How to Invest in Ethereum (as a Total Crypto Newbie)

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

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

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

What is Ethereum?

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

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

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

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

How Ethereum differs from Bitcoin

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

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

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

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

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

Should you invest in Ethereum?

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

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

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

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

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

Pros

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

Cons

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

How to invest in Ethereum

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

Investing apps

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

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

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

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

Cryptocurrency exchange

You can also use one of the best cryptocurrency exchanges to invest in Ethereum. In this case, you can buy ether using a debit or credit card, or by connecting your bank account to the exchange and buying coins.

Some of these trading platforms are considered centralized exchanges because they use a middleman or third party to facilitate the trade. On the flip side, peer-to-peer exchanges are considered decentralized.

There are a number of cryptocurrency exchanges, so it’s important to do some research to find the right one for you. To get started, check out our Kraken vs. Coinbase vs. Gemini comparison to determine if one of these exchanges can make sense for you.

When you invest in Ethereum using a cryptocurrency exchange, you usually pay a flat transaction fee. Whichever exchange you pick, always pay attention to the fees associated with the transactions so you know what you’re paying.

PayPal

PayPal now offers the ability for you to buy certain popular cryptocurrencies, including Ethereum. You need to have PayPal Cash or Cash Plus in order to make cryptocurrency purchases. If you have these accounts, you can buy ether and hold it for as long as you want.

A note about digital wallets

In order to hold Ethereum, or any other cryptocurrency, you need a digital wallet. Your digital wallet needs to be compatible with the currency you choose. For example, not all digital wallets support all cryptocurrencies. If you want to hold ether in a digital wallet, it needs to be compatible with the Ethereum blockchain.

There are two main types of wallet: hot and cold. A hot wallet is one that’s connected to the internet, and one where you might have a username and password. Some cryptocurrency exchanges, like Coinbase, offer digital wallets that make it easy to trade cryptocurrencies.

A cold wallet is one that isn’t connected to the internet and your security keys are kept offline. In order to access the wallet, you need to know the address and keys associated with it. These wallets make it harder to trade cryptocurrencies because they require extra steps for access.

In order to cash out, you might need to send your coins from one wallet to another, usually on an exchange, or use some other mechanism for receiving fiat currency, like the U.S. dollar, in exchange for your ether. Once you have the fiat currency, you can then transfer it to a bank account to complete your cash-out.

For example, if I want to liquidate some of the ether I have in my cold hardware wallet, I would plug it into my computer, and then direct my wallet to send a coin to my Coinbase wallet address. Once in my Coinbase wallet, it would be relatively easy to exchange my ether for U.S. dollars. Then I can transfer that money from my Coinbase account to my connected bank account at a traditional financial institution.

FAQs

Bottom line

Any investment comes with the risk of loss, and learning how to buy cryptocurrency and invest in Ethereum or any other coin could come with even bigger risks. Because digital assets are so new, they are more volatile in price in the short term, and it’s hard to see which — if any — will become widely adopted in the long term. When investing in Ethereum, be careful to limit your exposure and risk only what you can afford to lose.

Disclosure: The author of this article has positions in Bitcoin, Litecoin, Monero, Ethereum, and Dogecoin.