I talked with some friends about cryptocurrency investing, and got the question “is Ethereum a good investment?”. I decided to write an article about it, explaining why I think it is.
Ethereum is a good investment because the risk to reward ratio is great, institutions are buying and using Ethereum, and many exciting new upgrades are coming in the not-so-distant future.
Let’s get into why Ethereum is a good investment and my largest position in the cryptocurrency market at the moment:
Yes, Ethereum is a good investment:
As mentioned, Ethereum is my largest cryptocurrency investment at the moment. This is because of the risk to reward ratio and the institutional adoption we’ve seen lately.
According to the models, historical patterns, and technical analysis, Ethereum will reach the $8000 range by the end of the year.
To calculate the potential returns, you need to figure out the current Ethereum price (check now) and divide $8000 by it.
At the time of writing, the Ethereum price is $1800, which gives the potential returns:
$8000 / $1800 = 4.44 ROI = 344% returns.
To make an updated calculation, replace “$1800” with the current Ethereum price, and you’re good to go!
We have to look at the risk of investing in Ethereum as well, and we will do that in this article.
However, to understand the risk and potential rewards, you first have to understand what Ethereum actually is:
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What is Ethereum?
Ethereum is like the internet. It is a platform for developers to build stuff on. Anyone with an idea for a project can build it on Ethereum.
Let’s get more specific:
Ethereum is what we call a “programmable blockchain.” This means that programmers can make changes to the platform and make new applications. The Ethereum blockchain is often compared to “the internet”, as it lets you build things on it and use it to store information.
Applications built on the Ethereum blockchain are called “decentralized applications”, or dApps for short.
Decentralized applications gain the benefits of blockchain technology, like reliability, privacy, and of course, decentralization.
Another reason Ethereum is a good investment is that it’s got “smart contracts”:
Smart contracts are solving a major problem; having to trust people or third parties when making deals.
It is a contract that automatically executes when the predetermined conditions are met.
Ethereum has way more projects built on its platform than any of its current competitors, which is the biggest reason it’s a great investment.
When building a dApp, you want to use a platform where there already is a lot of activity – because of the network effect.
Think about it like this:
If you’re going to sign up for a social media platform, do you go with the one with the best tech and the best design? Or do you sign up for the one all your friends use?
You choose the one with all your friends, as the network effect has made this platform more valuable than the others, regardless of tech or design.
This is what’s happening to Ethereum. They do not have the best tech, nor the best design, but they do have the network effect working for them – which is why Ethereum is a good investment.
Below you see the market capitalization of Ethereum and its competitors:
Can Ethereum Reach $100K?
Are Institutions Investing in Ethereum?
We all know that institutions are adopting Bitcoin, but what about Ethereum?
In fact, Ethereum is being adopted by institutions at an accelerating rate. We are seeing big names like J.P. Morgan and Amazon showing interest in the technology. Also, The Grayscale Ethereum Trust has bought close to 1.5 Billion of ETH in the last six months, signaling institutional interest in Ethereum.
The image below shows the buying activity of The Grayscale Ethereum Trust, which is a way for institutions to invest in Ethereum indirectly:
The orange part of the chart is the total accumulated Ethereum by Grayscale since November of 2020. It’s around 750 000 ETH, which currently is worth 1.5 Billion USD.
Also, you should take a look at “Enterprise Ethereum Alliance” (EEA) – Institutions (200+) that work together to further Ethereum development and create new projects on its blockchain.
The board members include big names like these:
The fact that names like J.P.Morgan, Microsoft, and Santander are interested in Ethereum makes our case even stronger – Ethereum is a good investment.
Is Ethereum Investing too risky?
There are two types of risks when investing in cryptocurrencies: Systemic risk and idiosyncratic risk.
The systemic risk is the risk that the cryptocurrency market has. The risk that the whole market dumps. This risk follows any cryptocurrency investment, not just Ethereum.
Because Bitcoin is the market mover and the king of crypto, the systemic risk of investing in cryptocurrency is equal to the risk of investing in Bitcoin.
This cancels the idiosyncratic risk of investing in Bitcoin because the systemic and idiosyncratic risk is one and the same. However, this article is not about Bitcoin. It’s about answering the question, “is Ethereum a good investment?”.
The idiosyncratic risk is the risk that Ethereum fails, regardless of what the market does.
This is the risk of the Ethereum blockchain being compromised, competitors like Cardano or Binance Smart Chain catching up, or implement an upgrade unsuccessfully – making the blockchain obsolete.
In my opinion, the biggest risk of investing in Ethereum is the risk of competitors catching up. The risk of the blockchain being hacked, or failing at some point, is extremely low.
Notice, however, that the idiosyncratic risk of investing in Ethereum is mostly a symptom of their success.
The risk of competitors catching up exists because Ethereum has the lead. For this reason, the idiosyncratic risk of investing in Ethereum is relatively low, in my opinion.
Can Ethereum Investing Make Me Rich?
Well, yes, it can, if you’ve got enough invested or hold it long enough.
Let’s say “rich” means having $500 000. To reach this wealth in 2021, given my price prediction of $8000 per Ethereum, you would need to accumulate 62.5 ETH, which currently costs $112 500.
Well, most of us don’t have that kind of money lying around…
However, if you look at a longer time frame, it’s possible to cross the $500 000 mark with much less.
If you know what you’re doing, or follow someone who does, this is how to become rich by investing in Ethereum:
1) Buy as much Ethereum as you can
2) Sell it around the $8000 range, as this I likely to be the peak of this cryptocurrency cycle.
3) Reinvest your profit in Ethereum after the market has crashed 60%-80%.
This will make your ROI shoot up like crazy.
Let’s do the math, with a $10 000 investment:
Okay, so I’ve invested $10 000 dollars, which gets me approximately 5 ETH at the moment.
If I manage to sell them all for $8000, I’ll sit with $40 000 after selling.
Now, I let the market crash by 70% before putting my $40 000 back into Ethereum. The price will be, after the crash, $2400 per ETH ($8000 * 0.3 = $2400).
With a $40 000 investment, this gives me 16.66 ETH ($40 000 / $2400/ETH = 16.666 ETH).
The current cycle will provide an ROI of around 6000%, given a peak at $8000. If we assume that the next cycle gives something like 2000%, this is how much we would earn:
$40 000 invested with a return of 2000% equals $800 000, almost one million dollars.
Think about it, we invested $10 000, and after a few short years, we have $800 000. That’s an ROI of 80!
This is simplified and highly speculative, but it gives you an idea of what is possible to achieve if you make the right choices and hold for the long term.
To answer your question:
Yes, Ethereum can make you rich. I believe that the price will hit $8000, giving you a good ROI in this cycle. If you manage to sell near the peak and buy again in the next bear market, you’re expected return will be over 8 000% in 4-6 years.
How Much Should I Invest in Ethereum?
How much Ethereum you should have, is closely related to the question of whether or not Ethereum is a good investment.
I’ve been giving this a lot of thought, as this is a hard question to answer. It’s highly dependent on the risk you’re willing to take, as well as your goals.
However, I have made some general suggestions for “average Joe” who want a quick answer:
• 50% of your portfolio should be kept in Bitcoin.
• Ethereum should be the largest altcoin in your portfolio.
• Individual Mid-caps should not be more than 15% of your total portfolio.
• Keep the total small-cap and highly speculative coins below 10% of your total portfolio.
Mid-caps and small-caps refer to medium and small-sized coins, measured by market cap.
If you’re a beginner, I suggest you stick with the rules listed above.
However, if you’ve got some experience and know what you’re doing, there’s nothing wrong with investing more than 50% of your portfolio into altcoins.
I do have an article you can read to get deeper into this:
How Much Cryptocurrency Should You Buy?
Ethereum is a good investment, which is why it is currently around 40% of my personal portfolio.
Where Can I Invest in Ethereum?
You can buy Ethereum at most large exchanges, including Coinbase, crypto.com, Kraken, and Gemini.
The easiest one to use is Coinbase (referral link). I recommend using them if you’re an absolute beginner, even though their fees are a little high.
For the best user experience, I’d go with the app delivered by crypto.com (referral link). The experience is super smooth, and they got a bunch of altcoins to invest in and other services – all in the same app.
If you’ve got some experience and want the lower fees and best tools, I suggest using Kraken (referral link). They have a great exchange, especially for PC users, and have low fees.
I have no experience with Gemini, but I know they are trustworthy and prove a good product for its user.
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