How to buy Ethereum: Navigating the crypto market

Although Bitcoin is the leading cryptocurrency by market value, Ethereum is a strong contender in its own right. With a market capitalization exceeding $230 billion, it stands as the second-largest cryptocurrency. If you're interested in purchasing Ether, the official token that powers the Ethereum platform, here’s how to begin.

How to purchase Ethereum

Investing in Ethereum might be more straightforward than you think. Follow these five steps to get started:

1. Assess your risk tolerance

Investing in Ethereum involves a degree of risk. While all investments come with some level of uncertainty, cryptocurrencies are particularly susceptible to price volatility. For instance, after Elon Musk tweeted about Tesla no longer accepting Bitcoin as payment, the value of Bitcoin dropped by 15%. 

Ethereum has seen significant returns in the past but has also experienced sharp declines, sometimes in very short periods. For example, it plummeted from nearly $4,000 per coin in May 2021 to under $1,800 by June 2021. If you bought at the peak, your investment would have been halved in just a month. 

Therefore, it’s crucial to evaluate your risk tolerance and consider the diversity and stability of your overall investment portfolio before purchasing Ether. Experts advise that you should only invest what you can afford to lose.

2. Select a cryptocurrency exchange

Buying Ether is a bit more complex than purchasing stocks or mutual funds through a traditional brokerage. Cryptocurrencies are not traded on major exchanges like the New York Stock Exchange (NYSE), and many brokerages do not facilitate crypto investments.

To buy cryptocurrencies, you'll need to create an account on a crypto exchange. These platforms function similarly to brokerage sites, allowing users to exchange fiat currencies (like USD) for cryptocurrencies such as Ethereum, Bitcoin, or Dogecoin. If you don’t have a specific exchange in mind, check out our list of recommended cryptocurrency exchanges to find one that fits your needs. While some exchanges may have complex trading interfaces, many provide simple purchasing options for beginners, albeit with potentially higher fees.

When selecting an exchange, ensure it offers a crypto wallet to securely store your assets. Most exchanges provide this, but if yours doesn’t, you'll need to set up a separate wallet.

For those completely new to crypto, platforms like Robinhood or Cash App can simplify the buying process. However, be aware that using these platforms often means you can’t withdraw your Ethereum to a third-party wallet or spend it directly, as transactions can only occur within the platform.

3. Fund your account

Before purchasing Ethereum, you must deposit funds into your exchange account. Typically, you can transfer money from a personal bank account, complete a wire transfer, or use a debit card or PayPal.

When selecting a funding method, keep an eye on the exchange's fees, as they can vary by payment type.

Be cautious: Some platforms allow credit card purchases for cryptocurrencies. However, credit card companies often treat these transactions as cash advances, which may incur higher interest rates and additional fees.

4. Purchase Ethereum

Unlike stocks or ETFs, which are restricted by market hours, cryptocurrencies can be bought and sold 24/7 due to their decentralized nature.

To buy Ethereum, enter its ticker symbol—ETH—into the exchange's "buy" section and specify the amount you wish to purchase. If you don’t want to buy a whole Ethereum token or lack sufficient funds, you can buy a fraction of a coin. For example, if Ethereum costs $2,000 and you invest $100, you’ll acquire 5% of an Ether coin, similar to buying a fractional share of a stock.

5. Secure your Ethereum

Once your Ethereum purchase is complete, you need to store it safely. Some exchanges will hold your assets for you, but many prefer to manage their investments independently to minimize the risk of theft. While most reputable exchanges insure client holdings and keep the majority of their assets offline to prevent hacks, historically, exchanges that have experienced breaches often reimburse losses.

If you prefer added security, you can transfer your Ethereum to one of two types of external wallets:

• Hot wallet: These wallets are connected to the internet and can be accessed via computer or smartphone. While they are convenient and often provided free by exchanges, they carry a higher risk of security breaches due to their online connection.
• Cold wallet: In contrast, cold wallets are physical devices that are completely offline. These typically range in cost from $50 to $200, with more expensive options available. Although they are less convenient—requiring a manual connection to access your crypto—they offer enhanced security and are advisable for those holding significant amounts of Ethereum or other cryptocurrencies.

Selling Ethereum

When you’re ready to sell your Ethereum, simply return to your crypto exchange and specify the amount you wish to sell.

However, if you plan to sell a large quantity of Ether, it’s wise to consult a tax professional. Despite its decentralized nature, cryptocurrency is subject to taxation under federal law. Profits made from selling crypto are generally liable for capital gains taxes, which can significantly impact your tax obligations to the IRS when tax season arrives. 

Make sure to keep accurate records of your transactions to help streamline the reporting process and ensure compliance with tax regulations.

Is investing in Ethereum right for you?

Ethereum enjoys immense popularity, with over 116 billion coins held by investors worldwide. However, its status as a well-known cryptocurrency doesn't necessarily mean it's the best choice for your investment strategy.

Before committing to a volatile asset like Ether, it's crucial to conduct thorough research and ensure your financial situation is stable. Ideally, you should have a substantial emergency fund, be maximizing contributions to your retirement accounts, and maintain minimal debt. Even if you meet these criteria, remember that diversification is key. It’s wise to limit your exposure to Ethereum and other cryptocurrencies to a small portion of your overall investment portfolio. This way, you can mitigate risk while still potentially benefiting from the growth of the crypto market. 

Additionally, consider your investment goals and time horizon. If you’re looking for long-term growth and can tolerate short-term volatility, Ethereum might fit your strategy. However, if you prefer safer, more stable investments, you might want to explore other options or allocate only a small percentage of your portfolio to cryptocurrencies. Always make informed decisions that align with your financial goals and risk tolerance.