What You Need to Know about Ethereum
as an investor.
I am starting to believe that I may lack the intellectual capacity to understand what exactly is going on in the crypto-world. You can only imagine the amount of time and energy used just trying to lay a finger on this. (If you’re a pro at this, please correct me if I’m wrong)
Today I’ll try to explain the second largest cryptocurrency, Ethereum, in the least painful way. I have gathered my knowledge through devouring all the great content put out by amazing smart people. I am definitely not ahead of the curve; as usual I just want to make sense of what I have learned.
What is a Blockchain?
You may watch this video explaining the concept of Blockchain; super easy to understand:
What Is Ethereum?
Have you ever tried making pizza before? Ethereum is like your pizza crust, the base layer. With the base layer, you can make any kind of whacky pizza you want, base on your creative imagination. As long as you have access to the base layer, you will be able to create any pizza you want.
In business context, Ethereum is known as the “Excel of the Blockchain”. Do you know how many people actually use excel? Yup, almost every one – students to working adults to small businesses to corporations. Excel allows people to develop any kind of work flows and processes using spreadsheets.
The same is happening on the Ethereum blockchain. The flexibility of the Ethereum blockchain allows individuals and corporations to leverage on their technology to develop all sorts of decentralised applications.
Keep in mind that there are other base layers available for developers to use. You do not only have thin crust pizza; you have cheese crust, thick crust, earth’s crust? Whatever it is, the competition is high. Ethereum is currently the most popular base layer being used by developers.
There are hundreds of projects running on Ethereum that I can never keep up. These are the applications that we interact with when dealing in the crypto-world. Be it investing or trading cryptocurrencies, or buying NFT (Non-fungible tokens).
As you can see, Defi which stands for Decentralised Finance (another topic for another day), is currently where most developers are pouring their time and money into. We have in total about 233 DeFi projects and 215 of them are built on the Ethereum blockchain.
How do you invest in Ethereum?
Simplest way: Buy Ether – the token that is used on the Ethereum blockchain. When you buy Ether, you become one of the owners of the Ethereum platform. Like when you buy the stock of the company, you own a piece of the company.
Logically, if we buy Ether, we want the value of Ether to appreciate. To explain simplistically, the price is loosely governed by Supply and Demand. In order for Ether to appreciate in value, there must be higher demand for Ether.
When individuals use the applications built on the Ethereum blockchain, they need to use Ether to carry out transactions. More transactions on Ethereum means more demand for Ether, which translates to a higher price. The bigger the Ethereum ecosystem grows, the more valuable Ether becomes.
This is assuming that the supply of Ether does not increase by the same amount as the demand. Ethereum 2.0 will be taking care of this assumption as there will be diminishing supply of Ether tokens – ensuring that the value of Ether will always be rising, when demand increases.
How should you monitor your investment in Ether? Will it always be a viable investment?
With millionaires being idolised in the cryptoworld, most people are in for the short term gains. They are traders, not investors. They are probably just looking for the next opportunity to get rich quick; and price is all that matters to them.
However, for investors who wish to do some analysis. We need to deviate our focus away from the price and look at what is happening behind the scenes.
If I have Ether, I need to know
- What are the current shortfalls of Ethereum blockchain?
- What are the alternatives of Ethereum? i.e. the other base layers
- Are developers still interested in building on the Ethereum blockchain?
- Is there a growing number of individuals using those applications in the Ethereum ecosystem?
This list is not exhaustive.
Just because something goes up in price, it does not mean that it has actual value. Even if the coin moves 1000x today, it does not mean it has a future.
Crypto is still the Wild West since there are few rules and regulations in place. If you want big gains, you have to learn to accept big losses.
Note to self: No matter how much risk you are willing to take, the market is not obligated to reward you. Be more humble as the market goes your way. If you don’t, the market will eventually find a way to humble you.
Honestly, I did not cover everything about Ethereum. There is so much more to it than what I’ve written. Stay tuned for part 2? ☺