For new cryptocurrency buyers, purchasing Ethereum can seem daunting and many end up putting off their investment to a later date. This guide will clarify all that there is to know about making and securing an Ethereum purchase so that you can make an informed decision on how to move forward. We begin with an overview of the ways in which someone can buy ETH, skip ahead for the more detailed breakdown of buying and storing this asset.
How To Buy Ethereum
5 Ways To Buy Ethereum
1. Credit and Debit Card
Credit and debit card purchases are the most popular method for buying, selling and trading Ethereum. The following brokers and exchanges accept credit and debit card transfers in multiple currencies.
eToro allows its users to gain near-instant exposure (up to $2,250 without verification) to Ethereum through credit and debit cards purchases. The platform accepts Visa, Mastercard and Diner’s Club for both deposits and withdrawals. Withdrawals to credit and debit card are charged a flat fee of $25.00.
eToro is one of the easiest platforms to buy and sell Ethereum, however this comes at the expense of higher fees. The platform also provides unique features such as “CopyPortfolios”, allowing buyers and sellers to follow and copy the trades of top traders in the eToro network.
- Simple buy/sell features
- Detailed dashboard and portfolio management tools
- Social trading allows users to follow the best performing traders on eToro
- Multiple cryptocurrency markets, not just Ethereum
- Higher than average fees
- Limited selection of cryptocurrencies
- Card purchases unavailable to US customers
eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFDs.
Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.
Past performance is not an indication of future results.
Cryptoassets are volatile instruments which can fluctuate widely in a very short timeframe and therefore are not appropriate for all investors. Other than via CFDs, trading cryptoassets is unregulated and therefore is not supervised by any EU regulatory framework.
eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro. Your capital is at risk.
Coinbase allows buyers to invest small amounts into Ethereum using either Visa or MasterCard. Payments are instant and the purchased Ether is added to the user’s wallet within seconds. Larger purchases can be made via a bank transfer, wire or, for EU countries, SEPA payments.
Coinbase is the world’s most trusted cryptocurrency exchange and operates in over 100 countries across all seven continents.
- Highly trusted exchange for credit card use
- Competitive fees on debit/credit card purchases
- Credit/debit card purchases are instant
- Only Visa and MasterCard accepted
2. Bank Transfer
Bank transfers cater to both small and large purchases of Ethereum. While buying Ethereum with a bank transfer can be extremely convenient with minimal setup, they typically take longer to process.
Coinbase accepts bank transfers from the USA (ACH bank transfer system), Europe (SEPA) and the United Kingdom (Faster Payments). Those not residing in these areas can buy Ethereum with a debit card. A full list of Coinbase’s supported countries can be found here.
Bank transfers vary in speed depending on the user’s country. USA deposits via bank transfer can take up to 3-5 business days to complete, while European (SEPA) deposits can take up to 2-3 business days. Those residing in the UK will find their bank transfers are typically completed within the day.
- Accessible in Europe, USA and UK
- No fees on bank transfer deposits
- USA and SEPA bank transfers can take several days to complete
It is possible to buy relatively small quantities of Ethereum (less than $/£/€2000) with PayPal, however the available markets are very limited or sometimes non-existent. Issues with charge-back fraud and PayPal’s terms of service have deterred sellers in the past, leading to a very small market for what is one of the world’s largest online payment providers. Instead, many buyers and sellers opt for other providers such as Skrill and TransferWise.
While PayPal is relatively hostile towards cryptocurrency transactions, it is still possible to use the platform to make peer to peer transfers in return for Ether.
Ethereum-focused peer to peer exchange, LocalCryptos, is one of the only platforms for buying and selling ETH using PayPal. Unfortunately, most users shy away from PayPal as a payment option for the reasons mentioned above, so the number of markets are limited. This doesn’t mean it’s impossible to buy Ethereum with PayPal, however it is difficult and the market price often comes with a premium. For this reason, most buyers look to other payment methods like bank transfers and card purchases.
- Optional anonymity
- Non-custodial - LocalCryptos does not hold your funds
- Powered by smart contracts
- Relatively low liquidity for PayPal markets
LocalCryptos is one of the industry’s most secure peer to peer exchanges for Ethereum and cash buying on the platform is commonplace. Buyers pay a single escrow fee of 0.75% and can buy ETH with either cash in person or cash via a bank transfer. Cash purchases are available to anyone in the world and the size of a trade can range from a few dollars through to hundreds of thousands.
- Possible to buy Ethereum anonymously
- Cash purchases are available to anyone in the world
- Cash offers typically carry a premium above market rate
Those who already own another cryptocurrency, such as Bitcoin, are able to trade these cryptocurrencies for Ethereum at a cryptocurrency exchange. These trades account for billions of dollars in volume each day and are one of the more popular ways of buying Ethereum.
The following list of exchanges allow users to buy ETH with a variety of cryptocurrencies, ranging from Bitcoin (the most popular) through to lesser known currencies such as TRON (TRX) and Ripple (XRP).
Top 7 Ethereum Exchanges
How To Buy Ethereum
A Beginner's Guide To Ethereum
As with any investment, the purchase of a cryptocurrency like Ethereum requires some prior due diligence. Cryptocurrencies operate in a low-regulation environment and, for this reason, additional caution should be taken.
Ethereum price volatility creates significant risk in itself. Mitigating avoidable risk is key for providing the investor with the best chance of a positive return. This article should serve as a guide for safely buying and using Ethereum so that your investment remains safe.
- Cryptoasset - General term for any asset secured by cryptography, predominantly blockchain-based assets like Ethereum and Bitcoin.
- Decentralized exchange (DEX) - An Ethereum-based exchange which facilities trade amongst peers through a series of Ethereum smart contracts.
- ERC20 token - A token which operates on the Ethereum blockchain under the ERC20 token standard. These tokens have the advantage of being interoperable with a vast array of decentralized applications and can be transacted or exchanged in the same way to the native Ethereum token (ETH).
- Ethereum Virtual Machine (EVM) - A term for the Ethereum blockchain, specifically referencing its computational ability and use of smart contracts.
- Exchange - A platform used to buy and sell cryptoassets.
- Fiat currency - Legal tender such as US dollars, Euros or British Pounds.
- Hard fork - A software upgrade that requires miners and nodes to make a manual change to the software they run. Unlike soft forks, which require only a software update, hard forks can cause a split in the chain as miners and nodes continue securing the “old” chain while others move to the new one. Ethereum Classic was a result of such a “contentious hard fork”.
- Market capitalization - Is the total value of coin supply multiplied by the price per coin. A general term used to roughly quantify the value of a cryptoasset.
- Miner - 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.
- Node - A machine with a complete copy of the Ethereum blockchain. The Ethereum network consists of many thousands of nodes, each verifying each transaction on the blockchain.
- Oracle - Data that can be used in the functioning of smart contracts. Oracles come in all shapes and sizes and range between highly secure (decentralized) and highly insecure (decentralized).
- Proof of Stake - A mechanism to reach consensus on the blockchain by staking funds on the network. Malicious actors looking to attack the network by altering the blockchain’s history are penalized by having their stake slashed.
- Proof of Work - A mechanism to reach consensus on the blockchain by expending computational resources (“work”). Those conducting this work are known as miners. A network with a large amount of mining work is considered to be prohibitively expensive to attack.
- Smart Contracts - An immutable set of instructions (written in code) that execute autonomously. For example, a flight insurance smart contract that automatically released funds to relevant parties based on whether a flight was delayed. Flight data would be sourced from one or more “Oracles”.
Before purchasing Ethereum at any one of the exchanges or brokers above, it is advisable to consider the various Ethereum wallet options available.
For relatively small quantities of Ethereum (also referred to in this article as Ether or ETH), the cryptocurrency can be left on the exchange from which it was purchased. This is by far the simplest option.
For larger quantities of Ethereum, it is recommended that the investment is kept in the buyer’s own secure wallet.
Securing Ethereum outside of an exchange has a number of benefits:
- Mitigation against exchange theft, fraud and hacks
- Accessible offline without reliance on a third party service
- Ability to implement extremely high levels of physical security
Taking custody of newly purchased Ethereum can provide unparalleled security benefits, however there are also a number of other risks to consider:
- Failure to properly retain wallet credentials can result in the loss of funds
- Sending of ETH to the wrong address can result in the loss of funds
- Self-custody exposes the owner to the 5 dollar wrench attack
These varying risks mean that there is no “one size fits all” approach to securing Ether once it has been bought. However, those new to cryptocurrencies may find the simplest route is to leave their funds on a trusted exchange – avoiding any of the risks of self-custody.
One such exchange, Coinbase, has successfully secured billions of dollars in user funds for several years and is widely regarded as a highly secure wallet option.
For investors with an interest in taking complete ownership of their assets, they will need to consider self-custody of their Ethereum assets. For this, there are a number of different wallet options.
The first is a “hardware wallet“. The hardware wallet is a physical device that stores the owner’s private key offline and is secured by a PIN number. This type of storage – also known as “cold storage” – is considered to be the most secure because without access to both the device and the owner’s PIN, it is impossible for the funds to be stolen or hacked. Hardware wallets can be protected even further using a number of advanced security techniques.
The second type of wallet is a “browser wallet“. These wallets are typically designed for storing funds that the user wants to have easily accessible. The browser wallet is installed as a Chrome or Firefox extension and can be secured with a password. Ethereum-based browser wallets like MetaMask are also very useful for interacting with Ethereum dApps, however they are not designed for high value storage.
The third type of wallet is a “smart contract wallet“. Popularized by ArgentHQ, these wallets live entirely on the Ethereum blockchain and as a result, inherit the network’s tried and tested security model.
Unfortunately, smart contract wallets are only as secure as the code that is written. Human failure and a lack of thorough audits could lead to security vulnerabilities that rear their head in the future. Unless the user is capable of auditing the wallet’s code, some trust must be placed in a 3rd party.
Each type of Ethereum wallet will come with a private key or “seed phrase” that must be kept secure. Someone who is in possession of the private key or seed phrase has the ability to transfer funds without permission. For this reason, safely securing the wallet’s private key is absolutely essential.
Which payment method should I choose?
The two key factors for determining which payment method to use are:
The price of Ethereum can move dramatically, once falling over 12% during a one hour period. To ensure a speedy purchase and to avoid missing your chosen price target, it is advisable to deposit at an exchange well in advance of any trade.
Depending on the country of residence, payment methods like Credit/Debit Card can take as long as 10 calendar days to reach a buyer’s account. This delay is long enough for investors to miss their buying window entirely.
Other payment methods on offer can be quicker. Bank transfers in the UK can take less than a day to arrive and some exchanges do offer instant deposits via Debit Card (although these typically come with limits).
Fees are also a key factor to consider when buying Ethereum. Fees can be applied at several different points within a single trade. These come in the form of:
- Banking Fees
- Platform Fees
- Exchange Rate Fees
Depending on your country of origin and the banking partnerships arranged by your chosen exchange, it is possible that there will be a fee at either the deposit or withdrawal (or both) stages of your purchase. This fee will vary by exchange and banking method and can range between zero and 5% or more. It is recommended that those buying ETH consider the country in which their exchange operates and investigates any banking fees before making a purchase. Bank transfers are typically the lowest cost methods of buying Ether while PayPal and credit card purchases often incur the highest cost.
Whether trading on an exchange or buying through a simplified platform like Coinbase, there is likely to be a cost incurred as part of the service offered. Exchanges typically charge a diminishing fee based on the volume traded which can be anywhere between 0.05% and 0.25% of the total purchase.
Exchange Rate Fees
For those purchasing ETH with US Dollars, Euros or Pound Sterling, there are plenty of exchanges that deal directly with these currencies. If your local currency is not available for buying ETH, it is still possible to make a purchase, however it will require the conversion of your local currency into US Dollars or an alternative. The process of exchanging to another currency will typically be handled by the platform itself, however each currency conversion will bring about a fee.
For those looking to trade Ethereum by buying and selling regularly, it’s important to consider the size of the market “spread”. The spread is the margin between the current buy price and sell price of an asset. Larger spreads require a greater appreciation in the asset’s price before being able to break even or turn a profit. The larger the spread, the more risk taken on by the trader.
Using an App to buy Ethereum
One of the more user-friendly routes to purchasing Ethereum is through a mobile application. These apps are available both on Android and iOS and are ideal for buying relatively small quantities of Ether, often doubling up as a secure Ethereum wallet.
The Coinbase app is one of the most popular, allowing users to not only buy and sell Ethereum with ease but to transfer and secure it too. The Coinbase app, which also features a portfolio dashboard, enables purchases for not just Ethereum but dozens of other cryptocurrencies.
The process for buying Ethereum via an app is no different to that of an exchange website. If anything, app purchases are benefited by the speed at which users can complete “Know Your Customer” (KYC) checks via the phone’s inbuilt camera.
On December 7th 2017, the Coinbase app was the most downloaded app on the Apple App Store.
Other cryptocurrency apps are available from the likes of:
Cryptocurrency exchanges also feature applications for more advanced users:
How To Buy Ethereum
Tips for Buying Ethereum at an Exchange
Exchanges often cater to both new buyers and experienced traders. Coinbase, for example, gives new investors the ability to buy Ethereum through an easy-to-use dashboard. For experienced traders, the Coinbase platform has a “Pro” version which gives access to many more features, lower fees and more control.
With low fees come great responsibility. Using a pro-style exchange has enormous upsides but a simple fat finger error can be catastrophic. Here are some of the best tips for using an exchange to buy Ethereum at the best price:
- Bids and asks: every market has a set of bids and a set of asks – quantities and prices of an asset that are set by buyers and sellers. These orders make up the exchange’s “order book”. The depth of the order book will be key to whether there will be any “price slippage” in a purchase. An illiquid order book (very few bids and asks) will result in a large amount of price slippage, meaning a large buy order could find itself becoming very expensive very quickly. Use a site like CoinMarketCap.com to find the most liquid markets for Ethereum.
- Limit vs market orders: market orders are sent directly to the order book and fill a purchase regardless of the price. Market orders work well at highly liquid exchanges, however if placed at an illiquid exchange, the price could dramatically increase after the first few asks are filled. Market orders are generally best avoided. Instead, most buyers and sellers will use limit orders. A limit order allows the buyer to set the maximum price they are willing to pay, filling their order up to that amount. This provides certainty over how much a particular order will cost.
- Market pairs: a market pair consists of two assets – the base asset and the quote asset. The price of a pair like ETH/USD (where ETH is the base asset and USD is the quote asset), shows Ethereum denominated in US Dollars. Choosing an exchange that offers your local currency is typically best practice, as this allows you to avoid any foreign exchange fees. Unfortunately, markets for AUD, CAD, GBP and others can be difficult to find. If they do exist, they may be illiquid, leading to significant price slippage. In this instance, it is best to purchase via a liquid market pair like ETH/USD and stomaching the exchange rate fee to do so.
If you would prefer to speculate on the price of Ether without the learning curve of a pro exchange, the process couldn’t be more simple. In this instance, a user can buy Ether in a similar way to how they might buy a product from an online store. Let’s take Coinbase as an example.
- Register at Coinbase
Register at your chosen exchange by submitting a few personal details. Full identity checks are often included later in the process when a deposit or withdrawal is made.
- Complete KYC/identity checks
Before/after depositing, or prior to withdrawal, exchanges must carry out “Know Your Customer” (KYC) and Anti-Money Laundering (AML) checks. Exchanges will require proof of address and photo identification to proceed.
- Choose a deposit method
Each Ethereum exchange will offer their own banking methods. These are often a mix of bank wire transfers, SEPA, credit/debit card, PayPal or Skrill payments among others. Each exchange will typically charge a fee for each deposit method; fee details are usually found in the footer of the exchange’s website.
- Make a deposit in US dollars, Euros etc
Bank transfer or credit/debit card
Deposits will take from as little as 24 hours to several days to arrive in your exchange account. Deposit times will vary from exchange to exchange and the deposit method chosen.
- Buy Ether with your deposited funds
Once your fiat currency has arrived in your exchange account, you can use this currency to purchase Ether. Beginner friendly platforms such as Coinbase have made this process very simple. Exchanges which make purchases easy have been marked above with a tick symbol under “Beginner Friendly”.
How To Buy Ethereum
How to Buy Ether Anonymously
It is a myth that Bitcoin and Ethereum are anonymous. Transactions on these blockchains are recorded to a public ledger and information about them can be viewed through a block explorer like Etherscan.io.
These transactions do not record personal information, however they do reveal data that can often be used to learn more about a user. Data like the amount sent, timestamp, wallet addresses and transaction history can all be used to build a profile about the sender and receiver. It is not uncommon for these profiles to enable the discovery of a user’s personal information.
The public nature of Ethereum has led to the formation of blockchain analytics firms like Chainalysis. These companies work with individuals, institutions and governments to reveal detailed insight about transactions on the Ethereum and Bitcoin blockchains. There is, of course, a place for companies like these to prevent criminal activity, however for many, the need to remain anonymous makes for good Operational Security (OPSEC) hygiene.
Fortunately for buyers who are concerned about financial privacy, there are ways to remain anonymous when purchasing ETH and making subsequent transactions.
For small purchases, it is possible to buy Ether through an exchange such as Binance with very little or no personal ID required. However, these exchanges still require email addresses and phone numbers at sign-up.
What are the options for a truly anonymous purchase?
As discussed previously in this article, it is possible to buy ETH with cash using a peer to peer exchange like LocalCryptos. LocalCryptos allows buyers to meet sellers in person and exchange cash for ETH in complete privacy.
It is also possible to use LocalCryptos to buy ETH via an online bank transfer, which for the most part, preserves a user’s anonymity. However, bank transfers do reveal some personal information to the seller, so it is important to buy from a trusted party with a high rating on the platform.
Purchasing ETH anonymously is an important first step, however the transactions that are made subsequently can, without intention, reveal personal information about the sender and receiver. Unlike Bitcoin, whose system is based on “Unspent Transaction Outputs” (UTXOs), Ethereum uses account balances. Bitcoin users can easily create new addresses for sending and receiving payments (ensuring that each transaction has no historical links), while Ethereum users must create new accounts – a very difficult process to manage, particularly when using web3 applications.
There are however, a number of privacy features already being built on Ethereum to help resolve this issue. One approach is through the use of an Ethereum mixer like Tornado.cash. These mixers use non-custodial smart contracts to pool deposits from multiple parties. A user’s deposit can then be withdrawn to a different address, with the pool breaking any link to the original deposit.
One of the drawbacks to mixers is that they rely on a large number of deposits (the “anonymity set”). The complexity of these smart contracts also make for a relatively high gas cost, although the Ethereum “Istanbul” upgrade of November 2019 has alleviated this somewhat.
Other anonymity features are also under development. Most notably, consultancy giant, EY, has open sourced the firm’s Nightfall project, a protocol for private transactions on public Ethereum.
Is LocalCryptos the only place to buy ETH anonymously?
Unfortunately, there are very few peer to peer exchanges for buying ETH. Alternatives to LocalCryptos include:
- Peer to peer purchases through friends or family
- Cash purchase of Bitcoin via LocalBitcoins.com followed by trading BTC for ETH
How To Buy Ethereum
Safety Tips for Buying Ether
EthereumPrice.org calculates the price of ETH using a “volume weighted average” methodology. This calculation ensures that exchanges with higher trading volumes for a particular market (i.e. ETH/USD) have their price more prominently reflected in the average.
For this reason, price indexes from EthereumPrice.org, Messari and CoinMarketCap will invariably differ slightly as the exchanges used in the calculation are not identical.
You can easily verify the price of ETH by checking that the exchange you are using does not deviate too far from the average. If an exchange is trading “at a premium” above the market, it is best to look to another exchange if there is one available.
Secure ETH Storage
After successfully purchasing Ether from a trusted exchange using fiat currency (USD, EUR, GBP etc), funds can be stored on the exchange itself or in a secure wallet. For small purchases of Ethereum, users may wish to store their crypto on the exchange for ease-of-use.
For larger purchases, it is recommended that the funds are moved into a secure wallet. The beauty of storing funds in a secure wallet is that the risk of theft is drastically reduced so long as you take precautionary measures to protect your private key (essentially your password).
When it comes to secure wallets, there are hot wallets like MetaMask, My Ether Wallet (MEW) and Trust Wallet, and cold wallets like Ledger, Trezor and KeepKey. The difference between hot and cold wallets is whether or not they are “internet connected”.
You can think of hot wallets as being “always on”, since they are accessed through an internet browser. On the flip side, cold wallets are offline and must be connected to a computer in order to access the funds. Both wallets are password protected and can be backed up using seed phrases. Cold wallets are more secure than hot wallets, while hot wallets are generally more convenient than cold wallets.
Cryptocurrency markets are still nascent and as such they suffer from a lower regulatory environment than their traditional stock market counterparts. This means that exchanges can pop up virtually overnight, offering out of this world bonuses and discounts to try and entice people to deposit their money.
While there are rare situations when it’s advantageous to be one of the first traders on a new exchange, more times than not the risks drastically outweigh the rewards. This was demonstrated with the Cryptopia exchange, where in the crypto-boom of 2017, the exchange suddenly closed, leaving traders out of pocket.
As a general rule of thumb, remain skeptical of anything that is too good to be true. One popular scam is via one of the many fake “ETH giveaways” that pervade social media. In these giveaways, a user posts something to the effect of “to celebrate this event, we are giving away 1,000 ETH”, followed by another user replying to the post saying “Wow I can’t believe this worked!”.
It should go without saying that these are scams and that the users are fake. No one is ever “giving away” any sizeable amount of free ETH. These scammers have notoriously gotten better over the years and tend to gain trust by mimicking celebrities in ingenious ways. If ever in doubt, walk away or consult a trusted third party about the honesty of the campaign.
Another common place for scams to proliferate is on Telegram. Nowadays, all major channels have moderators that are pretty quick to recognize and ban scammers, but there are still sophisticated scammers that will go to great lengths to impersonate a colleague. If a friend ever reaches out asking to “lend them some ETH”, give that person a direct call. 99.9% of the time they will confirm it is a scam.
How To Buy Ethereum
Ethereum as an Investment
What is Ethereum?
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 is the currency of the Ethereum blockchain (although “Ethereum” is used interchangeably to describe both the currency and the blockchain) and is issued to those machines that carry out this work. Ether can then be traded easily for fiat currencies like US dollars or Euros, or it can be held as a speculative asset or for its utility. The Ethereum network now has many hundreds of 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 value. The price of Ether peaked in January 2018 at an all time high of over $1400 before crashing to $85 several months later. 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 venture capitalists through to retail.
Why Invest in Ethereum?
There are several reasons why a user might choose to buy or invest in Ethereum, here a handful of examples.
Buying Ethereum as an investment
- Accessing token sales and other blockchain investments
- Hedging against the incumbent fiat system
- Leveraging ETH through protocols like MakerDAO
Buying Ethereum for use
- Access to decentralized stable cryptocurrencies like DAI
- Access to decentralized synthetic assets
- Collecting and trading digital items
Decentralized Finance or “DeFi” is a term used to describe financial applications that run on the Ethereum blockchain. These applications are capable of performing traditional financial tasks but without the need for a middleman or third party.
Instead, DeFi applications operate as a collection of smart contracts built on Ethereum, moving value from wallet to wallet using a set of predefined instructions that cannot be altered. There is now a vast array DeFi applications that allow users to earn interest or create leverage with their ETH.
A Brief DeFi Example
The DeFi market is soon to cross $1 billion with two major applications leading the market, MakerDAO and Synthetix. MakerDAO, which allows users to borrow the stablecoin DAI (pegged to the US Dollar) using ETH as collateral, introduced the “DAI Savings Rate” (DSR) in November 2019. This DSR allows users to earn interest on DAI stored in a smart contract. The token is capable of holding a stable value due to the way in which the DAI token is issued.
In order to mint DAI, a user must first lock some collateral in the form of Ether. The user can then draw out DAI as a percentage of the collateral locked up – the more collateral locked, the more DAI can be drawn.
To reclaim the collateral, the minted DAI is simply returned to its associated smart contract (known as a Vault). As the price of DAI fluctuates around its 1 dollar peg, users are incentivized (through the stability fee and DSR) to burn or mint tokens as a mechanism to ensure its price stability.
The system is far more complex than this basic explanation; it involves not only some sophisticated economic games but a system to govern each colletaralized position, liquidating those positions which become overdrawn should the price of Ether fall.
The main takeaway as a potential investor and buyer of ETH, is that MakerDAO is one of a number of DeFi applications that are rapidly gaining traction in the space. Over 2.7M Ethereum tokens were locked as collateral across all DeFi applications in December 2019 – over 2.5% of the total supply of Ethereum.
Other DeFi applications including Uniswap, Compound.finance and Augur-based applications like Guesser.io also exist, with many of these attracting significant liquidity.
Users are increasingly buying and locking Ethereum to take advantage of these DeFi applications and investors would do well to pay attention to this trend.
Is it too late to Buy Ethereum?
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 possible that Ethereum’s value will only stabalize once the currency has achieved its goal of being a globally decentralized 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 it is today.
Major network upgrades for the Ethereum blockchain are also yet to be released. These upgrades will reduce the supply of Ether tokens while also increasing the capacity of the network by many orders of magnitude.
Of course, these network upgrades work in both directions; the risk of a failure in any software update could be catastrophic, however the upside of a successful upgrade could equally be enormous. For this reason, it would be sensible to consider Ethereum a more risky investment than that of Bitcoin, however there is arguably a greater potential for higher returns.
ETH Investment Strategies
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.
Buy and hold
One of the most common investment strategies for Ethereum is “buy and hold”. If Ethereum is to replace even a fraction of fiat currency or the derivatives market, its value will be far greater than it is today.
Given the volatility of Ethereum, those looking to buy may want to consider “dollar cost averaging“. With this approach, an investor would split their total investment into chunks, acquiring Ether over a chosen length of time and buying in at an average price.
Dollar cost averaging can reduce the level of volatility that an investor is exposed to in the short term.
Decentralized Finance has also opened the door to income-generating “hold” strategies. Adding ETH to the Uniswap liquidity pool or lending it through Compound.finance are just a couple of ways to generate an income with idle Ether.
Buy and diversify
It is safe to say that predicting the future price of Ethereum is much like predicting the weather in 5 years time. While it is unlikely that Ethereum will disappear anytime soon, 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 Binance and Kraken. This type of trading compounds risk on an already volatile asset and should be treated with caution. Let’s not go there.
ETH 2 Economics
Ethereum 2.0 or “ETH 2” is a major network upgrade for the Ethereum base layer which is planned to begin in Q1 2020. The upgrade combines a number of protocol changes, many of which have been in development for several years and are tipped to greatly influence Ethereum’s position in the market.
When choosing to buy ETH as an investment, it’s important to understand how this major network upgrade will alter Ethereum economics, and how the demand and supply of Ether is likely to change as a result.
Proof of Stake
The core component behind ETH 2 is the move from Proof of Work to Proof of Stake. Instead of mining the Ethereum chain for block rewards, users will stake Ether in the network and earn an interest rate for doing so.
Through some clever mathematical proofs and economic incentives, Proof of Stake is the mechanism that will secure the Ethereum base layer with minimal electricity requirements and maximal distribution – users are expected to be able to stake ETH with the processing power of a Raspberry Pi.
How much will I earn by staking ETH?
The annual yield for staking ETH will stabalize somewhere between 2% and 34% (it is too early to narrow this down) depending on a number of factors. A full breakdown of ETH 2.0 economics and the various scenarios that could take place can be found here.
How secure is staking ETH?
Proof of Stake will operate at the base layer of Ethereum and therefore the security and reliability of Proof of Stake is of the utmost importance. A security issue in the Proof of Stake mechanism – while negative for the perception of Ethereum – would therefore be resolved at any cost. Staked ETH will be the lifeblood of Ethereum and treated as so. It is possible, therefore, that Proof of Stake will provide the “risk free rate” of blockchain investments.
How much will I be able to stake?
Anyone will be able to stake as much or as little as they chose. For those validating Ethereum using their own ETH 2 client, the amount staked will need to be at least 32 ETH.
With the emergence of “staking pools” like Rocket Pool, it will also be possible for users to stake fractions of an Ether.
For the first few years at least, staking Ether will require a good understanding of command line interfaces and basic PC components. However, those who are not interested in staking may understandably be interested in the price speculation surrounding ETH 2.
ETH 2 Demand
The amount of ETH staked in the network will stabalize somewhere between 500,000 ETH (the minimum required to provide security to the chain) and 110,000,000 ETH. Annual yields for staking ETH will fall somewhere between 2% and 34% as described above.
The more validators online, the lower the annual yield and so it is likely that the yield will trend to the lower end of the range over time. If Proof of Stake is able to fulfil the industry’s role as a “risk free rate”, the demand for staking ETH may well drive the price of the currency upwards.
ETH 2 Supply
The circulating supply of ETH will fall as more ETH is locked in the blockchain’s staking contract. Depending on the demand for staking, it is possible that over half the total amount of ETH ever created will be locked in staking contracts. Proof of Stake will also drop issuance of new ETH significantly, decreasing the annual inflation rate of Ether from roughly 2% to as little as 0.5% or even negative. The total inflation rate of Ethereum will be dependent again on the number of stakers but also on the amount of transaction fees burned (see EIP 1559).
How To Buy Ethereum
Wallet Security Tips
Whilst rare, there have been several horror stories of users losing thousands of dollars in Ether from a poor understanding of Ethereum wallets and transactions. 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 is 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.
Securing Ethereum – The Easy Way
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 has been 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 wealth are you willing to leave in the hands of that exchange?
Whilst it is unlikely that your coins will be stolen or that the platform will become insolvent, it is a 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 to access those coins. 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 Ethereum - The Hard Way
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 is unforgiving and securing Ether properly is critical. Those looking for an easier security option may wish to hand over their wallet management to a 3rd party – details of which can be found above.
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 unauthorized access to either 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.
Additional Security Measures
Whether you choose to store your coins on an exchange, desktop/mobile 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 multi-signature wallet allows 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.
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 a One Time Password (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 Ethereum exchange “protected” by SMS 2FA.
How To Buy Ethereum
Ethereum Price History
Past performance does not predict future results however it does put the market in some context. The price of Ethereum has fluctuated wildly since its Initial Coin Offering which valued ETH as little as $0.10. With an all time high of $1385.02, Ethereum has risen and fallen in enormous magnitudes, creating a frothy market of speculation in its wake.
The price history of Ethereum tells one story – unimaginable gains and losses have been possible in the past and could well continue into the future. This asset is one of the most volatile and exciting of all.
How To Buy Ethereum
ETH 2.0 and Future Developments
Making a decision to buy Ether today requires a good understanding of how the Ethereum network will look tomorrow.
The future for Ethereum is by no means certain, however there are a number of important developments that are likely to have a positive impact on the demand and price of ETH.
The following upgrades all apply to “Layer 1” infrastructure in the Ethereum stack. While developers are working on all layers of the stack across countless different teams, it is the infrastructure layer that will unleash the blockchain’s potential in the future. These categories aim to improve capacity and security on the network.
In 2018, a number of protocol upgrades were combined together under the umbrella term Ethereum 2.0. This term describes the implementation of Proof of Stake and Sharding as well as a number of other key concepts that help improve the capacity and scalability of Ethereum.
Ethereum 2.0 is expected to begin its Phase 0 in Q1 2020 with the launch of the beacon chain deposit contract.
While Phase 0 of Ethereum 2.0 is expected to begin shortly, there are a number of teams working on improving the existing Ethereum blockchain referred to as “Ethereum 1.x”.
Most interestingly among the 1.x improvements is EIP 1559, which introduces the burning of ETH to every transaction.
Ethereum Improvement Proposals (EIPs) describe the motivation and specification for altering the Ethereum network in some way. EIP 1559 is a proposal to change how transaction fees (gas fees) are calculated on the network.
One of the side-effects of EIP 1559 is the “enshrining” of Ether as the payment currency for gas on the network. Under existing conditions, gas fees can be paid for in all manner of tokens, removing the need for ETH to fund the network. EIP 1559 will force a small “BASEFEE” amount to be paid in ETH, creating a demand for Ether that grows with network usage.
Vyper Programming Language
The Solidity programming language, created by Gavin Wood specifically for Ethereum, has been hugely effective in building the first generation of Ethereum smart contracts. However, in being the first of its kind, it also revealed a number of unexpected challenges with smart contract programming.
Vyper is a new smart contract programming language which aims to resolve a long list of issues faced by Solidity. Vyper is a “pythonic” (Python-style) programming language with numerous benefits for security, auditability and simplicity. Vyper documentation can be found here.
Ethereum WebAssembly (eWasm), is a subset of WebAssembly, a low-level instruction set which is not yet widely in use. WebAssembly is incredibly fast, drastically improving the speed at which operations are executed and in the case of Ethereum, will enable developers to build smart contracts in popular programming languages like C, C++ and Rust.
Ethereum and Bitcoin are two separate cryptocurrencies. They are often compared to each other due to their popularity but there are actually very few similarities. Bitcoin is used for payments while Ethereum is used for payments and smart contracts. Bitcoin is limited to 21 million coins while Ethereum has a supply of coins that will expand indefinitely (currently at 2 ETH every 15 seconds). There are many more differences between the two and both have very different investment potentials.
When comparing cryptocurrencies, it is advisable to compare coins within a category. For example, comparing Ethereum to another smart contract platform like EOS would be far more relevant than comparing Ethereum to Bitcoin.
Buying Ethereum can range from a few clicks in a webapp to a major networking effort, the choice is yours. The content on this page will go a long way to helping you get started, however the recommendation for new users is to begin with a simple exchange like Coinbase.com. Coinbase makes buying Ether a very straightforward process and from there you can experiment with small transactions before eventually setting up an Ethereum wallet of your own.
This is the million dollar question that is asked not just in the cryptocurrency space but across all financial instruments. The best time to buy is the moment you’ve decided that the fundamental value of Ethereum will grow in the future. Some investors prefer to avoid short term volatility by “dollar cost averaging“.