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Is Ethereum a Good Investment?

Henning Taeger
Henning Taeger
Henning is a writer and editor here at Dollargeek who is passionate about personal finance and cryptocurrency. He enjoys sharing his knowledge about financial management and cryptocurrency with readers, helping them make informed decisions about their money. In his spare time, Henning can be found playing the latest video games or jamming on his guitar. He is constantly on the lookout for new ways to improve his financial literacy and stay up-to-date on the latest trends in the world of cryptocurrency.

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Is Ethereum a Good Investment
Table of Contents

Introduction

Ethereum (ETH) is a digital asset, one of the most talked about cryptocurrencies of 2022. Ethereum has been in the news all year due to the upgrades coming to its blockchain system. Like Bitcoin, Ethereum works on a blockchain.

A blockchain is a mechanism used to facilitate and validate crypto transactions.

Bitcoin and Ethereum work on a type of blockchain called the proof-of-work (PoW) blockchain. PoW blockchains validate transactions through crypto mining. Here, miners solve cryptographic calculations and aim to find the right data for a new block.

Once a miner arrives at the correct answer, a block containing several hundreds of transactions is added to the blockchain.

But PoW blockchains have some negative effects on the environment and can be limited eventually. Due to these factors and more, Ethereum is moving to a proof-of-stake (PoS) blockchain, a greener and more user-friendly blockchain.

So, with the upcoming transfer to the PoS blockchain, is Ethereum a good investment right now?

In this article, we’ll explore how the new change to the Ethereum blockchain will affect Ethereum, the demerits of Ethereum investments, and the factors that make investing in Ethereum an attractive investment.

Ethereum Investing: Is it safe?

Ethereum is the second most popular cryptocurrency, next to bitcoin. With a market cap of about $184 billion, Ethereum makes up one-fifth of the entire crypto market. There are several reasons why Ethereum retains the number 2 position in a list of over ten thousand cryptocurrencies.

Before we delve into what makes Ethereum a good investment option, let’s look at how ETH has performed over the years.

Ethereum’s Past Performance

The table below shows the percent change in the price of one Ethereum from a specific year to date.

Year of Investment Price of ETH  % Change in ETH Price
2016 $11.72 +13722%
2017 $313 +417%
2018 $232 +596%
2019 $174 +828%
2020 $335 +382%
2021 $3952 -58%

 

The table shows the price of one Ethereum on September 5 of each year from 2016 to 2021. Suppose you bought $1000 worth of Ethereum on September 5, 2016, when Ethereum was worth $11.72 if you held the investment until the corresponding date in 2022. A 13722% increase would have yielded a total of $138,220. Now, that’s a phenomenal growth that favours early adopters.

If you invested $1000 in Ethereum on September 5, 2018, at $232, by September 5, 2019, your investment would be down by 25%. Your one thousand dollars will only be worth $750, but if you didn’t sell at a loss and held until today, your investment will be up by 596%, and you would have $6960.

But if you bought Ethereum in the bull market of 2021 and held it until today, your investment will be down 58%. This illustrates how the crypto market works. Prices do not usually maintain a perpetual upward or downward trend.

Investing in Ethereum is safe, but you should be familiar with its volatile tendencies. It’s important to know when to buy Ethereum because your entry position determines how profitable you’ll be. So, you might be asking, is Ethereum a good investment right now? Let’s find answers to that.

Is it a Good Idea to invest in Ethereum?

The best time to buy Ethereum was before the bull market of 2021; the next best time to Invest in ETH is in a bear market when the prices have fallen. Bear and bull markets are cyclical. It’s expected that a bull market will follow once the current bear market ends.

What Speaks Against Investing in Ethereum?

A few things make investors think twice before investing in Ethereum. They include:

Volatility

Like Bitcoin, Ethereum is a volatile asset whose price can change drastically. The future price of Ethereum is based on speculation, as it’s hard to predict what will happen in the crypto market. Currently, the world is waiting for the merge, when Ethereum will be switched to another blockchain. It’s hard to know how this event will affect the price of ETH, whether it’ll rise or fall.

Scalability Issues

One of the reasons Vitalik Buterin, Ethereum’s co-founder, is keen on upgrading Ethereum’s blockchain is the constant network congestion plaguing the blockchain. The current Ethereum blockchain can only process about 20 transactions per second.

Because of this, Ethereum isn’t optimized to handle numerous transactions. However, after the blockchain upgrade, Ethereum will be able to process up to 100,000 transactions per second.

High Gas Fees

Because of the short throughput of the Ethereum blockchain, which is set at 20 transactions per second, many transactions will not be filled quickly at the normal gas fees. Instead, if you want your transaction to be processed immediately, you’d have to increase your gas fees for your transaction to become prioritized.

People who opt to pay higher gas fees will complete their transactions before those who retain the standard gas fees.

Uncapped Supply

The total number of all the Bitcoins that will ever be produced is 21 million. If the law of demand and supply is applied to cryptocurrency, then it’s true that the lower the supply of Bitcoin, the higher the demand. Because Bitcoin has a fixed supply and a growing demand, the value is likely to increase over time.

But it isn’t the same for Ethereum. Ethereum does not have a fixed supply. More ether coins will continue to be produced. There are currently over 120 million Ethereum coins and counting. Because of its unlimited supply, many investors are sceptical about how valuable Ethereum will be in the future.

What Factors Make Ethereum an Attractive Investment?

Although Ethereum struggles with a few issues, it’s still a favorite choice among many investors. Here’s why.

Growth

Bitcoin used to hold over 50% of the entire crypto market capitalization. Now BTC holds about 38% percent, and Ethereum has climbed to make up 20% of the entire crypto market capitalization.

Ethereum’s growth was massive in 2021 with the increased popularity of non-fungible tokens (NFTs), most of which were developed using Ethereum. Because Ethereum has the highest utility for building Defi apps and NFTs, it has significant growth potential.

Utility

The major catalyst spurring the growth of Ethereum is its utility. Ethereum is two-sided. As a coin, Ether can be used for crypto transactions. And as a blockchain, developers can build smart contracts for many world use cases. Smart contracts are self-executing programs that allow transactions to be initiated and completed.

They are the basis of operations of defi applications like Uniswap, a decentralized exchange, and Compound, a lending platform. Ethereum is also the leading blockchain for creating and trading NFTs. These use cases make Ethereum the most sought after when looking to develop web 3 applications.

Ethereum blockchain upgrade

Ethereum 2.0 is the anticipated upgrade to Ethereum. Although the current Ethereum blockchain has a few issues, most of them will be solved with the series of upgrades coming in the Ethereum 2.0 plan. After the merge, Ethereum will start operating on a new blockchain.

The new blockchain will be faster, less expensive, and more scalable. The “merge” can make Ethereum a strong investment eventually if successful.

Business Opportunities

Entrepreneurs can create applications on Ethereum to provide financial services on the web. Businesses willing to embrace web 3 can do so using Ethereum smart contracts. As businesses across various industries leverage opportunities in web 3 for growth and development, Ethereum investments can become very profitable in the future.

Pros and Cons of Investing in Ethereum

Pros Cons
Decentralized and globally accessible  Subject to rapid price fluctuations 
High utility for building web 3 solutions  Slow transaction speed 
Upgrade to Ethereum 2.0 can make for a strong investment  High gas fees
Increased growth and business opportunities for entrepreneurs and investors  Uncapped Supply 

Different Ways of Investing in Ethereum

There are different ways to invest in Ethereum, including short and long-term investments. You can buy and hold Ethereum long-term, or actively trade it for profits in the short term.

Buy and Hold

You can purchase Ethereum on crypto exchanges like Coinbase, Gemini, or Binance. Before you buy ETH, use the crypto chart to view the price history to determine a good entry point. The general rule here is to buy when the price of ETH is low and hold for as long as you like, or sell when the price climbs higher.

Trading

Spot Trading

Spot trading uses the same principle as the buy-and-hold strategy. You buy ETH when the price is low and sell when it rises.

The only difference is that spot traders buy ETH and make a profit once Ethereum rises to a particular set price. For example, if you invested $1000 into Ethereum in 2020 when the price was $335, you’d have gained 382%, and your investment will be worth $4820 in 2022.

Derivatives Trading

Derivatives trading involves trading Ethereum using futures, options, and perpetual contracts. Derivatives trading gives you more opportunity to make multiple times any profit by using leverages.

For example, if you use a x5 leverage, you’d make five times the profit in a spot trade. But, derivatives trading also exposes you to more risks than spot trading, and you can easily lose your assets if the market prices go against your trading positions.

How Much Should You Invest in Ethereum?

Investing in crypto is not a low-risk investment. The crypto market can be quite volatile when you look at the daily price movements. Financial planners suggest you make crypto investments only about 5% of your total investment portfolio. Investing a small percentage of your money in cryptocurrencies such as Ethereum will help you minimize investment risks.

If you’re just starting crypto investing, invest only an amount you’re comfortable with. But, whether you choose to be a short- or long-term investor, you can make money in crypto with the right investment strategy.

Expert Predictions on Ethereum

Many crypto experts’ predictions are heavily based on what happens to Ethereum after the merge. Although, It’s impossible to accurately predict what Ethereum will be worth by the end of 2022, hearing from these experts can give an idea of what could happen.

According to Mike McGlone, intelligent analyst at Bloomberg, Ethereum’s price will be around $4000 by the end of the year. CEO and founder of Allnodes, Konstantin Boyko-Romanovsky, suggests that ETH will reach $5,000 after the upgrade.

Many crypto experts are bullish on Ethereum and believe the price will skyrocket after the “merge,” but other experts are not quite positive in their outlook. Venture capitalist Kavita Gupta predicts that Ethereum might drop to $500 if there’s a massive sell-off in the market.

Conclusion

Ethereum is regarded as the king of defi as it is the most used blockchain, powering thousands of decentralized finance apps like Uniswap and Yearn Finance. Ethereum’s utility and growth lately make it one of crypto investors’ most popular investment options.

If you’re looking to invest in Ethereum, remember to invest in tandem with your risk tolerance level. Eventually, Ethereum has a good potential to yield excellent returns on investment.

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