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 over$500 billion, however, the crypto bear market of 2022 took its toll and despite a strong start to 2023, it is now sitting at around $219 billion in market cap (March 30, 2023).

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.

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.

In June, Jerome Powell, the chairman of the US Federal Reserve, described crypto-assets 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—although the Federal Government is planning on introducing regulation in 2023—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.

Related: The Future of Crypto In Australia

Investing in Ethereum offers several notable advantages, particularly as it plays a central role in the emerging world of decentralised finance (DeFi). As the backbone for an extensive array of decentralised applications and smart contracts, Ethereum’s secure and public blockchain has the potential to reshape various industries, making it a compelling proposition for forward-thinking investors.

One key advantage of buying into Ethereum is the opportunity to participate in and benefit from the growth of DeFi, which aims to democratise access to financial services. Through Ethereum, individuals can access lending, borrowing, and trading services without the need for intermediaries such as banks, reducing fees and increasing efficiency. This financial revolution has the potential to unlock new economic opportunities and disrupt traditional financial systems.

Moreover, Ethereum’s ongoing transition to a Proof of Stake (PoS) consensus mechanism, known as “the Merge,” aims to improve scalability, energy efficiency, and security. This development presents investors with additional advantages, such as the ability to stake Ether and earn a consistent yield on their investment. Staking allows investors to support the network’s security and operation by locking up a portion of their Ether, and in return, they receive rewards in the form of additional Ether over time.

In addition, the investing platform eToro says Ether can be used at a growing number of online and bricks-and-mortar retailers. Transaction times are often faster when compared to those for Bitcoin and it also provides access to a number of decentralised applications (dApps) enabling developers to create new online tools to facilitate these real world payments.

Progress in the retail payments sphere was emphasised in March 2021 when British-based Christie’s became the first auction house of its kind to accept Ether as payment for a work of art by Beeple. Called ‘Everydays: The First 5000 Days’, the purchase price equated to a figure of $US69.3 million.

At the end of April 2021 and confirming the financial sector’s growing interest in the cryptocurrency sphere, the European Investment Bank issued its first ever €100 million two-year digital bond via the Ethereum blockchain.

Meanwhile, at the beginning of May 2022, , including one for Ethereum, aimed at measuring the performance of digital assets.

As time passes, more and more companies are looking to accept cryptocurrency as a form of payment, increasing the use cases and adoption of digital assets like Ether.

Ethereum can be purchased from a wide range of crypto exchanges, such as Binance Australia or Kraken, or via an investment platform, such as eToro.

You create an account with the chosen provider confirming your place of residence and identity and then link to your bank account in order to buy the currency. Fees will vary from one provider to another and can depend on the amount you want to deposit, (eventually) withdraw and for the transactions you want to carry out.

Payment methods can include those via debit/credit cards to PayPal and instant Osko payments. New investors may need greater levels of customer assistance compared with seasoned traders.

In the world of cryptocurrencies, few things can be taken for granted, and there are no certainties. And as we’ve reported above, there are plenty of senior figures in the financial community who hold deep reservations about the safety, perhaps even the viability, of the overall concept of crypto.

But Nigel Green, chief executive and founder of the international deVere Group financial consultancy, has previously suggested Ethereum is the crypto to watch: “Ether can be expected to significantly dent Bitcoin’s market dominance over the next year and beyond. Compared to its bigger rival, Ethereum is more scalable, offers more uses and solutions, such as smart contracts which are already used across many sectors, and is backed with superior blockchain technology,” he added.

AJ Bell’s Laith Khalaf acknowledges Ether’s relative strengths within the cryptocurrency context, but he advocates extreme caution: “Ether, or Ethereum, is more flexible than Bitcoin because it is programmable according to use, so it can be used to verify business transactions or contracts as well as make payments.

“However, the value of that asset is still only what someone else will pay for it, and while that might be quite a lot right now, once crypto fever has died down, it may not be worth the code it’s written in.”

This article is not an endorsement of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency as an investment class.