Ethereum is the world’s second-largest cryptocurrency after bitcoin. Aside from being a tradeable digital asset, the Ethereum blockchain is a decentralised, peer-to-peer network that facilitates smart contracts and supports decentralised applications (dApps). The blockchain allows traders to buy, sell and invest in Ether (ETH), its native cryptocurrency. It also supports ETH staking, offering investors various opportunities to make money with Ethereum. 

Whether you want to learn more or are considering investing yourself, this guide explores how Ethereum works, examines its potential risks, and offers ETH price analysis to help you make better-informed decisions. 

What Is Ethereum?

For many people, when they think of Ethereum, the first thing that comes to mind is the ETH coin. However, while Ether is a popular digital asset, Ethereum is more than just a tradeable coin. So, what is Ethereum? 

Ethereum is one of the most popular blockchains in the cryptocurrency market. It is powered by its native cryptocurrency, Ether (ETH), one of the most widely traded digital assets. Besides being a popularly traded cryptocurrency, ETH serves as a means of payment on the blockchain and for tangible goods and services in the real world. 

The Ethereum blockchain was designed to be scalable, secure, programmable and decentralized. It hosts numerous developers building thousands of decentralized applications (dApps) for various purposes. In other words, anyone can join Ethereum and build digital technology. 

Ethereum also supports smart contracts, thanks to its switch from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism. The digital contract allows investors to access various decentralised finance (DeFi) tools and applications for ETH lending, borrowing and staking.

How Does Ethereum Work?

Simply put, Ethereum is a decentralized blockchain that uses Ether to facilitate active trading, digital payments and permissionless, transparent DeFi activities such as crypto staking. It also has a decentralized community of developers powering its ecosystem with their dApps. 

Blockchain Technology

Like other cryptocurrencies, Ethereum runs using blockchain technology. Every Ethereum-based transaction happens on the blockchain. Developers deploy their apps on the network, and the blockchain stores every piece of information related to transactions and applications. 

Burn Mechanism

Ethereum uses a burn mechanism to reduce its coin’s circulating supply. The burn mechanism involves the blockchain destroying some existing tokens by sending them to an inaccessible address to ensure that all existing tokens are contracted to validators. This helps to reduce the network’s gas fees and makes the currency deflationary.

Proof-of-Stake Consensus Mechanism

For transactions to happen on the Ethereum network, the blockchain uses a validation model called the PoS consensus mechanism. Unlike the previous PoW model, Ethereum completes its transactions using a network of validators instead of miners. These validators must create transaction blocks, verify them, and vote on their validity for an Ethereum transaction to be successful. 

Staking 

Besides ensuring that transactions run smoothly on the Ethereum network, the validators secure the blockchain by preventing double spending or other fraudulent activities. Becoming a validator requires staking ETH on the network to process transactions. Ethereum validators receive interest paid in Ether on their staked assets as a reward for their job. 

The average yield on ETH staking is 4%, making it a potential source of passive income for Ethereum network validators. Interestingly, all that is required to run a validator node on the Ethereum network is staking 32 ETH.

Use Cases and Applications of Ethereum

While the most popular use case of the Ethereum blockchain is trading Ether, there is more to Ethereum than being a store of value. Other use cases include:

• Building dApps and running smart contracts
• Running DeFi applications and systems
• Minting non-fungible tokens (NFTs)
• Web3/crypto gaming
• Building energy and carbon emission apps
• Developing identity verification tools
• Supply chain management
• Cross-border payments and remittance
• Governance and decentralized autonomous organisations (DAOs)

Ethereum’s utility spans various sectors, making it a valuable blockchain to both businesses and developers. 

Who Created Ethereum? 

Vitalik Buterin and Joseph Lubin launched Ethereum in 2015. At the time, Ethereum was the first open-source cryptocurrency platform that allowed public users to build decentralised applications and contribute to its ecosystem.

Other members of the Ethereum founding team include Gavin Wood, Charles Hoskinson and Anthony Di Iorio. Although Buterin is still on the Ethereum team, other developers such as Hoskinson and Wood have moved on to found the Cardano and Polkadot blockchains, respectively. Both blockchains are now rivals to Ethereum. 

History and Inception of Ethereum

Ethereum’s history dates back to 2014, when Vitalik Buterin conceived the idea of creating an alternative to Bitcoin, the foremost digital form of money. However, the Ethereum vision was more than just a digital currency – the goal was to develop a blockchain to decentralize transactions, making them more scalable, fast, and secure. At the same time, Ethereum set out to solve the scalability issues plaguing the Bitcoin network.

It is important to note, however, that when the Ethereum network went live in 2015, it used Bitcoin’s PoW consensus mechanism. The network validated transactions with PoW by assigning transaction blocks to miners, who would complete them using expensive and energy-intensive machines. The reward system was also different, as miners received new ETH tokens as incentives. 

Until the Merge in September 2022, Ethereum operated using this model. After its upgrade to PoS, Ethereum eliminated miners and switched to transaction validators, who are part of Buterin’s original plan for the Ethereum network.

Ethereum Price Analysis 

As of January 2024, Ethereum trades at around $2,200 per token. The current ETH price is up by over 35% compared to its January 2023 price, thanks to the late 2023 resurgence in the broader crypto market. Similarly, the spot Bitcoin Exchange-Traded Fund (ETF) approval by the US Securities and Exchange Commission (SEC) in early 2024 resulted in more demand for cryptocurrencies, especially Bitcoin and Ether. 

Although Ethereum has grown by more than 80,000% compared to its $2.77 launch price in 2015, the current ETH price is a far cry from its all-time high. In November 2021, the Ethereum price attained an all-time high of $4,800 after a surge in NFT demand. However, after the 2022 and 2023 crypto winter and other negative events in the crypto sphere, such as the Terra (LUNA) and FTX collapse, the coin’s price dropped to around $1,100. 

With bullish sentiment on Ethereum and other top cryptocurrencies such as Bitcoin increasing, many Ethereum price predictions are optimistic for 2024. The coin’s technicals, including the moving averages (MA) and exponential moving averages, show a current sell pressure, suggesting a potential price drop after a market correction. Looking at long-term potential, however, some analysts believe that Ethereum’s price will hover between $4,500 and $6,500 in 2025 and continue to grow from there. 

Factors Influencing Ethereum’s Price 

Cryptocurrencies are volatile, with various factors contributing to price fluctuations that impact the ETH price:

• Supply and Demand: Ethereum’s price is influenced by demand and supply forces. When the demand for the coin exceeds its supply, it becomes scarce, and the price increases. Conversely, a decline in demand causes oversupply and a subsequent price fall. 
• Market Sentiment: Investors’ sentiment about Ethereum is another factor that can impact its price. When market sentiment is bullish, traders generally believe that ETH will increase in price, thus increasing demand for it. On the other hand, bearish market sentiment reduces the coin’s demand among traders, causing a price fall. When navigating Ethereum trading, use market analysis tools and indicators such as moving averages and oscillators to make well-informed decisions. 
• Macroeconomic Factors: Macroeconomic or external factors such as inflation, interest rate hikes, exchange rates and regulatory changes can also impact coin prices. Some investors use Ethereum as a store of value and a hedge against inflation when fiat currencies lose value. High exchange rates can also increase demand for Ethereum as people seek alternatives to traditional currencies. However, more people may sell their cryptocurrencies for food and other essential needs during financially challenging periods. This increased selling pressure causes a price decline. 

Ethereum Market Performance

Ethereum has maintained its position as the second-largest blockchain after bitcoin as of January 2024, but how does it compare with other top cryptocurrencies? 

Looking at the coin’s current market performance, Ethereum has a market cap of $268.5bn. The market data suggests a significant demand for ETH among crypto traders and investors. In comparison, only bitcoin has a higher market cap, sitting at over $782bn.

Another popular altcoin, Tether (USDT), has a market cap of just over $95bn, while Litecoin’s market cap is around $4.8bn. Essentially, Ethereum’s uptrend has the potential to continue if the market sustains a positive sentiment.

How to Buy and Store Ethereum 

Now that you know what Ethereum is, how it works, and what its price potential is, it’s time to purchase some tokens. Follow the steps below to buy Ethereum:

• Step 1: Choose a reputable brokerage and create a trading account
• Step 2: Complete identity verification
• Step 3: Deposit funds using crypto or fiat currencies
• Step 4: Buy ETH

Wallets and Ethereum Safe Storage 

After purchasing ETH, transfer your coins to a wallet for additional security. Hot wallets have the advantage of easy access and proactive management of cryptoassets, while cold wallets offer more long-term security. Non-custodial wallets offer users increased control over their assets, whereas custodial wallets that offer third-party support can be more beginner-friendly.

The Future of Ethereum

Ethereum’s transition from PoW to PoS has significantly impacted the blockchain. The network now has the potential to process 100,000 transactions per second, making it more efficient than many competitor blockchains. 

In April 2023, the project completed its Shapella upgrade, enabling ETH investors to withdraw their staked assets for the first time. In addition, the project will execute Sharding, which will divide the network into different segments for quicker transaction processing. 

With more upgrades in the Ethereum ecosystem to boost scalability and efficiency, issues such as high gas fees and network congestion will be eliminated. As a result, Ethereum will be the go-to network for businesses, developers and payment providers looking to adopt cryptocurrency. 

For crypto investors, analysts believe that Ethereum will follow in Bitcoin’s footsteps and apply for spot Ethereum ETF trading. A successful approval of this by the SEC will further strengthen the ecosystem’s growth and cause an increased demand that will positively impact Ether’s price. 

Risks and Challenges 

It is important to understand the risks associated with investing in Ethereum. The best way to manage risk with any cryptocurrency is by keeping a diversified investment portfolio that combines Ethereum and other cryptoassets, to spread risk and reward across coins. 

• Volatility: Ethereum is a volatile asset and price predictions are merely speculative. There are no guarantees that you will see either short- or long-term gains from investing in ETH. 
• Security Risks: There have been security breaches in the Ethereum network, particularly through smart contract vulnerabilities. An attack can disrupt the network and result in stakers losing their assets. However, Ethereum tackles such security risks using an extensive node network through its enhanced PoS consensus mechanism to combat vulnerability attacks. The upcoming Shard chains will also tackle security issues by distributing the network’s workload across multiple chains, mitigating vulnerabilities.
• Regulatory and Legal Aspects: Various legal and regulatory frameworks exist in the crypto space, commonly addressing the network’s DeFi features. For instance, regulatory changes such as the SEC’s crackdown on crypto staking can impact ETH staking services on major exchanges. A decline in staking activities can impact the ETH price negatively. As these guidelines are ever changing, there are many grey areas in the existing legal aspects of Ethereum.

Comparing Ethereum to Other Cryptocurrencies 

How does Ethereum stand out from other major cryptocurrencies? 

Ethereum vs Bitcoin (BTC)

Bitcoin and Ethereum are the two largest cryptocurrencies. However, transactions on Ethereum are faster because it uses the PoS consensus mechanism instead of Bitcoin’s PoW. Similarly, Ethereum uses smart contracts and validators to verify transactions, while Bitcoin uses miners and expensive hardware. While bitcoin has a high market cap and coin price, it does not offer crypto staking like Ethereum.

Ethereum vs Cardano (ADA) 

ETH and ADA are similar in design and use. Both are decentralized blockchains that allow developers to build dApps on their networks. They also operate using the PoS consensus mechanism, validate transactions using smart contracts, and enable crypto staking. 

However, Ethereum is a more established blockchain with a higher market cap and trading price. The Ethereum ecosystem is also more extensive, with over 3,000 dAapps, including yield platforms, NFT marketplaces, and lending protocols on the network. 

Ethereum vs Litecoin (LTC)

Litecoin is a fork from Bitcoin, so it shares features similar to the world’s largest cryptocurrency. Compared to Ethereum, Litecoin has many limitations. First, it uses the Scrypt-based PoW consensus mechanism, while ETH uses PoS. Therefore, LTC doesn’t support crypto staking and DeFi features. However, Litecoin offers mining to its users, and miners’ profits may be greater than Ethereum validators get as staking yields. 

However, Ethereum is more valuable and has a larger market share. 

FAQs

How much is 1 Ethereum to buy?

A unit of ETH currently sells for about $2,200. However, the coin’s price may vary slightly across different exchanges. 

Is Ethereum actually safe?

The Ethereum network is a safe platform for smart contracts and decentralized applications. However, price volatility can make investing in Ethereum (ETH) risky. 

Is Ethereum better than Bitcoin?

The Ethereum blockchain offers scalability, lower fees and quicker transactions than Bitcoin. However, BTC holds more value than ETH. The better buy depends on your investment preferences.