I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.
See all posts Frank GogolShould I Buy Ethereum?
Updated on April 10, 2024
Written by
Written by
Reviewed by
Rohit Mittal
Reviewed by
Rohit Mittal
Rohit Mittal is the co-founder and CEO of Stilt. Rohit has extensive experience in credit risk analytics and data science. He spent years building credit risk and fraud models for top U.S. banks. In his current role, he defines the overall business strategy, leads debt and capital fundraising efforts, leads product development, and leads other customer-related aspects for the company. Stilt is backed by Y Combinator and has raised a total of $275M in debt and equity funding to date.
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At a Glance: The value of Ethereum is determined by supply and demand dynamics. As an inflationary currency, the constant addition of new coins through mining and usage affects its price. The more people demand Ethereum and use its services, such as transactions and decentralized applications, the more its value increases. However, Ethereum is highly volatile, making it a risky investment. It should be approached with caution and not constitute a significant portion of one’s portfolio. It is important to have emergency cash reserves and maintain a balanced investment portfolio.
Ethereum is the second most popular cryptocurrency with a more than 20% share of the crypto world. It has shown promising results by growing over 500% in its value recently and is not showing any signs of losing to bitcoin. Besides bitcoin, no other cryptocurrency comes even close to it. Being a highly traded cryptocurrency, it is famously used for the purchases of NFTs. But is it the right time to invest in this cryptocurrency? Should you be buying and storing Ethereum now? Read on and find out.
What Gives Ethereum Value?
Ethereum is an inflationary currency. That is, there is no fixed amount of Ethereum in the world. As long as people keep using it and miners keep mining the coins, the newer currency will be added to circulation all the time. Hence, the price of this crypto coin depends entirely on the supply and demand equilibrium.
When more people demand it, its price goes up, and its price falls when there is less demand for it. Of course, it also depends on the number of coins in circulation at the time. Mostly it is priced depending on the amount of trading is done on any given day. This makes it a highly volatile cryptocurrency.
The Ethereum blockchain offers many services. And since it is an inflationary currency, the more people opt for these services, the more they are likely to increase the value of this currency. For example, for every transaction done on the Ethereum blockchain, there is a transaction fee and a “gas fee”. These fees are levied as commission to the miners for verifying the transactions. The gas fee is applied in compensation to the energy required to run the computers that make this technology work. The higher the number of transactions, the better the transaction fees and the more stable the gas prices as well.
Understanding Ethereum Volatility
Understanding the crypto market is extremely difficult. It is a relatively new investment avenue, and there is still a lot of development to be expected in this segment. Ethereum was a project that started in only 2015 and is yet to really gain the sort of stability equity stocks show.
This makes it an extremely risky investment because there is no data other than people’s perception of it and its use in the market. For example, in the whole year of 2016, Ethereum was only bouncing around $5 and $15 all year round. Then, out of nowhere, it shot up to $1500 in 2018. Soon after that, it fell to $100 levels by December 2018. It never again crossed $500 till the end of 2020. If you had invested at the beginning of 2016, you’d have gotten nothing but anxiety looking at the price volatility. And if you had taken it out by 2017, you’d have missed out on the price surge till 2018.
And looking at over a year of its gains, if you invested at the high of 2018, it would have fallen to less than ¼ th of your portfolio and made you frustrated. And if you had thought like last time, if you hold it long enough, you’d regain your money, for two years, it would constantly be around the same price before finally taking a break. Most people have exited it in that period. Those who did not are millionaires right now.
Hence, given the high volatility of this segment, it should be a cautious investment.
How Does Ethereum Fit Into Your Existing Portfolio?
Ethereum technology is behind the working of decentralized applications. These applications include:
- Direct peer-to-peer transaction.
- Take insurance without the services of an insurer
- Conduct payments without a centralized authority
- Music streaming where the money goes directly to the artist instead of the recording studio
- Buying and selling NFTs
- Buying and selling game tokens within the game
Most of these are pretty complex to understand unless you are involved in them. Thus, if you are investing in this, you should know that you are betting on people adopting this technology and using it more and more. The more people adopt this technology, the higher its demand and the higher the price. However, due to market fluctuations and its diversified range of opportunities provided, if enough of these fail, the coin, on the whole, is likely to fail. So never invest more than 5% of your portfolio in this cryptocurrency.
Usually, these days, the go-to investments lie in stock markets for any investor. Only a select few people are willing to invest in the crypto market. If that’s how you plan, then you should do it. After all, the crypto market doesn’t necessarily depend on the stock market. So, it could protect your investments by adding an extra layer of diversification to your existing stock market shares.
How Much ETH Can You Afford?
Investment is ultimately a cash-burning game. Once you buy Ethereum, you should not expect to take it out anytime soon. The rule of thumb for any investor is to have enough emergency cash lying around to last them a long time. Without securing this cash, you should never try to invest. Typically, the right amount to secure would be at least six months’ expenses if you’re employed and 12 months’ expenses if you’re a business owner.
On top of this, it is never a good idea to invest all your money into one asset, in this case, Ethereum. So, make sure you study and make the right choices, and invest more into other classes. Trying to maintain a balanced portfolio is essential. So it would be best not to afford Ethereum with all your money at one go.
Finally, if you’re skeptical about the market dynamics or are new to crypto investing and do not really understand it all, you could just start by buying small quantities over the course of time and then decide to increase the amount you purchase.
Ultimately, it is in your hands how much of Ethereum you can afford. Remember, any investment you make, you should be ready to lose that money completely and still be financially well-off. Investments have proven to both build and destroy wealth simultaneously, more so in the crypto market.
Read More
- How to Make Money with Cryptocurrency
- How to Withdraw from Binance
- How to Transfer From Coinbase to Coinbase Pro
- How to Transfer from Coinbase to Binance
- How Does Cryptocurrency Gain Value?
- How to Read Crypto Charts
Final Thoughts
Ethereum is a blockchain technology that is used as a payments platform worldwide. Its currency is Ether, and it is an inflationary currency. That means its value mainly depends on the supply and demand curve of the Ethereum blockchain. However, it is a volatile investment opportunity and should not be treated lightly. Its prices have historically been unpredictable and highly volatile, and that is why it is not advisable to invest more than 5 – 10% of your entire portfolio in this segment. One should not spend all their savings on this, rather make sure they have access to an emergency fund and only then invest in it over and above that emergency fund. It is perfect for NFT investments as well.
Frank Gogol
I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.