Investing in Ethereum: A Beginner's Guide to Understanding & Getting Started

With cryptocurrencies gaining in popularity, many people are wondering how they can take advantage of the trend. One cryptocurrency that has increased in prominence, due in part to the rise of non-fungible tokens (NFTs), is Ethereum.

But what is Ethereum exactly? And how do you even invest in it?

Here’s how to invest in Ethereum — and how to decide whether it’s the right investment move for you.

In this article

• What is Ethereum?
• How Ethereum differs from Bitcoin
• Should you invest in Ethereum?
• How to invest in Ethereum
• A note about digital wallets
• FAQs
• Bottom line

What is Ethereum?

Ethereum (ETH) is an open-source blockchain technology that operates differently from Bitcoin (BTC). Ethereum was created by Vitalik Buterin, who still works on upgrading its protocol.

One of the main focuses of Ethereum is that it offers a platform for building decentralized applications (also referred to as dapps). These dapps can fulfill several purposes, as evidenced by the virtual reality world called Decentraland. You can also create your own apps and even issue your own tokens as part of the apps you build.

It’s also worth noting that the first NFT, related to the CryptoKitties trading game, was created on the Ethereum blockchain in 2017. And not only is it possible to build worlds and create games and apps using this blockchain, but it’s also possible to issue smart contracts and manage a supply chain.

The currency associated with Ethereum is called ether. It’s important to note that a digital currency like ether is different from a government-issued or central bank-backed fiat currency like the dollar. With cryptocurrencies, there isn’t a central authority that backs the currency, and you need to rely on its acceptance by others who use it.

How Ethereum differs from Bitcoin

When investing money in cryptocurrencies, it’s important to understand the distinctions between different blockchains. Collectively, crypto coins that are alternatives to Bitcoin are known as altcoins. Aside from Ethereum, other popular altcoins include Ripple, Tether, and Litecoin.

One of the biggest differences between Bitcoin and Ethereum is the fact that Bitcoin is a digital currency built on blockchain technology, whereas the Ethereum platform can actually be used to create apps and set up contracts.

Even though ether can be used as a medium of exchange, the blockchain it’s associated with can serve other purposes. You can create NFTs of your own, build apps, track inventory, and even automatically execute contracts. With Bitcoin you can send payments to others and, if you believe that it’s “digital gold,” you can use it in your portfolio as an asset class.

Even though Bitcoin is more well known, Ethereum is more widely used, as there are companies building apps and programs using the protocols, and Ethereum also fuels a wide number of other cryptocurrency tokens. Ethereum is considered the second-largest cryptocurrency, however, based on its market cap, which is roughly half of Bitcoin’s.

Read our guide to cryptocurrency for beginners for more information on the basics of how the crypto market works.

Should you invest in Ethereum?

Whether you should invest in Ethereum depends on your personal goals and portfolio strategy. For investors interested in diversifying their assets and including alternatives like cryptocurrencies, Ethereum can be a good choice.

Additionally, Ethereum might be attractive to investors who are looking to invest in the underlying blockchain technology, not just looking for a cryptocurrency. If you believe Ethereum network’s multiple uses will lead to it eventually becoming the dominant cryptocurrency, you could benefit in the long run.

However, it’s important to realize that you could lose your money when you invest in Ethereum. Cryptocurrencies and other digital assets aren’t covered under Securities Investor Protection Insurance (SIPC insurance), so even if the backer or trading platform fails, you won’t get your money back as you could if you invested in the stock market through an insured financial institution.

In many cases, it makes sense to limit your exposure to alternative assets like Ethereum. For example, I try to limit my alternative assets to between 5% and 8% of my total investment portfolio.

If you decide to invest in Ethereum, it might also make sense to look into other digital currencies. Just as you might want to diversify your stock investments, it can also make sense to diversify your cryptocurrency holdings into multiple crypto ecosystems. Just make sure you aren’t investing money you can’t afford to lose.

Pros

• Ethereum is more than just a currency; the underlying blockchain also has other applications and uses
• More businesses are using Ethereum
• There are no caps to Ethereum

Cons

• Ethereum is lesser known than Bitcoin
• There are fees to execute different transactions, including smart contracts, on the Ethereum blockchain
• Scaling Ethereum has been an issue

How to invest in Ethereum

As you prepare to invest in Ethereum, it can help to consider your platform options and figure out what is likely to work best for you. Buying ether is similar to how to buy Bitcoin, but it’s important to understand some specifics.

Investing apps

Some investing apps offer access to cryptocurrency trading. Two of the most prominent are Robinhood and Webull. However, it’s important to note that these brokerages don’t actually allow you to own the underlying assets.

Instead, you receive the marker for cryptocurrencies, rather than the actual coin. This means you can’t transfer your crypto assets into these apps. You also can’t send ether from a Webull or Robinhood account to your digital wallet.

Both Webull and Robinhood offer fee-free trading. However, they do make money on spreads and Robinhood requires a limit order for cryptocurrencies, rather than market orders, due to the volatility of cryptocurrency prices.

For more information, read our Robinhood review and Webull vs. Robinhood comparison. And also make sure you understand the difference between a limit order vs. market order.