e. decentralized finance, is the fastest growing area of blockchain technology applications), voting systems, security software or auction platforms. In practice, we are talking about a set of very diverse solutions, the functionality and possible applications of which are limited only by the imagination and skills of developers (application developers).
It is worth knowing that for building decentralized applications, sets of smart contracts are used, that is, code scripts – in Ethereum they are created using the Ethereum Virtual Machine. When a smart contract enters the blockchain, it begins to operate like a self-running computer program. It works as a programmer, without oversight, modification or interference by third parties.
The oldest and most important blockchain for application development
In practice, the description provided for the blockchain, running Proof of Work and Proof of Stake algorithms, as well as dApps and smart contracts suits many cryptocurrencies. Ethereum differs from them in that it was created early and has been able to significantly expand and improve its network. It can be said that this project unleashed the potential of blockchain technology and encouraged developers to create more similar concepts. Projects like Cardano (ADA) or Polkadot (DOT) look promising, but so far Ethereum from the blockchain remains the most preferred in the market.
Where do you buy Ethereum and how do you store your ETH?
If you consider ethereum an interesting project and want to invest in it, you can buy ETH through a private exchange or crypto exchange. The latter option may seem a little more complicated, but in general it is more profitable. Another thing is that every cryptocurrency exchange offers a number of useful tools that facilitate trading and analysis of charts. Therefore, if you are seriously interested in the cryptocurrency market, we suggest that you create a free account on one or even several of them.
The cryptocurrency Ethereum is one of the most important currencies in the market, so you can buy and sell it on all cryptocurrencies. You can count on favorable trading conditions in the case of Binance, BitBay, Coinbase, Kraken, Huobi, OKex or Bitfinex exchanges for example. In most of them, you can trade ETH together with popular fiat currencies, such as the euro, US dollar or British pound (also in PLN on BitBay), as well as in pairs with fixed currencies, for example rope. Moreover, Ethereum is a cryptocurrency in which dozens of other tokens and digital currencies are quoted – only Bitcoin creates more markets in pairs with cryptocurrencies.
It is worth noting that Ethereum is one of the first digital assets for which a future market has been created (Binance not only offers contracts, but also options on ethereum). Cryptocurrencies can be traded with leverage on many exchanges, with a multiplier of up to 100. However, the risks of trading in this case are very high, so beginners should stay away from it.
You can store your ETH on any cryptocurrency exchange, but this is not a recommended solution. The most secure option is to send the cryptocurrency to an external desktop, mobile wallet, preferably from devices, for example from Ledger or Trezor. Each medium and long-term investor should decide on one of these options – cryptocurrencies intended for current trading should be held only on exchanges.
How does the ETH rate behave? Historical Price Chart
If you are thinking of investing in Ethereum, you should take into consideration the historical behavior of the ETH exchange rate as well as the prices of other cryptocurrencies, especially Bitcoin. On this basis, it will be easier for you to assess the investment risks and the potential profit of the planned investment.
As you can see, in 2016, 1 ETH could be bought for less than $1, while only 5 years later they were paid out for $4,000. Even for the cryptocurrency market, the growth is undoubtedly impressive. On the other hand, it is hard not to notice the long periods in which Ethereum drops dramatically. Suffice it to say that those who bought the coin at the top in January 2018 (around $1,400 each) were on the downside by more than 90% less than a year later. They had to wait 3 years to fully recover from the “losses”.
Ethereum is a cryptocurrency with a large capital and high trading liquidity, thanks to its relatively low price volatility (for the cryptocurrency market). During quiet sessions, the rate changes by a few, but there are still days when the rate change reaches 20-30%.
Ethereum – Price Predictions
Ethereum and cryptocurrency enthusiasts anticipate further price increases in the long-term. They assume that the market is still undergoing a dynamic evolution and that the long-term uptrend will be maintained. Analysts and investors interested in growth are anticipating that in the next few years the price of ETH will exceed 10, 20, and maybe even 30k. American dollar. Some predict that Bitcoin will die out over time and that Ethereum will become the most desirable cryptocurrency in the market.
However, expectations of this kind are best approached with caution. Although they are very popular, there are also voices that cryptocurrencies are strictly speculative assets with their best years behind them. Some say it was one big bubble, while others predict the end of the amazing long-term boom that has been going on since the inception of this market. If this happens, the ETH rate could go back to the level of several hundred or even several tens of dollars.
You have to keep in mind that today’s cryptocurrency market is more mature and more dependent on other markets (especially stocks) and global sentiment. This has many important findings, at least two of which seem to be of particular interest.
In a liquid evolving market, it is difficult to make amazing profits in a short time – the possibility that cryptocurrencies are highly capitalized, i.e. ethereum, whenever they see another increase in value several hundred times in a public perspective for example. On the other hand, greater reliance on the situation in other markets and global moods means that making investment decisions based on, for example, the famous BTC stock flow model or the four-year cycle theory of Bitcoin halving, may (but does) Not necessary) to achieve worse results than before. This is also important in the context of investing in Ethereum, whose price, as in the case of other cryptocurrencies, still largely depends on what is happening in the Bitcoin market.
Ethereum – a cryptocurrency with great potential
Please note that this brochure is educational and does not provide investment advice. You have to decide on investing in ethereum on your own, preferably after doing an in-depth research on this project and its prospects.
However, the truth is that Ethereum has a high usability and is the most popular smart contract platform for decentralized financial applications. Moreover, the blockchain is constantly being improved, which makes it possible to believe that despite the increasing competition in the industry, the project will maintain its leadership position. Not only are individual investors noticing the potential of Ethereum, but also analysts, institutions, and companies from the new tech sector, some of which have decided to buy ETH.
Ethereum is undoubtedly a forward-looking project, but no one can be sure that the price of the cryptocurrency will continue to rise in the long term. It may happen that although the enterprise will develop intensively, it will not bring satisfactory profits due to, for example, an unfavorable macroeconomic environment or an uncertain situation in the financial markets. On the other hand, in the period of optimism in financial markets, including cryptocurrencies, ethereum and other projects, it can be greatly appreciated even in the absence of positive information about it.
