Forbes Advisor has provided this content for educational reasons only and not to help you decide whether or not to invest in cryptocurrency. Should you decide to invest in cryptocurrency or in any other investment, you should always obtain appropriate financial advice and only invest what you can afford to lose.
Ether, the official name of the token more commonly called Ethereum, is the second leading form of cryptocurrency today. Here’s more on what it is, how to buy it, and the potential risks involved.
What is Ethereum?
Ethereum is a network of various online communities that allows people to communicate and transact with one another directly, without the need for intermediaries.
In a centralised network like Twitter, Twitter facilitates the sharing of messages, images, videos and other media between users. In financial services, payment providers allow people to send and receive money. But decentralised networks like Ethereum, in theory, can do away with the ‘middleman’, making peer to peer communication and transactions faster and cheaper. However, when buying and selling on crypto platforms, broker fees will apply.
Ethereum is best known for its Ether (or ETH) cryptocurrency. When making a transaction with a fiat currency, like Sterling, a third party must be involved to facilitate the payment, such as a bank or payment provider. Ethereum transactions, however, use a decentralised ledger to process transactions without an intermediary.
No single person owns the ledger: instead every member of the network has a copy of the ledger and can, if they choose, participate in recording transactions.
While a bank currently keeps track of what’s in its customers accounts, crediting and debiting accounts as transfers are made, the Ethereum ledger is maintained by volunteers. Those who participate have to stake their own ETH for the chance to validate transactions and, in return, earn valuable ETH.
The more ETH a user is able to stake, the better their chances of becoming a validator.
Whoever is chosen has their copy of the ledger used as the official record of transactions when 51% or more of the network agrees that it’s accurate. The majority vote prevents someone from attempting to claim there’s more ETH in an account than there actually is.
To scam the network in this way, a user would need to stake enough ETH to control more than half the votes on the network, which is financially prohibitive.
Unlike Bitcoin, however, the Ethereum platform isn’t just for crypto transactions. Ethereum allows for more than just the transfer of transaction records. Users can build and deploy decentralised applications (dApps) or smart contracts on the Ethereum network.
For example, there are social networks on the Ethereum network such as Peepeth. Because these platforms are decentralised they’re less susceptible to censorship or influence. Users cannot be banned or otherwise restricted.
Members of the dApp communities themselves vote on the direction of such projects, perhaps deciding how content moderation or how content is boosted or hidden.
Buying Ether
First, an account on a crypto exchange needs to be set up. We’ve ranked our pick of the best here, for reference. Accounts are usually free, and can be set up in about 20 minutes. Registering involves downloading an app or visiting a website before entering some personal information.
Increasingly, there are some simple identity verification checks that will need to be passed. This could involve uploading a passport photo, following a set of prompts in front of the user’s phone’s camera, or both. Once registered, the user will need to credit their account with fiat currency to trade for ETH.
One ETH currently costs £1,496, so investors may only be buying a portion of one ETH. Whatever the case, exchanges typically have a minimum deposit of £10 in order to start trading.
Once credited, investors can navigate to the Ether page within the exchange, confirm the amount they’d like to spend and execute the trade. The ETH will then be credited to their account.
The ETH holder, will get a public and private key that they’ll use to execute trades. The former is similar to a bank account number that can be shared with others in order to receive funds.
The latter is like a password and should be kept private. Most exchanges offer a free crypto wallet for users to share public and private keys. Both are needed to execute a trade, so it’s important to keep them safe.
Here’s how to get started laid out in 5 easy steps.
1. Determining risk levels
There’s no getting around it – buying Ethereum is a gamble. While all investments have some risk associated with them, cryptocurrencies are especially vulnerable to price fluctuations. Just think about the impact a couple of hundred characters can have on crypto pricing: when Tesla boss, Elon Musk, tweeted last year that his company would no longer accept Bitcoin as payment, for instance, the coin’s value tumbled by 15%.
Although Ether has had impressive returns in the past, it’s also had some significant crashes, sometimes in astonishingly short amounts of time. Notably, it went from a high of almost £3,000 per coin in May 2021 to less than £1,300 a month later, a drop of more than 50%. That’s some pretty extreme volatility.
That’s why it’s important for investors to consider their risk tolerance along with the diversity and stability of the rest of their investment portfolios before buying Ether. Experts recommend that investors never invest more in crypto than they can afford to lose.
2. Choose a crypto exchange
Buying Ether is more complicated than just buying shares or collective investment funds through a brokerage account. Cryptocurrencies aren’t traded on major exchanges like those of London or New York, and many brokerages don’t offer crypto investing.
To buy crypto, investors have to first create an account on a crypto exchange. Practically speaking, it’s just like the brokerage platforms that may be already familiar: Crypto exchanges allow buyers and sellers to exchange fiat currencies – such as pounds and dollars, for example – for cryptocurrencies such as Ethereum, Bitcoin or Dogecoin.
If an investor doesn’t already have a crypto exchange in mind, they might want to look at our list of best cryptocurrency exchanges. Though some exchanges’ trading platforms can be complex, most offer a purchase interface for beginners, though it may charge higher fees than the main trading platform.
A couple of key points to consider: When choosing an exchange, make sure it offers a crypto wallet to store investments. The vast majority do, but if yours doesn’t, investors will need to seek out one of their own.
For true beginners, there are platforms that are designed to simplify the crypto purchasing process. But it comes at a hidden cost and investors can’t withdraw their Ethereum investment to put it in a third-party wallet or use it to pay for online purchases.
Using one of these simplified platforms will mean the crypto investment can only be traded within the platform it has been bought on. So investors would need to cash out of that platform and then rebuy it on a crypto exchange to hold it in a separate wallet.
3. Fund an account
Before Ethereum can be bought through a crypto exchange, investors will have to fund their account. In most cases, money can be deposited from a bank account, such as a current account. Investors can generally use a debit card or deposit money from a payments provider.
Not all providers allow investors to use their credit cards to buy crypto, for example TSB, Virgin Money and Tesco Bank block transactions with crypto exchanges.
Some providers may allow investors to use their card to buy crypto, but they should beware of any fees they might add to the cost of the transaction.
4. Buy Ethereum
Investors buying shares, collective/pooled funds or exchange-traded funds are limited by market hours. For example, the London Stock Exchange trades between 8:00 am and 4:30pm and is closed at the weekend and on bank holidays.
Cryptocurrencies such as Ethereum work very differently. Because they’re decentralised currencies, they can be bought and sold around the clock.
To purchase Ethereum, enter its ticker symbol – ETH – in the exchange’s “buy” field and input the amount you want to buy. Investors don’t have to buy a whole Ethereum token if they don’t have enough money in their account for a full coin; they can purchase a fraction of one. For example, if the price of Ethereum is £2,000 and £100 has been invested, they can purchase 5% of an Ether coin.
5. Storing Ethereum
After the purchase of Ethereum has been processed, investors have to store their cryptocurrency. While some platforms will store it for the investor, some people opt to store their investments themselves to reduce the potential likelihood of losing their crypto to a hack.
This is understandable, but it’s also important to note that some of the major exchanges tend to insure their clients’ holdings and often store the majority of their assets offline to prevent massive theft.
But investors that want peace of mind surrounding their crypto, can choose to move it to one of two types of third-party wallets:
- Hot Wallet: A hot wallet is connected to the internet and can be accessed from a computer or smartphone. They can be convenient and are usually provided by cryptocurrency exchange platforms at no additional cost, though investors can also use their own if they’d prefer having their crypto off of the exchange. However, because they’re still connected to the internet, they’re at a higher risk of security breaches
- Cold Wallet: Cold wallets, meanwhile, are external devices disconnected from the internet while not in use. They usually cost between £30 and £150, though there are even more expensive versions available. While cold wallets can be less convenient than hot wallets (they have to be manually connected to the internet each time investors want to access their crypto) they tend to be safer and may make sense for investors that own a significant amount of Ethereum or other cryptocurrencies.
Selling Ethereum
Selling Ether is similar to buying. If an investor has ETH in their account, they can visit the page of another crypto asset within their exchange, choose how much of their ETH they want to spend and execute the trade. Or, they can simply sell it, within the exchange, for fiat currency.
Whether buying or selling, most crypto exchanges take a small percentage of the trade as a fee. In both cases, investors should see a preview before each transaction telling them how much the exchange will get and how much they’ll be left with.
When selling a substantial amount of crypto investors may want to consult a licenced tax professional. Despite its decentralised nature, profits from a sale of crypto are potentially liable to capital gains tax.
Should an investor buy Ethereum?
Ethereum is considered an extremely popular cryptocurrency with over 116 billion coins currently in the hands of investors. But just because it’s one of the more well-known cryptocurrencies doesn’t mean it’s right for any given one.
Before buying a volatile investment like Ether, investors will want to make sure they’ve done their research and their finances are in good shape. Ideally, this means investors should have a large ‘rainy day’ fund, be exposed to minimal debt and have their pension arrangements in good shape.
Even if an investor can tick all those boxes, it’s important to consider diversifying portfolios, so only a portion of investments should be in Ethereum or other cryptocurrencies, given the volatile risks.
What is Ethereum 2.0?
Ethereum 2.0 is the current version of Ethereum. There was a major change in the way the network operated last year, and Ethereum 2.0 refers to the system as it exists since then.
Until 2022, users had to compete to validate transactions differently. Instead of staking some of their own ETH, they had to guess a long alphanumeric string of text within a short window of time.
The string had too many possible combinations (trillions) to simply guess, so people used their computers to test possible combinations. The more powerful a computer was, the more guesses it could make per second, improving the user’s chances of correctly guessing the string or being the closest by the time the window closed.
Whoever won was rewarded with an amount of Ether and had their version of the ledger to the ongoing ledger of all previous records – the blockchain.
This old ‘consensus mechanism’ was called proof of work. The idea was that it prevented cheating because in order to record a dishonest version of the ledger on the blockchain, a user would need enough computing power to both guess the string and control at least 51% of the votes on the network to approve their doctored ledger.
This was practically impossible, but led to an arms race of computing horsepower – with users competing to build more powerful computing rigs in order to reap the rewards of validating a block of transactions – free Ether.
All of this computing power used a tremendous amount of energy, which was seen as being unsustainable.
Ethereum 2.0 marked the introduction of a new consensus mechanism called proof of stake. Now, users don’t need powerful computers to stand a chance of validating a block and earning ETH. Instead, they stake their own ETH for the opportunity.
The more Ether that is staked the better the chances of becoming a validator and earning the freshly minted ETH. And, since it is necessary to stake a tremendous amount of ETH to be chosen and control 51% of the votes on the network, the new consensus mechanism prevents cheating without the environmental impact.
The catch is that proof of stake stacks the deck in favour of those with the most ETH to stake, rather than those with the most computing power – which critics say enriches the already wealthy.
Bitcoin, Ethereum’s biggest rival, still uses the old proof of work consensus mechanism.
Cryptocurrency is unregulated in the UK. The UK regulator, the Financial Conduct Authority, has repeatedly warned investors that they risk losing all their money if they buy cryptocurrency, with no possibility of compensation.
Frequently Asked Questions
What’s the difference between Ethereum, Ether and ETH?
The terms Ethereum and Ether are often either confused or used interchangeably.
Ethereum is a blockchain platform. Ether is the native currency of the Ethereum platform. Users spend Ether to consume Ethereum’s services.
ETH is the stock symbol or ticker symbol used as shorthand for Ether.
