An unintended consequence of bitcoin’s rise has been the growing appeal of alternative coins. Investors squeezed out of bitcoin trade due to a swift and steep surge in its value are increasingly looking for a relatively inexpensive way to broaden or boost their crypto exposure.
Enter ethereum: the second most valuable virtual coin. Ether stepped out of bitcoin’s shadow and rose steadily over the last couple of years to the top of the heap of altcoins, a catch-all term for all cryptocurrencies other than bitcoin. Although worth a small fraction of bitcoin’s value, ether has clocked a staggering 980% jump in price over the past year, as of June 17, 2021. This compares to bitcoin’s 313% gain for the same period.
Not surprisingly, Canadians across the spectrum of age and investable assets are itching to hop on the ether rodeo, in the giddy hopes of bitcoin-like bounty. If that sounds like you, read on to understand ether’s features, functionality—and flaws—before you saddle up.
What is ethereum?
For the uninitiated, ether is the native cryptocurrency for the ethereum blockchain, a decentralized, open-source software platform with smart contract functionality.
What does that mean? Smart contracts are self-executing agreements that live on the blockchain. They can be used to verify and record a range of transactions between buyers and sellers without the need for an intermediary or a central authority.
“You can think of ethereum as the Internet and ether as Facebook, YouTube or Twitter, which are applications built on top of the Internet,” says Michael Zagari, an investment advisor in Montreal with Burlington, Ont.-based Mandeville Private Client Inc.
Anyone who wants to deploy a smart contract must use ether as a digital currency to pay the fees. Ether is the fuel that makes the ethereum blockchain run.
Ethereum is a global phenomenon, but has Canadian roots. It was invented by Russian-Canadian Vitalik Buterin, who described ethereum in this 2013 white paper while still in his teens. The blockchain was officially launched in 2015.
At first, ether was designed to be used within the ethereum blockchain network. However, ether started to gain broader currency as a mode of payment when companies and vendors started accepting it for their goods and services. (Even renowned auction house Sotheby’s announced in spring 2021 they will be accepting ether and bitcoin as payment for physical artworks.)
Is ethereum a good investment in 2021?
The broadening of ethereum’s functionality, social media buzz and flashy newspaper headlines have intensified interest in ethereum. The resultant FOMO-fuelled buying frenzy has sent ether skyrocketing 215%, more than tripling its prices, this year alone, as of June 18, 2021.
Some crypto watchers liken the explosion in ether’s popularity to the rise of the internet in the 1990s. “This is like investing in actual infrastructure of a New Age, decentralized Internet,” says Christopher Matta, president of 3iQ Digital Assets (US), Canada’s largest digital asset fund manager.
However, rather than obsess over its price movements, investors should focus on what ethereum can help build and problems the technology can solve. Think like a venture capitalist who’s looking at a “highly volatile product with huge potential rewards, but also huge amount of risk,” Matta says.
Experts counsel against any speculative, get-rich-quick play. Only the “investor who has a long-term time horizon and who can stomach severe volatility should seriously consider adding ether to their portfolios in 2021,” Zagari advises.
The recent stock market volatility has pushed more investors towards ether, which has emerged as an asset class that can provide uncorrelated returns compared to traditional instruments. Although, things could just as easily go pear-shaped if you try to play the momentum game.
Ether could offer an attractive risk/reward outcome, only “if you can buy and hold, and stretch out its extreme volatility risk over many years,” Zagari contends.
If you want to dip your toe into ether, start with a 5% allocation, says Matta. “You’re concentrating an investment in potentially a cutting-edge technology, [but one] that has only been around six years, and it’s still not fully proven,” he cautions.
Over the past year, ether has rung up nearly 1000% return, as of June 18, 2021—a phenomenon that Matta says, “illustrates the asymmetric risk profile of ether.”
You could lose your money, but there’s also the 10-times potential upside. This makes it worth the risk for some investors—but it’s “not necessarily the best investment if you don’t have a three- to five-year time horizon,” Matta says.
For conservative investors, Matta recommends a 50-basis points allocation as more appropriate. In that case, if ether “went to zero, it would not change your financial well-being, but if it [appreciates] five times, you’ve just made significant returns,” he says.
Investors should also know the cryptosphere remains a highly disruptive field. Ethereum has challengers that are trying to topple it with more sophisticated blockchains. Although activity is growing on ethereum blockchain—spurred by DeFi and NFTs (see below)—ether’s continued march upward will depend on the platform’s ability to continue to evolve and defend its territory.
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Buying ethereum with CAD
Canadian investors looking to bite into the second-most-popular virtual coin have a few options. They could buy ether directly at one of Canada’s homegrown crypto exchanges: Newton, Wealthsimple, NDAX, Bitbuy, Shakepay, CoinSmart, and others allow Canadians to buy and sell multiple crypto assets, including ETH.
To head off risks involved with holding crypto directly, investors can move their digital coins to cold storage, an offline safeguard with private keys to your assets. (Matta cautions of “some of the risks associated with crypto exchanges after what happened with Quadriga,” referring to the untimely death of the Canadian exchange’s owner, leading to investors losing millions of dollars worth of crypto held on the platform.)
Ether can also be purchased at an ATM. Crypto teller machines are “a little more accessible to a certain group of the population [that] can’t link and send wires to a crypto exchange,” says Matta, but warns that ease of access comes with higher fees.
“If you go to a crypto exchange, you’ll probably pay anywhere from 10 to 50 basis points to purchase ether, whereas on an ATM you might pay 1% to 10%,” he says. In either case, the investor is going to own the same asset.
For the more risk averse investors, there are ether mutual funds, as well as exchange traded funds (ETFs), including those offered by Purpose Investments, Evolve Funds, and 3iQ, that provide exposure to ether (ETH), among other digital currencies.
In April, Canada approved the world’s first ether ETFs for retail investors. “This means you can purchase ether inside your RRSP or TFSA accounts,” Zagari notes.
No matter the means of ether ownership, investors must have some capacity for risk and a long investment horizon, carefully weighing the volatility risk against the potential payout, and allocating accordingly.
What about DeFi and NFTs?
More recently, ethereum’s use cases have expanded to include such innovative concepts as decentralized finance, or DeFi, and non-fungible tokens (NFTs). This evolution has pumped new oxygen in ether’s desirability.
DeFi is a system that allows users to lend, borrow or swap cryptocurrencies on a decentralized blockchain network, without involving banks or brokers.
NFTs, arguably the wildest ethereum innovation, are digital tokens that represent works of art. These tokens are applied to assets—artworks, music, memorabilia, and more—using blockchain technology, which helps verify ownership, uniqueness, and authenticity of the work. NFTs have unlocked new revenue sources for artists and creators, as aesthetes and collectors splurge big bucks on digital avatars of artworks and souvenirs.
Innovations like DeFi and NFTs are paving the way for a whole net set of functionalities for ethereum. It may be noted, though, that unlike bitcoin, ether coins can be minted ad infinitum. While only 21 million bitcoins will ever be issued, there’s no hard cap on ether’s supply. As of June 14, 2021, there were more than 116 million ether coins in circulation.
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