Introduction to Ethereum

This week I thought I would provide my thoughts on Ethereum technology since lately it has been receiving quite the attention in the media. After carefully thinking about how I could explain this advanced technology I decided the best way to articulate what the Ethereum technology is all about is through a Q&A format.

What is Ethereum? Is it the same thing as Ether?

Ethereum is a decentralized platform and Ether is the crypto-fuel or cryptocurrency that is built on top of the open source Ethereum blockchain. You can think of Ethereum as the internet and Ether as #Facebook, #YouTube or #Twitter which are applications built on top of the internet. All of the applications that run on Ethereum require computing power and that power comes at a cost. In order to support the Ethereum platform, developers created a digital currency to pay for transaction fees and computational services. Users can send Ether to other users forming an ecosystem of exchange, storage of value and developers can write smart contracts to receive, hold, and send Ether.

How do you view Ethereum as an investment asset? Is Ethereum a good investment right now in 2021?

As investors, our focus should be on what Ethereum can help build or what problems the technology can solve. Think about how the internet helped create #Google and #Gmail. Investors did not make their money by investing in the internet but rather investing in companies that was built on top of the internet. In my opinion, any investor who has a long-term time horizon and who can stomach severe volatility should consider adding Ethereum to their portfolios in 2021.

What specific role would Ethereum play in a diversified portfolio?

In my opinion, Ethereum can provide uncorrelated returns compared to traditional asset classes such stocks or bonds.

Adding Ether or Bitcoin or other cryptocurrencies?

I am currently following #Ether, #Bitcoin and #Cardano technology.

Investing is all about risk versus reward. Would you say Ethereum’s performance reward is worth the risk?

Yes, I do. If you can stretch out the extreme #volatility of Ethereum by spreading the risk over many years with a buy and hold approach, I believe you can produce an attractive risk/reward outcome.

Is Ethereum safe? A few words about its safety profile that investors should know.

Think of Ethereum as distribution of power. Do you feel more or less secure when one counterparty or entity has complete control over all the terms and conditions of your relationship?

From an investor perspective, I would classify this 6-year-old technology to be speculative therefore consider extreme volatility as a factor in your decision-making process before adding Ethereum/Ether to your portfolio.

What percentage or portion of your portfolio should be allocated to Ethereum /Cryptocurrencies? What part of your portfolio should they occupy?

It really depends on how much of your portfolio do you consider to be #illiquid. In other words, what percentage of your portfolio would you consider immovable for a few years? For most investors that number should not exceed 5% of your total portfolio.

Is Ethereum, and cryptocurrencies in general, more suited to investors of a certain temperament, demography, life stage or time horizon?

If you have a financial plan and you are already on target to reach your financial goals, incorporating a small portion of Ethereum into your portfolio is certainly an option worth considering. For others without a financial plan, I would advise against day trading any cryptocurrencies and instead consider a buy and hold approach.

If you have a financial plan and you are already on target to reach your financial goals, incorporating a small portion of Ethereum into your portfolio is certainly an option worth considering. For others without a financial plan, I would advise against day trading any cryptocurrencies and instead consider a buy and hold approach.

What are some of the ways Canadians can buy Ethereum with Canadian dollars? Which would you say is the safest way to buy Ethereum?

Canada was the first country in the world to list an #Ethereum ETF on a public stock exchange. This means you can purchase Ethereum inside your #RRSP or #TFSA accounts. You can also purchase Ethereum on platforms such as #Coinbase where you can create a digital wallet enabling you to hold Ethereum and many other cryptocurrencies. Both options are the safest and easiest way to adopt the technology into your life without the responsibility of storage or security of your investment.

Does the prospect of rising inflation increase the lure of Ethereum?

I think it does since rising inflation concerns highlights the benefits of Ethereum and other cryptocurrencies.

Could you please briefly speak to Ethereum’s role in #decentralized finance (DeFi) and NFTs?

Anytime we have intermediary such as a Bank completing a transaction between two parties, the rules that govern the relationship are highly in favor of the intermediary. Ethereum’s role acts as a disrupter to traditional finance by removing the intermediary and allowing direct peer to peer exchanges. #NFTs are also held on the Ethereum blockchain and can provide individuals such as artists and content creators a unique opportunity to monetize their individual services. By removing intermediaries who act as gatekeepers, NFT’s can provide artists and content creators exclusive ownership rights and direct access to public markets.

Additional thoughts on Ethereum?

In the 1830s, Samuel Morse co-invented the #Morse code, a technology with a set of rules that many people agreed upon designed to helped solve the problem of communicating from abroad. What I find interesting is that Samuel Morse did not actually own the technology he co-created. If Samuel Morse wanted to make changes to the Morse code, he would need everyone who used the technology to agree to such changes.

The distribution of power or control was not given to one person, group, or entity but rather the network itself. Now, imagine that same approach in areas such as government, wealth management, insurance, collectibles, and corporate governance.

Have a great weekend!

Talk soon,

Michael