Ethereum is a blockchain – a ledger containing a history of all transactions – that is secured by a distributed network of machines, each working to process and validate transactions. Ether, the currency of the Ethereum blockchain, is issued to those machines that carry out this work, and Ether can then be traded easily for fiat currencies like US dollars or Euros. This network now has many thousands of participants who are able to transact with anyone in the world without middlemen.
Transactions on Ethereum are final and immutable. If a transaction is invalid (for example, the user does not have enough funds), then the transaction is not included in the blockchain. The entire history of all valid transactions is stored by many different machines in thousands of physical locations, each copy being identical to the other. The blockchain is a global agreement of the history of every transaction ever made. Due to this distributed nature of the Ethereum blockchain, there is no central point of failure and no possibility of being shut down.
The Ethereum blockchain was launched in July 2015 with a price of less than a dollar and climbed slowly until March 2017 when the cryptoasset experienced an enormous surge in price. This guide to buying Ethereum will explain why Ether has value, whether the currency is a good investment, and what risks and considerations should be taken into account when looking to buy Ether.
To first understand Ethereum’s value proposition, and whether you as an investor should consider purchasing Ether, it is best to consider the unique benefits that cryptoassets offer and why they attract the attention of such a broad range of investors, from VCs through to retail.
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Before discussing Ethereum as an alternative investment vehicle and its many benefits, risks and rewards, it is best to list a handful of definitions which should help make this article easier to follow.
General term for any asset secured by cryptography, predominantly blockchain-based assets like Ethereum and Bitcoin.
Legal tender such as US dollars, Euros or British Pounds.
Is the total value of coin supply multiplied by the price per coin. A general term used to roughly quantify the value of an entire network.
A platform used to buy and sell cryptoassets.
An immutable set of instructions (written in code) that execute autonomously. An example would be a flight insurance smart contract; this would automatically release funds to relevant parties based on whether a flight was delayed using trusted 3rd party flight data as the “truthsayer” or “oracle”.
A term for the Ethereum blockchain, specifically referencing its computational ability and use of smart contracts.
A machine with a complete copy of the Ethereum blockchain. The Ethereum network consists of many thousands of nodes, each verifying every transactions in the blockchain.
A machine that bundles transactions into “blocks” and adds them to the blockchain. Blocks are added to the chain when the miner is able to successfully complete a difficult computational problem.
Unlike other assets, Ethereum is not backed by gold or promised by government. To understand whether Ethereum is worth buying, it is first best to examine the fundamental value of the Ethereum blockchain itself. For the sake of simplicity, this section will look at the Ethereum blockchain only.
The Ethereum blockchain is a protocol that operates on the laws of mathematics. Unlike a central bank or government, who can quickly and unexpectedly adjust money supply, Ethereum’s coin distribution is written into immutable code that is publicly available and agreed by consensus. It is the blockchain’s unbreakable encryption and mathematical truths which back this digital asset, as opposed to gold or government promise.
Ethereum is an inflationary currency; 5 new Ether coins enter the system whenever the next valid block in the blockchain is found (a block is found roughly every 15 seconds). The process of finding blocks is a separate topic, but the key point is that – unlike Bitcoin, whose supply is capped at 21 million coins – there is no limit on the amount of Ether that will be issued over time. However, this rate of inflation will decrease over time as the aforementioned issuance of 5 Ether becomes a smaller percentage of the overall coin supply. Furthermore, planned network changes (which must be agreed by consensus), due to be launched in the coming months, will place downward pressure on the inflation rate as discussed here.
Transactions on the Ethereum blockchain are valid based on a few factors, but the most obvious is that the user must have a balance greater than the amount they are sending. The purpose for which they are sending or receiving coins is irrelevant. Any user of the Ethereum blockchain – regardless of location – is able to decide how to spend their value without authorization. Having sovereignty over one’s wealth may seem unnecessary for many in the West, however those from developing nations, or countries experiencing hyper inflation and money controls, stand to benefit enormously by untethering from their fiat currency system. Unlike the traditional fiat system, Ethereum offers users full sovereignty if they wish. Of course users can choose to trust 3rd parties if they would like to, but that is not a requirement as it is in the traditional banking space today.
Ethereum transactions are low cost and fast, capable of handling 15 transactions per second with protocol upgrades in the next 12 months that are anticipated to increase this figure to 1000+. To put that into perspective, VISA handles an estimated average of 2,000 transactions per second. Furthermore, 3rd party payment channels are being developed which will take transactions off of the Ethereum blockchain without compromising security and reducing fees further – increasing the capacity of the network by several orders of magnitude.
Ether has real-world value that is in demand. Major Ethereum exchanges will complete large million dollar sell orders within seconds without moving the price. Liquidity could certainly be higher, and brief “flash crashes” have been noted in the past, however for the vast majority of users and investors, Ethereum’s liquidity allows for fast exchange to and from fiat currency.
Up until now this article has focused on the fundamentals of the Ethereum blockchain and its use case as a currency for transacting value. Ether serves well as a currency, however it is the ability to deploy “smart contracts” on the EVM which furthers its case as an alternative investment. Smart contracts are still in their infancy, however a number of industries are on the cusp of major disruption thanks to this technology:
Much like gold, Ethereum and others are being used as a hedge against economic uncertainty. However unlike gold, Ether can also be transacted globally and near-instantaneously through the internet with minimal fees and unlimited amounts. The supply of Ethereum is also transparent and predictable through its open source code which is publicly auditable. In the case of gold, supply shocks are not uncommon.
There are several reasons why a user might choose to buy or invest in Ethereum, here a handful of examples.
Investment strategies vary, and suitability is subject to your own personal risk tolerance. This guide is for information purposes only, and if in any doubt consult a financial adviser.
One of the most common investment strategies for Ethereum is “buy and hold”. If Ethereum is to replace even a fraction of fiat currency, its value will be far greater than it is today. The same can be said if Ethereum becomes the currency of choice for the “machine payable web” which will enable billions of devices to transact value efficiently with each other.
Given the volatility of Ethereum, those looking to buy may want to consider “dollar cost averaging”; spending the total investment amount in chunks over X period of time to acquire Ether at an averaged price.
It is safe to say that predicting the future of Ethereum is much like predicting the weather in 5 years time. It is unlikely that Ethereum will disappear anytime soon, but as Ethereum has shown Bitcoin, it is possible for a little-known cryptoasset to become a dominant force in a short period of time. Purchasing Ethereum to exchange for other cryptoassets like Ripple (XRP) and Ethereum Classic (ETC) is a good way to hedge against the unexpected failure of any given coin. Whilst one coin may fail, many VCs and technologists are in agreement that cryptoassets of some nature will become ubiquitous in the future.
Some investors choose to day trade cryptoassets on exchanges like Poloniex and GDAX. This type of trading compounds risk on an already volatile asset and should be treated with caution. Let’s not go there.
If Ethereum was to become ubiquitous as a digital currency – enabling micropayments among machines and borderless/trustless transactions between people – then it is quite obviously not too late to buy Ethereum. The price of Ethereum in 10 years time is likely to either be $0.00 or an uncapped amount that can only be imagined. It is my personal expectation that Ethereum’s value will only stabalize (i.e. stop increasing) once the currency has achieved its goal of being a globally decentalized platform with billions of devices and humans interacting with it. Of course, the value of the currency will experience enormous highs and lows as investors join and whales leave, but if the technology is to succeed, then the long run price will be much greater than today.
From the content on this page, it should also become apparent just how challenging it can be to purchase Ether, and that in and of itself is one reason why it is unlikely to be too late.
Those who choose to secure their Ether “the easy way” – as described further below – can skip this section.
Before purchasing Ether, it’s essential to become familiar with wallet software and transactions in general. Ethereum – as with any cryptoasset – is extremely unforgiving. One false move when sending or receiving a transaction can result in the loss of an entire bankroll. However, this risk can be somewhat mitigated by following our simple security guide below. The risk can be further mitigated by learning a basic understanding of the technology in this section (it’s not complex) and using caution. Further advice on how best to transact Ethereum can be found immediately below.
An Ethereum wallet is a piece of software that “stores” your Ether funds. Ethereum wallets could be a desktop application, a mobile/web app, a hardware/paper wallet or an online exchange. The official Ethereum wallet can be downloaded at Ethereum.org.
New users may find themselves downloading a “full node”. Full nodes can be used as a wallet, however they require the user to download the full Ethereum blockchain (many gigabytes in size). If you are new to Ethereum, then it is recommended that you use a “light client”. Light clients do not require the full blockchain to operate.
Light client Ethereum wallets:
Now that you have chosen a particular Ethereum wallet, it is important to understand the private key that will be generated with it before depositing any funds. The private key is the key to your wallet; if anyone else has your private key then they also have full access to your wallet and its associated funds. When creating a wallet, you will be asked to take a copy of your private key. The above wallets generate your private key offline, it is never sent to a server and therefore cannot be intercepted. It is now up to you how to store and backup your private key. Many users choose secure cloud storage with 2-factor authentication or offline prints of their private key. For larger sums of Ethereum, extra security measures can be taken with “hardware wallets” described further below.
You have now downloaded an Ethereum wallet and secured your private key. Before funding your wallet with Ether, it’s important to become familiar with the make-up of a simple Ethereum transaction.
Your Ethereum wallet will automatically generate a handful of receiving addresses (also known as “public keys”) which are a function of your private key. Unlike the private key, receiving addresses can be distributed freely without risk of theft, and payments to these receiving addresses will add funds to your private key (wallet). For those interested in the technicals, see Bitcoin’s “public key cryptography”.
All transactions on the Ethereum blockchain are publicly visible through a “block explorer” such as Etherscan.io. As an example, we are going to look at this arbitrary transaction of 0.2 ETH. In this transaction you can see 2 public keys:
Using MyEtherWallet as our example software, the above transaction is simply the input of the address we wish to send funds to, the amount, and the gas limit (fee). The latter is set automatically by the software – but it’s prudent to double check the cost as miscalculations have been known to occur.
The from address does not need to be specified. This address is chosen automatically based on the balance of each address.
Once a transaction has been sent, a transaction hash is created and shown to you in the software. This transaction hash can then be put into a block explorer and the same details we have just looked at can be found for your new transaction.
Block height and confirmations
This is the mined block which your transaction was included in. It takes roughly 15 seconds to mine a block. The period between your transaction being broadcast (i.e. sent to a receiving address) to when it is first included in a block is a period in which your transaction will be “pending”. Inclusion in a block is called a confirmation, and every subsequently mined block adds another confirmation. The more confirmations a transaction has, the more “bedded-into” the blockchain it is. Transactions with 30+ confirmations are generally considered extremely secure – they will persist in the blockchain for all eternity.
Block height can also be thought of as the block number since the creation of the blockchain. In our example’s case, the transaction was included in the 3,804,203rd block to be mined.
Now that you are familiar with sending Ether, the same idea can be applied to receiving it. In the case of purchasing Ethereum, once it has been bought from an exchange, the exchange’s withdrawal function will ask for your wallet address. Input your address along with the amount of Ether you wish to withdraw to your wallet, and then once confirmed, a transaction hash will be shown. The Ether will immediately show as being “pending” in your wallet, and you can follow the number of confirmations it has using the transaction hash on Etherscan.io.
Whilst rare, there have been several horror stories of users losing thousands of dollars in Ether from poor due diligence. Here are a few of the key items to check off when making a transaction of a significant sum.
Copy and paste the address
Never type in a wallet address by hand. Addresses are long and case-sensitive, a single mistake will result in the funds being lost forever. There is no charge back or customer support number in Ethereum.
Check the transaction fee
A good Ethereum wallet will show you the calculated transaction fee in dollars and cents. Always double check that the transaction fee is reasonable.
Check, double and triple check the address
Once you’ve copied and pasted the address which you wish to send or receive Ether to, check it over and over until you’re certain it’s correct. Looking at the first and last several letters/numbers will ensure it’s been pasted correctly.
Good wallet software will also confirm the address that you are sending or receiving to. This mitigates the risk of malware intercepting and replacing the address you input.
Test your transaction
One of the driving forces behind Ethereum adoption are the low transaction fees. There is no harm in sending a negligible amount of Ether in order to test your understanding of the process and that all of the details are correct. This will ensure that everything goes smoothly when sending larger amounts.
Purchasing Ethereum can be done simply through an exchange. Once Ether has been purchased, the cryptoasset should be stored securely. There is some additional information regarding wallet security further below.
This section will expand over time, as more exchanges appear and more countries are accepted. There are many other exchanges available, but currently we have just featured one.
The process of purchasing Ethereum through an exchange is simple. Register an account with the exchange below, deposit US dollars, Euros etc and purchase Ether through the platform.
Coinbase is recognized as one of the most popular exchanges for users to buy and sell Ethereum. The exchange is open to many countries in Europe as well as the United Kingdom and USA. Residents in Australia are able to purchase Ether at Coinbase, but another exchange must be used to sell the cryptoasset for AUD.
By joining Coinbase using any of the links on this page, you help to support EthereumPrice.org and will also receive a free $10 for any deposits over $100.
Some may prefer a “peer to peer” route to purchasing Ethereum, avoiding KYC and AML and in many cases, purchasing larger quantities. Whilst this activity may be frowned upon by your country’s regulators, it is possible to do so – at your own risk – through an online peer to peer exchange like LocalBitcoins.com
This route first requires the purchase of Bitcoin, which is then exchanged for Ether. Setting up a Bitcoin wallet is much the same as the process above, and a list of trusted wallets can be found on Bitcoin.org.
Bitcoin can then be exchanged for Ether anonymously through ShapeShift.io. However each transaction is limited to a maximum amount (typically a few thousand dollars in value).
This section of the guide intends to simplify the process of securing Ethereum for non-technical users. This method of security hands over management to the exchange with which you purchased Ether.
In this instance, users can secure their newly purchased Ethereum by leaving it in their wallet on the exchange itself. This introduces some risks, including platform risk (the platform may fail as has been seen before with the MtGox Bitcoin exchange) as well as the risk of digital theft, as was seen with Bitfinex. Ultimately, some users choose to secure large sums of Ether by leaving it on an exchange, but in doing so they give up their ability to audit and ensure its security. The decision to do this is a personal one – how much do you trust the exchange, and how much are you willing to leave in the hands of that exchange? Whilst it is unlikely that your coins will be stolen, or that platform will become insolvent, it is a real possibility that should be accounted for.
A note on exchanges
Securing Ether on an exchange is a legitimate approach to security, particularly if the funds stored are relatively small in size compared to an investor’s overall portfolio. However, when storing coins on an exchange, you do not own the private key. Essentially, you have handed over responsibility of your Ether to the exchange. Exchanges are not the same as a bank, and the same financial regulations do not apply. Insolvency or theft may result in lost funds.
Securing Ether is a critical step in ensuring that your investment is safe. Unlike many developed countries, the banks will not protect your cryptoassets like they protect your cash. As mentioned, investing in cryptocurrencies in unforgiving, securing Ether properly is critical. Those looking for a simpler security option by handing over this management to a 3rd party can see the above section.
Hardware wallets are one of the safest ways to secure your Ether. Hardware wallets generate and store your private key offline, and at no point is the private key exposed to your connected device (PC). Storing your coins offline in this way mitigates the risk of digital theft – one of the most common attack vectors for cryptoasset holders. As with other Ethereum wallets, a recovery seed is provided on creation, and a PIN is chosen to secure access to the device itself. It is the PIN and the recovery seed that must then be secured extremely well, as access to either by a malicious individual may result in loss of funds. Further protection can also be taken in the form of 2-factor authentication and multi-signature wallets as discussed below.
The two most respected hardware wallets for Ethereum (and other cryptoassets) are Trezor and the Ledger Nano S. Those storing Ethereum on a Trezor device will need to use it in combination with MyEtherWallet (see the full guide here). For that reason, many users opt for the ease of use that comes with the Ledger Nano S.
Whether you choose to store your coins on an exchange, desktop/mobile wallet or hardware wallet, 2 Factor Authentication (2FA) is a highly recommended additional security layer. The 2FA process requires that the user inputs a one time password (OTP) before being able to login to a wallet or send Ether. Google Authenticator is one of the most popular interfaces for 2FA and is used by a range of Ethereum wallets.
Different wallets and exchanges will implement 2FA in different ways, however the additional security that it provides remains the same. A potential thief would not only require your password to steal your Ether, but access to the physical device from which the OTP is generated as well.
A word of caution
2FA through an app like Google Authenticator has so far proven extremely secure. However, some platforms choose to bypass the use of an app and instead send an OTP over SMS. SMS 2FA should be avoided entirely, as the OTP can – in many cases – be observed without needing to unlock a phone. More catastrophically, social engineering has been used to convince telecoms staff to port a phone number to a new SIM; if an attacker is able to do this, then the phone number alone can be used to gain access to any platform “protected” by SMS 2FA.
These wallets allow the user to secure their Ethereum by requiring multiple participants to sign each transaction. Typically a multi signature wallet is “2 of 3”, meaning that 2 of a total of 3 private keys must sign the transaction for it to be successfully broadcast to the network. In these instances, the 3 private keys can be split across different physical locations along with their own physical security to ensure that there is no single point of attack.
Different wallets will have their own implementations of multi signature security.
Ultimately, the security options that you choose should be based around your risk tolerance. The above information should serve as some inspiration for how best to secure your Ethereum but should not be considered comprehensive. Cryptoasset security practices are being developed on an ongoing basis, consult your wallet of choice for their own recommendations.
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