What Is Ethereum (ETH) And How Does It Work?

What Is Ethereum (ETH) And How Does It Work?

Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Ethereum, also commonly known as Ether, is the world’s second largest cryptocurrency behind Bitcoin , and like any digital currency, it has experienced its fair share of ups and downs over its relatively short lifetime.

The price of Ethereum rose to a record $US4800 in late 2021, which signified a rise of more than 900% over the previous 12 months and sparked speculation that Ether would overtake Bitcoin in value.

However, Ether was not immune from the crypto routing of May 2022 and tumbled in value alongside many other cryptocurrencies. Ether is now trading at $US1423 (as of July). What are cryptocurrencies?

In the truest sense, cryptocurrencies are a digital means of exchange which use cryptography as a form of security. However, in more recent times, the term ‘cryptocurrency’ has evolved to encompass a decentralised financial system (DeFi), a highly volatile asset class that can nose-dive or surge on the back of a Tweet, a space for bad actors to steal vulnerable investors’ identities and money, a mode of asset diversification, and a form of digital payment.

Ethereum once had an effective market capitalisation of around $250 billion, however, has recently lost more than $100 billion in value due to the crypto slide of May 2022 and is now sitting at around $135 billion in market cap.

If you’re familiar with Bitcoin but less au fait with its closest rival, here’s what you need to know about Ethereum including why, one day, it could still become the dominant player on the cryptocurrency stage . Source: eToro First, a crypto wealth warning

You don’t need to follow the financial world that closely to know that cryptocurrencies have become one of its biggest stories in recent years.

Nowadays, they pre-occupy the thoughts of governments and major financial institutions alike and divide opinion as to whether they are essentially Ponzi schemes that need to be severely regulated, or are simply volatile asset classes for investors who enjoy a high-stakes gamble.

If your financial plans revolve around capital preservation – hanging onto what you’ve got – then the volatile behaviour of cryptocurrencies is most definitely not for you.

Last month, Jerome Powell, the chairman of the US Federal Reserve, described cryptoassets as no better than “vehicles for speculation”. And at its May AGM, the legendary Berkshire Hathaway vice-chairman and investor, Charlie Munger, said Bitcoin was “disgusting and contrary to the interests of civilisation”.

Comments such as these, however, fail to put off millions of aficionados around the world from trying to make money from cryptocurrencies, including Bitcoin . This includes Australians, who are increasingly getting in on the act: recent Roy Morgan research has revealed that 5%, or more than one million adult Australians own at least one cryptocurrency.

If that includes you, Laith Khalaf, UK financial analyst at brokers AJ Bell, offers some simple guidance: “Those who wish to gain exposure to cryptocurrencies should only do so with a small amount of money that they are willing to lose,” he suggests.

It’s worth adding that crypto-asset investing is unregulated in Australia , as well as in most EU countries and in the UK, and there’s no consumer protection should things go wrong.

Which brings us back to Ethereum. What is Ethereum?

According to online brokers eToro, Ethereum is unique in the cryptocurrency universe.

Ethereum, released in 2015, embraces an open-source software platform that developers can use to create cryptocurrencies and other digital applications.

Ethereum’s native cryptocurrency is called Ether (trading ticker is ETH), while Ethereum actually refers to a specific blockchain technology, the decentralised distributed electronic ledger that keeps track of all transactions. Ledgers are the foundations of cryptocurrency transactions.

Think of Ether as the cryptocurrency token derived from the Ethereum blockchain. A blockchain allows encrypted data to be transferred securely, making it almost impossible to counterfeit. As with Bitcoin, these tokens are currently “mined” via computers solving mathematical problems.

Bitcoin uses blockchain technology as well (see above for the differences between the two cryptocurrencies), but Ethereum is regarded as more sophisticated and can be used to run applications. It’s this aspect, some commentators say, which could one day help it to shunt Bitcoin from the top cryptocurrency spot.In recent times, Ethereum’s popularity has grown among both retail and institutional investors alike. What are the advantages of buying into Ethereum? According to eToro, Ethereum can be easily traded or exchanged for other cryptocurrencies.In addition, the broker says […]

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