Ethereum 101: Should you Invest in Ethereum in 2021?

If you’re mildly familiar with the cryptocurrency landscape, you’ll know that it’s dominated by two major cryptos: Bitcoin and Ethereum.

Bitcoin is arguably the larger and more valuable one, with a market capitalisation of US$629.57 billion according to CoinMarketCap as of June 8, 2021. Meanwhile, Ethereum trails behind Bitcoin with a market capitalisation of US$300.26 billion.

But Ethereum’s cryptocurrency, Ether (ETH), is growing in popularity as a more accessible and seemingly more stable alternative to Bitcoin.

In this article, we’ll take a closer look at Ethereum’s fundamentals to find out if you should invest in Ethereum rather than Bitcoin.

 

Ethereum’s price chart since its beginning

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Living in the shadow of Bitcoin has its advantages. While Bitcoin’s price fluctuated wildly in the 2018 and 2021 crypto boom and crash, Ethereum has been relatively more stable.

For example, in May 2021, Bitcoin crashed by 37% after Elon Musk said that Tesla will not be accepting Bitcoin as payment. Ether, on the other hand, fell by only 11%.

But apart from its relationship to Bitcoin, Ethereum also has its own merits, according to its believers.

Tegan Kline, co-founder of blockchain software company Edge & Node said via Bloomberg that Ether (ETH) “will most likely exceed Bitcoin at some point in the future” and that “Ethereum will be superior when it comes to innovation and developer interest”.

It’s also worth mentioning that large government bodies and financial institutions also seem to like Ethereum more than Bitcoin. Case in point: the European Investment Bank (EIB) seeks to launch a 100€ million (S$161.3 million) digital bond on the Ethereum blockchain network.

What is Ethereum?

should you invest in ethereum

From the outside, Ethereum might look like “another Bitcoin”, but it’s actually a different animal.

The original cryptocurrency, Bitcoin, was meant to be a digital cash replacement without the middleman — banks, card service providers (VISA/MasterCard/Amex), etc — controlling or facilitating money transfers.

Ethereum, on the other hand, is not simply a cash replacement. It takes Bitcoin’s principle of decentralisation and applies it to a wider scope — into a software platform where developers can build decentralised applications (dApps).

 

Ethereum is also usually the basis for non-fungible tokens (NFTs), where users can create one-of-a-kind digital tokens with unique cryptography and signatures to be collected and sold.

 

There is no middleman or regulator within this digital ecosystem. Instead, they are self-regulated by “smart contracts” — lines of code that execute transactions, commands or agreements within these dApps according to the master Ethereum protocol.

 

So far, so good. But what does this have to do with Ether (ETH), the cryptocurrency? Well, Ether is actually the cost of using the Ethereum network, and it plays an important role in keeping the network secure.

 

What’s the point of the Ethereum network?

Hang on though — why do we need an Ethereum network of decentralised apps?

 

The case for dApps is simple: to hand control of data back to its users. Right now, our data is controlled by the likes of Facebook, Google and Apple. But what happens when these tech behemoths decide to misbehave and misuse our data for their agenda?

 

Here’s an example: We’ve seen what happened in Facebook’s Cambridge Analytica scandal, which involved manipulation of the 2016 US Elections, resulting in Donald Trump becoming the president of the US.

 

Advocates believe that decentralisation can curb the power that these tech giants have over our data. In the ideal Ethereum world, governance would be in the form of automated “smart contracts”, with parameters that are purely objective — not corrupted by fallible humans & organisations.

 

How does Ether keep Ethereum secure?

invest in ethereum in 2021

The Ethereum network is set up such that its currency, Ether, is also a security feature.

First, to use the Ethereum network, you need to pay a transaction fee in the form of Ether. These transaction fees update dynamically — the more congested the network is, the more Ether (ETH) you pay to use the network. This system prevents spamming, accidental (or hostile) infinite loops and other computational wastage.

 

Furthermore, in order to attack the Ethereum network, you would need to have control of 51% of Ethereum’s market cap at any given moment in time.

 

Ethereum’s market cap is currently ~US$313 billion (~S$413 billion), so to execute that attack for an hour would cost the attackers about ~US$1.6 million (~S$2.1 million). In other words, the cost is so high that it’s probably not worth the effort and resources to enact a 51% attack.

 

This line of defence helps preserve Ether’s value, because, as we all know, any sort of hack or cyberattack-related news would result in a significant fall in any cryptocurrency’s value.

 

How to mine Ethereum?

Ethereum uses a Proof-of-Work (PoW) algorithm much like Bitcoin’s, which means that Ether can be mined. Here’s how it works:

New Ethereum transactions are lumped into blocks.

New Ethereum blocks are validated via smart contracts from many different nodes or computers in the network.

To validate these new blocks as confirmed transactions, the user, or miner, has to use computing power to generate unique, one-way-only cryptographic information called hashes.

In addition to generating hashes, miners have to “play a game” of “Guess the Correct Nonce” to add to their new block of hashes.

Successful miners get rewarded with 2 Ethers (ETH).

But, as with mining any sort of cryptocurrency, you would require a HUGE amount of computing power, with special devices called application specific integrated circuits (ASICs).

 

ASICs have at least twice the hash rates compared to modern graphics processing units (GPUs), and at least four times the hash rates compared to central processing units (CPUs). They cost anything from US$2,500 for the basic models, to US$10,000 for an advanced one.

 

Given the rather paltry reward of 2 ETH, which is about ~S$7,000, it’s not really worth mining Ether yourself if you don’t have economies of scale or access to super high-tech equipment.

 

What is Ethereum’s environmental impact?

Similar to Bitcoin, mining Ethereum places considerable stress on the environment:

Ethereum’s Energy Consumption
Time Electrical Energy Used Carbon Footprint Generated Electronic Waste Generated
Per Year 48.47 TWh

Comparable to the power consumption of Iraq

23.02 Mt CO₂

Comparable to the carbon footprint of Lebanon

11.12 kilotons

Comparable to the e-waste generation of Luxembourg

Per Transaction 98.96 kWh

Equivalent to the power consumption of an average U.S. household over 3.34 days

47kg CO₂

Equivalent to the carbon footprint of 104,168 VISA transactions or 7,833 hours of watching YouTube

111.5g

Equivalent to the weight of 1.72 ‘C’-size batteries or 2.43 golf balls

Source: Digiconomist

These figures are better than Bitcoin’s, but not by much — Ether only has about 5% to 6% smaller carbon footprint.

It’s worth noting that Ethereum is transitioning to Ethereum 2.0, which is supposed to be more energy-, time-, and cost-efficient by moving to a Proof-of-Stake (PoS) model. This means that you put up your Ethers (ETH), or pool it, onto the network for users around the world to check against when it comes to validating new blocks.

 

Is Ethereum better than Bitcoin as an investment?

Even though they’re both cryptocurrencies, it’s almost impossible to compare Ethereum and Bitcoin apple-to-apple. Here we recap the main differences.

Ethereum Bitcoin
Purpose To decentralise data To decentralise cash
Method Decentralise data by creating a transparent and trustless computing platform with humanless smart contracts executing protocols Decentralise cash by providing a transparent and trustless payment platform with records of transactions on the public blockchain
Cryptocurrency Ether (ETH), currently worth ~US$2,710 Bitcoin (BTC), currently worth ~US$37,000
Purpose of cryptocurrency To provide a singular currency for transactions to occur on the Ethereum network, and to deter consolidation of power from attackers of the network To make payments for real-world goods, and to deter financial institutions, regulators or governance from consolidating and controlling money
Transaction time 15 seconds to 5 minutes 10 minutes
Supply cap Uncapped 21 million
How it maintains its value Ether (ETH) sink via Ethereum transaction fees Arbitrary supply cap and Bitcoin halving events

As the “original” cryptocurrency, Bitcoin is the more recognised of the two, with the most top-of-mind recall. It has also gone farther in terms of mainstream merchant acceptance.

But Ethereum’s network is more versatile, with a wider scope of application than Bitcoin. This has also made Ethereum more attractive to government bodies, who are now seeking to co-opt Ethereum — instead of trying to regulate it like Bitcoin.

In addition, Ethereum 2.0 is an attempt to address the environmental impact of cryptocurrency — an issue that now plagues Bitcoin’s journey into the mainstream.

Finally, Ether is also the newer of the two cryptocurrencies with a much lower market value than Bitcoin, making it the more accessible crypto.

But Ethereum is uncapped! Isn’t that bad?

Unlike Bitcoin, Ethereum does not have a supply cap. Check out its numbers from CoinMarketCap:

Cryptocurrency Price Market Cap Circulating Supply Supply Cap
Ether (ETH) ~US$2,710 ~US$314 billion ~116m ETH Uncapped

At this rate, you’re probably wondering why Ethereum is uncapped, whilst Bitcoin is. After all, isn’t scarcity the main reason why Bitcoin is so highly valued?

Instead of a total supply cap, Ethereum uses a yearly supply cap system, where the annual maximum supply is 18 million Ethers (ETH). Ethereum’s founder, Vitalik Buterin, argued that having a capped model would encourage users to ‘HODL’, or hoard their cryptocurrency instead of using it.

To prevent ETH’s value from falling due to increase in supply, the Ethereum network has a built-in “sink” of Ether, comprising the transaction fees people pay to use the network.

 

How to buy Ethereum?

Before you start buying Ether — or any other crypto, you must first understand that crypto is highly volatile and risky.

Only when you’re comfortable enough with the risks and uncertainties associated with crypto, should you consider buying it.

The easiest and cheapest way to buy Ether (ETH) would be through a cryptocurrency exchange such as Binance and Coinbase.

Buying into cryptocurrencies requires a sort of faith in how blockchain technology could revolutionise our lives.

Remember, cryptocurrency is still in its infancy and is incredibly volatile. The size of the crypto market is also TINY compared to stocks, bonds and commodities like gold.

If you prefer to invest in assets that have a proven track record, then you should NOT buy Bitcoin, Ether, or any other cryptocurrencies.

However, if you do believe in the potential that Ethereum brings, make sure you put in amounts that you can afford to lose, as a way to diversify your investments aside from real-world products like stocks and ETFs.

 

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