What is Ethereum and Should You Invest?

You’ve heard about Ethereum, but you’re not quite sure what to make of it.

How is it different than Bitcoin? How does the technology work? And most importantly, is it a good investment?

Cryptocurrencies continue to creep more prominently into popular media and the public consciousness. Bitcoin is at the forefront of the industry, and is at the forefront as always.

Most people have a very rudimentary knowledge of Bitcoin as a currency, but very few have any understanding of Ethereum.

So are they (and you) missing out? That’s still up for debate.

There is plenty to know and admire about Ethereum. It could pave the way for technology in the future. Major influencers in the technology space have seen the tremendous value Ethereum’s underlying premises offer.

It not only provides an alternative cryptocurrency to Bitcoin, it opens up the opportunity to build applications that improve efficiency and reduce costs across industries.

Ethereum enables the use of “smart contracts,” which is changing the face of multiple industries through its many applications.

We’ll cover exactly what this industry-disrupting technology does in a minute. A brief summary is that these smart contracts allow you to set up automatic transfers, payments, and escrows with Ethereum.

They create a financial system that’s more flexible and secure than traditional banking, and it’s not going unnoticed.

Technology expert Vinay Gupta has said that Ethereum’s smart contracts “…are going to be an increasingly huge deal. I think they are going to be immensely important.”

In this article, we’ll cover where Ethereum came from, how it differs from Bitcoin, and if you should invest.

Behind the Scenes of Ethereum

Cryptocurrencies like Ethereum wouldn’t exist without the blockchain. The blockchain is a digital ledger of transactions.

You can think of it as a shared Google spreadsheet. Each time a transaction is made, it’s entered into the document, where anyone can view the edits and ensure the information is correct.

The first major use of blockchain technology was Bitcoin, which started in 2009. As Bitcoin grew, industry pioneers saw the need for more adaptability.

When comparing Bitcoin and Ethereum, there’s a simple analogy to be made with the advent of the internet.

When the internet first started, the technology only had a few applications. The most immediate of these was email, which allowed you to communicate with others outside of the cumbersome postal service system.

Bitcoin is the “email of blockchain” in many ways. It provides a huge advantage—that of financial transfer—using the system.

But just like the internet, blockchain is a massively powerful technology that can provide so much more than just digital cash.

Ethereum opens up blockchain in the same way the World Wide Web opened up the internet.

Every computer that runs the blockchain, known as a node, has a copy of the ledger of transactions. This means that the history can not be changed, altered or deleted.

Running the software in this way makes the technology completely decentralized as no single party is in control of the data.

In the current financial system, there is always a third party (such as a bank) handling your money and transactions.

With blockchain technology, users can truly work on a peer-to-peer basis. But developers wanted a blockchain with scripting capabilities allowing the system to move and secure anything independent of human action.

While humans can set up transfers and payments with Bitcoin, there is always the element of human error behind the process. Besides, the only thing you can transfer with Bitcoin is Bitcoin.

If you’re a musician, for example, you don’t get royalty payments until the record company decides to send them to you. They could forget, breach the contract, or even go bankrupt–leaving you with nothing.

But Ethereum is different. You can make exchanges in digital money, known as Ether. But you can also transfer shares, property, content, or anything else of value.

This is all run through the system that makes it possible–the Ethereum Virtual Machine, or EVM.

One of the biggest features of the EVM are smart contracts. These are programmed rules that happen independent of human interaction, and are immune to downtime or fraud.

We use this concept of programmed rules everyday in real life. Think of your air conditioner or heater–it’s programmed to turn on when the temperature reaches a certain level, and does so automatically.

This is faster, cheaper, and more effective than assigning this job to a human. Ethereum’s smart contracts work in much the same way, but for a variety of technologies and applications.

infographics 02 1 1

A royalty contract set up with Ethereum would guarantee you’ll get your royalties. The Ethereum smart contract would deliver the royalty to you as soon as the payment is made.

But it isn’t limited to contracts like these. The Ethereum code is broad and all-encompassing, allowing developers to do much more than we can imagine now.

When developers wrote the protocol for the internet, they created it broad enough to allow for websites and applications that would have been unimaginable in the early days of web-based technology.

As technology has continued to improve, however, that same protocol is now used for massive sites like YouTube, Twitter, and Netflix that would have been impossible without a broadly-defined set of rules.

The same is true with Ethereum. Since the technology is still in its infancy, there are only a few applications we can think of today. In the future, however, the Ethereum protocol will continue to be used for programs and systems we can only imagine today.

The Ethereum platform could be used for loans, title transfers, regulatory compliance–even voting. Because it’s managed by a network of computers and not one centralized system, these applications would be stronger and more robust than their present-day counterparts.

A cryptocurrency programmer named Vitalik Buterin first proposed the idea of Ethereum in 2013, and developed the project alongside a small team.

pasted image 0 3

The development was funded via a crowdsale where investors bought Ether (the cryptocurrency the powers Ethereum) with Bitcoin.

Ethereum went live in 2015 and has enjoyed immense backing. Its support has made it the second largest cryptocurrency behind Bitcoin.

As seen with other cryptocurrencies, Ethereum has gone through plenty of volatility and development issues that have led to hard forks, or splits in the technology.

A hard fork occurs when there are major changes to the operating protocol of a blockchain, the list of transactions that allows cryptocurrencies to work.

Often users and developers end up with differing opinions on how to proceed.

A fork creates a split in the blockchain, meaning there is a duplicate chain (and thus new cryptocurrency) created.

Hard Fork

This happened to Ethereum in 2016 and left Ethereum Classic, the original and now lesser used blockchain, and a differently developed Ethereum, which is the subject of this article.

When talking about Ethereum it is important to note that this is the name of the blockchain, or system behind the currency, and that the actual currency is called Ether.

However, you will find that many people simply refer to both as Ethereum. This is crucial to the working of Ethereum and quite a major difference to Bitcoin.

Its unique appeal has found a new market in huge players in the financial industry.

How Ethereum Is Taking the Financial Services Industry by Storm

While Bitcoin is pretty much just a digital currency, Ethereum is an open source blockchain that includes digital currency along with other features.

This means that developers can work to build applications on the network using what are known as “smart contracts.”

Ethereum adds more to their network than Bitcoin with scripting capabilities that enable smart contracts to be written.

With Ethereum, the state of each of these smart contracts accompanies Ether transactions in the ledger. This makes it more than just a currency.

Ethereum Vs Bitcoin What Sets Them Apart CNBC YouTube

What are these smart contracts? They function how you would imagine a contract, but immutable by humans. As long a contract is coded properly, it’s 100% guaranteed against human error, fraud, or malfunction.

Our current contracts in society rely heavily on trust in another person or organization.

They are a written agreement to prove what each party is required to do, and they’re usually enforced by the courts.

A smart contract has the same objective but provides an automatic solution. Computers are able to monitor, verify and enforce the negotiation or performance of a contract.

Even better, it’s decentralized, which means it’s shared by multiple nodes across the network. This means that it can’t be tampered with, unlike a centralized organization like a bank.

While banks rely on countless backups to ensure their data is secure, blockchain systems don’t need to–thousands of nodes across the world maintain a secured backup as part of the system.

These contracts could be used across many industries in the future from real estate to music production.

Infographic Comparing Bitcoin Ethereum and Other Cryptocurrencies 1

You can create almost any kind of application using the Ethereum platform, known as decentralized apps, or dApps.

Just like the Apple App Store provided a platform and market for millions of smartphone apps, the Ethereum system provides a way for an infinite number of dApps to be developed.

For example, instead of trusting a third party to distribute royalties from every album sale, a smart contract could be written to pay the required people almost instantaneously.

There are a few major benefits to smart contract technology. Because it’s decentralized, there are a number of advantages over traditional systems.

First, it’s immutable. A third party can’t adjust the code once it’s written, which makes it very secure. It’s nearly impossible to hack in the traditional sense.

Second, it prevents corruption. Since the apps are based on consensus within the network, there is no possibility of one actor changing the rules for his or her own benefit. This makes Ethereum highly desirable.

Third, it’s secure. Since there’s no single point of failure with the system, it’s a highly accessible process that’s well-protected and secure. It’s like a system that requires a burglar to break into every house in a city to get away with a single theft.

Finally, there is zero downtime. Since every node on the network is maintaining the code and system, there’s no single server that can crash or need repairs. Other nodes will simple stay online, keeping the system going indefinitely.

These have immediate benefits in the world of finance, industry, and banking. It could ensure payments for rideshare drivers on Uber or Lyft, guarantee an equal royalty cut for Airbnb renters, and provide fair payments for online gambling.

The other notable difference to Bitcoin is the amount of cryptocurrency that will be created. There will only ever be 21 million Bitcoins mined, meaning it has a finite quantity.

In comparison, there is no limit to how much Ether will be created. This is either a good or a bad thing, depending on your perspective.

You could argue that because Bitcoins are limited, the price could skyrocket when there are none available.

But Ether has an advantage in that more can always be mined, like gold. Gradually, Ethereum is moving towards a proof-of-stake system that differs from Bitcoin’s proof-of-work method.

Whereas proof-of-work mining requires extensive computers and energy to keep the process running, proof-of-stake relies on holdings, or stake, of Ether.

In other words, it provides a sort of return on investment for those who already own Ether.

But Ethereum has a final ace up its sleeve that makes it far more promising in the “real world” than any other cryptocurrency available today: corporate sponsorships.

Perhaps the biggest hindrance to the widespread adoption of Bitcoin or other cryptocurrencies is the lack of acceptance by the business world. Without major Fortune 500 companies accepting the currency, it will probably never become mainstream.

But this is where Ethereum stands apart from the rest.

Unlike other cryptocurrencies, which struggle to gain any kind of acceptance by major organizations, Ethereum has a huge number of giant corporations eager to support it and help it succeed.

The Enterprise Ethereum Alliance is a positive step in the adoption of this technology within the broader world.

The alliance connects Fortune 500 companies, startups, tech organizations, and industry thought leaders with Ethereum experts.

Its premise is for Ethereum experts to work together to build systems running a blockchain that supports smart contracts.

The alliance includes a number of blue chip companies such as BP, Intel, JP Morgan, Microsoft, and UBS.

pasted image 0

Such acceptance would make it hugely valuable, and push up the price of Ether.

Since Ether currently has a much lower buying price than Bitcoin, and the future applications of the technology look promising, Ether could pay off to become a great investment.

If Ethereum is built into the banking system and the wider world, owning even a little part of it will become an investment that pays huge returns.

Ethereum special appeal to large companies gives it an advantage over Bitcoin that may come to be more and more important in the coming years.

On a long-term horizon, this could lead to stability, which would encourage spending and keep the currency alive and healthy.

This discourages hoarding, which is one of the concerns with Bitcoin. The supply and demand of the currency plays a large role in how the currency performs.

The Skyrocketing Price of Ethereum

Cryptocurrency prices have always been volatile, and are likely to stay that way for the next few years at a minimum.

It’s not easy to give a specific value to Ethereum (Ether) as it can change by tens of dollars each day. However, the current price of Ether is below.

Just like Bitcoin, Ether can move hundreds of dollars in a day.

That, of course, means you can make a lot of money or lose a lot of money very quickly if you’re investing in the short-term.

As these cryptocurrencies are not widely used as a form of payment, they can almost feel like a cross between buying stocks and currency.

As an example of the volatility, the current 24 hour high for the cryptocurrency is $316 and the 24 hour lowest price has been $288, which is a $28 swing.

pasted image 0 2

Ethereum has had a great year in 2017, with more investors bullishly charging into the market and development projects being brought to the fore.

Much of this price increase has been driven by Initial Coin Offerings, or ICOs, for coins other than Ethereum. These new coins are raising money in much the same way as Ethereum, and selling stock in their coin using Ether.

The price has jumped from around 30-40¢ to up to over $400. If you were an early investor in Ethereum, your investment has seen massive returns.

pasted image 0 1

It’s obvious why many people are speculating on Ethereum.

With the current price at $300, is there money to be made, or are the risks too high?

So, What Are the Risks of Investing in Ethereum?

Cryptocurrencies are still developing, and that means they haven’t gained complete acceptance just yet.

There are a number of vendors that accept Ethereum around the world, but we are still a little way from buying your morning latte with digital currency.

This is the same with all cryptocurrencies, include Bitcoin, Litecoin, and all other altcoins. Because they aren’t as immediately usable as cash right now, Ethereum can still be thought of a speculative investment asset like Bitcoin.

Unlike Bitcoin, however, Ethereum is much newer and has not gained as much funding or market cap. For now, Ethereum is likely to play second fiddle to Bitcoin.

However, Ethereum is leagues ahead of Bitcoin in that it has the full support of blue chip companies through the Enterprise Ethereum Alliance. This makes it far more likely than other cryptocurrencies to gain widespread acceptance in the coming years.

Despite a surge in the summer of 2017 that brought Ethereum close to dominance, Ethereum remains steadily in second place behind Bitcoin in total market cap.

Global Charts CoinMarketCap

This makes it an even more speculative investment. There could be huge gains to be made, but that also means the risk of failure is higher.

Another concern of Ethereum is the risk of competitors. While this applies to any industry, it plays a much larger role for a potential currency.

The Ethereum code is based in the Solidity programming language. This has a number of benefits, and helps keep Ethereum secure and reliable.

But it comes with a major disadvantage. Because Solidity is used primarily with Ethereum, there are a few other applications for the language. This has made it fairly obscure, meaning few programmers know how to use it.

A competing smart contract blockchain technology could develop using a language that’s easier to learn, simpler to use, and has more widespread adoption. If done correctly, this competitor might outstrip Ethereum’s current dominance in the market.

Ethereum’s node technology means there is no single point of failure for the code and operations of the cryptocurrency. But the dominance of Vitalik Buterin as the brains behind the currency means there is a single point of failure for its success.

Vitalik serves both as Ethereum’s primary advocate and programmer. Unlike Bitcoin, which was created by an anonymous user and built upon by a number of early adopters, Ethereum could quickly decline in popularity and value if something were to happen to Vitalik.

There’s also concern that Ethereum’s price is determined in large part because of the altcoins that are using it in their ICOs. When such a large portion of the currency is used for a single purpose, it can be difficult to predict the actual value of the currency over time.

Additionally, there is inflationary supply of Ethereum. Unlike Bitcoin, which severely restricts the total number of coins mined to 93 million possible coins, Ethereum has no such cap.

As such, there is a constant stream of new Ether being created, which can make for a highly inflationary currency.

While this is a challenge to Ethereum’s viability, it may fade away as Ethereum transitions to proof-of-stake instead of proof-of-work mining, as discussed earlier.

When considering all the factors at play, does Ethereum stand the test?

How Ethereum Can Be the Best Investment to Make

To start with, the future prices of all cryptocurrencies are very hard to predict.

They are still a relatively new concept and volatile prices are swayed by the news, current affairs, and even bankers tweeting their thoughts.

The prices of all digital currencies tend to be linked to the successes and failures of Bitcoin.

When Bitcoin is going strong, it puts confidence in most other currencies, including Ethereum. Of course, when Bitcoin prices are falling, so do the prices of other currencies.

As Bitcoin has risen in price during 2017, so has Ethereum, increasing by over 5000% just since the beginning of the year.

Infographic Comparing Bitcoin Ethereum and Other Cryptocurrencies 2

(This may have to do with media coverage that oftens portrays Bitcoin as the only cryptocurrency available.)

Ethereum is a strong cryptocurrency despite only being just over two years old.

When Bitcoin was two years old, it was still completely underground and gaining a pretty bad reputation, which it has yet to overcome.

People still associate Bitcoin with Silk Road, a dark web marketplace that was used to buy and sell drugs, counterfeit IDs, and other illegal items until its shutdown by the FBI in 2013.

800px Silk Road Seized

Ethereum, on the other hand, has a cleaner track record.

The potential future uses of smart contracts can provide a positive impact on business and society, and businesses are using Ethereum before underground markets.

The technology behind Ethereum could lead to it being used by the biggest corporations in the world.

It’s easy to see the benefits of smart contracts, and major players are not blind to this. There are distinct advantages for payments and transfers using smart contracts through Ethereum.

Using current financial methods, international bank transfers are prohibitively expensive, and credit card payments charge a percentage and take days to process.

Blockchain technology is a way to break down these barriers to a financial system that has become outdated by the internet.

The Bottom Line on Ethereum

If you are looking to invest in cryptocurrencies and want something more than Bitcoin, then Ethereum is your next go-to move.

As with any investment, you must consider the risks. The payoff could be tremendous, but you are also liable to lose everything you put in.

The design and unlimited amount of Ethereum currency may mean that it never fully catches up with Bitcoin.

But Ethereum provides a more speculative option which could pay off in the long run. If the price point follows Bitcoin, your $300 Ethereum could jump to $3000 in one year.

The potential for the Ethereum blockchain technology and smart contracts is quite eye-opening, and might be chugging away behind the scenes in the future.

As it gains wider acceptance for payment systems, banking, real estate, instant messaging, and trust ratings, Ethereum could change payment on a global scale.

If you’re going to invest, start sooner rather than later. Ethereum holds promise with some of the largest companies in existence, which bodes well for its future.

Within a few years, Ethereum could be the best investment you make today.

Leave a Comment: