Investing in Ethereum

Ethereum (ETH -0.56%) is the decentralized, open-source technology that powers much of the crypto world. Everything from decentralized finance (DeFi) applications and non-fungible tokens (NFTs) to enterprise blockchain solutions relies on Ethereum's technology.

Ethereum's native token, Ether, is the second-largest cryptocurrency after Bitcoin (BTC -0.63%). The Ethereum Merge, the network's long-awaited shift to a proof-of-stake system, is expected to make the technology remarkably more energy-efficient. The Ethereum Foundation has predicted the shift will cut energy usage by around 99.95%.

If you want to profit from the growing use of Ethereum, there are several ways you can invest. The most direct option is buying Ethereum itself. Because it's extremely volatile, this carries the greatest risk but also the greatest potential profits. Another option is buying Ethereum stocks, including managed funds that invest in Ethereum for you and companies with large exposure to Ethereum technology.

What is Ethereum?

Ethereum is an open-source blockchain technology in the form of software. Software developer Vitalik Buterin originally proposed the idea in 2013, and Ethereum launched in 2015.

Any developer making an application that would benefit from blockchain technology can build it on the Ethereum network. While Ethereum is most associated with its native Ether token and other cryptocurrencies, its technology is also enabling widespread innovation in industries as diverse as insurance, logistics, and healthcare.

Developers write programs on Ethereum using self-executing, self-enforcing protocols called smart contracts, which are deployed to Ethereum-powered blockchains. The blockchain's network of computers executes the smart contract by performing specified actions when the conditions of the contract are met. Blockchain data can't be modified after it's created, and that gives users confidence in the technology.

Although early cryptocurrencies, most notably Bitcoin, are merely stores of value that can be transferred, Ethereum has more uses. If Bitcoin is a smartphone app, Ethereum is more like the device maker. Ethereum's cryptocurrency benefits from its technology because transaction fees for decentralized applications on its blockchain are paid in Ether.

What is the Ethereum Merge?

The Ethereum Merge is the term for the network's switch from its original proof-of-work system to a proof-of-stake system, scheduled to occur in mid-September 2022.

When Ethereum launched, it used proof of work, the same system used by Bitcoin, to validate and record transactions. A notable drawback of this system is extremely high energy usage, which has led to Bitcoin using more power per year than some entire countries.

In 2020, Ethereum introduced the Beacon Chain, a proof-of-stake network. However, it continued using its original proof-of-work mainnet for processing transactions. The Merge is when Ethereum will combine the Beacon Chain with the mainnet and make the transition to proof of stake.

The primary benefit of The Merge is energy efficiency. Transaction speeds will change a small amount but not enough for most users to notice.

Top Ethereum stocks

Here are the best stocks to buy if you want to add Ethereum to your portfolio:

1. Grayscale Ethereum Trust

The Grayscale Ethereum Trust (ETHE -2.38%) is a managed fund that makes it easy to add Ethereum to your brokerage account. Each share is backed by a fixed amount of Ether tokens (approximately 0.01 Ether per share).

Keep in mind that the fund's share price is often lower than the value of Ethereum at the prevailing conversion rate. Grayscale also charges a somewhat expensive annual management fee of 2.5%. Shareholders can't exchange shares for Ethereum, so there's no price arbitrage opportunity.

2. Bitwise Ethereum Fund

Bitwise is the world's biggest crypto index fund manager. It offers managed funds for multiple types of cryptocurrency, and one option is the Bitwise Ethereum Fund.

The fund is available to accredited investors and has a minimum investment of $25,000. The fund's managers seek to minimize transaction costs, and they hold the fund's Ethereum offline in cold crypto storage, making it a cost-efficient and secure Ethereum stock. There's an annual management fee of 1.5%.

If you want a more diverse digital asset portfolio, check out the Bitwise 10 Crypto Index Fund (BITW -1.31%), which includes a mix of several of the top cryptocurrencies.

3. Coinbase

Coinbase (COIN -5.13%) is the largest cryptocurrency exchange in the U.S. The company charges transaction fees to buyers and sellers of a wide range of cryptocurrencies, including Ethereum. In addition to Ethereum, many other cryptocurrencies traded on Coinbase use the Ethereum blockchain.

The exchange rolled out Ethereum staking in 2021, allowing investors to lock up their Ether and earn rewards on it during the upgrade to a proof-of-stake system. Coinbase's staking program is expected to significantly benefit from the completion of The Merge. Analysis from Goldman Sachs (GS -2.38%) predicts that Coinbase will generate $250 million to $600 million in additional revenue from Ethereum staking.

4. Staked ETH Trust

The Staked ETH Trust is the first traditional investment vehicle that allowed shareholders to get Ethereum exposure and receive staking rewards. It's open by private placement to accredited investors, with a minimum investment amount of $25,000 and an expense ratio of 1%.

Considering the attention that Ethereum staking is getting from The Merge, the fund could become very popular. The staking rewards allow the trust's underlying Ether holdings to grow about 7.5% annually, helping it to outperform non-staking funds.

The biggest advantage of the Staked ETH Trust is how much it simplifies staking for investors. You invest in it by buying shares, like any traditional investment vehicle, and the staking itself is handled by the fund administrator.

5. Robinhood Markets

Robinhood Markets (HOOD -2.2%) may be best known as the discount broker that ushered in the age of commission-free trading. That's not the only way it has been ahead of the game. In 2018, it began offering crypto trading of Bitcoin and Ethereum.

The broker has since expanded its selection to include a few other cryptocurrencies, including Litecoin (LTC -0.63%) and Bitcoin Cash (BCH -0.55%). Although Robinhood isn't a pure cryptocurrency play, it does offer some exposure to Ethereum.

How to invest in Ethereum

If you want to directly invest in Ethereum, you can buy it through a crypto exchange, a stock broker, or even a payment app that carries it. Since Ethereum is one of the largest cryptocurrencies by market cap, it's available on almost all platforms that sell crypto.

Here are the different types of platforms you can use to buy Ethereum:

• Cryptocurrency exchanges: The exchanges let users buy, sell, and trade cryptocurrencies. Examples of popular crypto exchanges include Coinbase and Gemini.
• Stock brokers: Some stock brokers have started selling select cryptocurrencies, with Robinhood being the most prominent example.
• Payment apps: You can buy and sell crypto, including Ethereum, on PayPal (PYPL -2.63%) and Venmo, which is owned by PayPal.

For serious crypto investors, a crypto exchange is usually the best option. Exchanges offer the widest selection of cryptocurrencies and the most features. They also let you transfer your crypto off the exchange to a crypto wallet that you control. Stock brokers and payment apps often don't let you transfer your crypto anywhere.

Related investing topics:

Should you invest in Ethereum?

Ethereum technology is at the core of most blockchain applications. Many believe blockchain will play a significant role in the future of finance and other industries, making exposure to Ethereum technology a potentially profitable addition to your investment portfolio.

The value of Ether as a digital currency is much more volatile and unpredictable than the growth of Ethereum technology. You can mitigate some of that risk and should take steps to guard against hacking, but, ultimately, the value of any investment directly linked to Ether is likely to fluctuate.

Any of the above investment recommendations deserves consideration, especially if you believe that the development of blockchain technology is only just beginning.