Is it too late to buy Ethereum?
January 2018 saw the price of Ether, or ETH, the coin of the Ethereum platform, surge past $1,200 – up from just $300 in October. The boom mirrored that of other cryptocurrencies, such as Bitcoin, which reached a price of almost $20,000 in December 2017. The boom was short lived however, as ETH dropped below $1,000 in early February and, by September, was down to almost $200. Have investors missed the boat? Is it too late to buy Ethereum?
Nobody knows the answer for certain of course. Cryptocurrencies and blockchain technologies are still new. Investing in them is similar to investing in a startup business; there is high potential for volatility and many of those that launch will ultimately fail. Predicting which ones is the hard part.
Cryptocurrencies and the blockchain have their supporters who are confident that we are in the early days of a revolution. The volatile price changes that we have seen will, according to these observers, settle down but the trend will continue upwards. The most optimistic of these people will tell you that values will increase by a lot – perhaps 10-times what they are now.
On the other side are the experts and analysts outside the cryptocurrency world. They are often suspicious of the technology in general and argue that prices for coins are a bubble that will eventually burst. Their argument is that there is no underlying, intrinsic value on which these currencies rest. Unlike, say, an investment in a business which has value based on the future profits of the business.
Ethereum’s underlying technology
What factors do we need to weigh up when considering whether it is still worth buying Ethereum? First, there’s the technology itself. Cryptocurrencies are built on a technology called ‘the blockchain’. Transactions – transfers of currency from a buyer to a seller – are grouped into blocks and verified by computers on the network, known as miners. These blocks are linked together in a chain by cryptographic calculations.
The entire blockchain, which is a distributed ledger, is shared with the whole network. If a fraudulent transaction is attempted, such as someone trying to spend the same coins twice, then the cryptographic hashes securing the block will no longer work, and the fraud should be clear to all.
As a reward for this verification task, miners are given a small amount of new coins. Unlike Bitcoin, there is no cap on the maximum supply of ETH – new coins will continue to be issued for as long as the network is in operation. This raises the question of whether there will be an inflationary effect that will, over time, see the value of individual ETH decrease.
Second, if you have a use for the cryptocurrency then it is worth buying it. This is where Ethereum offers something that Bitcoin, it’s better-known rival, does not. Ethereum is a platform on which applications, known as Dapps, can be run. These can be anything from games to applications that run entire organisations. They are all designed to benefit from the distributed, decentralised nature of the blockchain.
If a widespread ecosystem of Dapps develops then Ethereum’s value will be based on something more than its capabilities as a currency, and this will boost the value of it as an investment. In that sense, buying Ethereum is similar to investing in Amazon, because you believe Amazon Web Services will generate value from powering internet applications. This ecosystem is still in its infancy, meaning that if you are willing to bet on its success, then it is definitely not too late to buy Ethereum.
The cryptocurrency bubble
While Bitcoin and Ethereum are the best known, there are numerous cryptocurrencies all trying to distinguish themselves from one another, and all seeking to gain a user base that will allow them to grow. Even the most optimistic observer must acknowledge that they cannot all succeed. But how do you pick the winners?
Cryptocurrency sceptics argue that this is evidence of a bubble – the economic term for the situation that arises when the price of an asset far exceeds any intrinsic value. In the early 2000’s, stock market investors saw share prices grow among a new wave of internet and technology companies. Tempted by the possibility of a fast return, they bought these stocks, driving their values higher than potential profits could justify, and eagerly sought new internet companies to invest in.
Eventually, companies built on poor ideas or run by people who didn’t know what they were doing, were being valued as if they were the new Microsoft. It was a bubble and when it burst, the stock market crashed. Technology stocks took years to recover.
Those who warn of a cryptocurrency bubble include experts such as Alan Greenspan, former chairman of the US Federal Reserve, and Jamie Dimon, chief executive of JP Morgan. They see the flurry of new cryptocurrencies, the rush to invest and the volatile pricing as evidence of a bubble.
But bubbles are hard to identify. Some things that appear to be bubbles are not at all. They are just outliers that defy traditional rules. That’s what cryptocurrency optimists argue is happening today. A new technology is re-writing the rules of much of the financial sector and, in doing so, is not following previously established patterns.
Your risk appetite
As with any investment, there is an element of risk involved in buying Ethereum. Do you believe there is enough value there that, over time, the price will continue to rise? Or are you convinced by the warnings of a bubble? How you feel about those issues will determine whether you buy-in at all and, if so, how much you invest.