7 Potential Risks and Challenges When Investing in Ethereum 

If you are considering investing in ETH, you are not alone! As the second largest cryptocurrency, Ethereum sparks lots of interest in the crypto space. 

However, like any financial investment, it has its imperfections. To ensure you make an informed decision, here are seven potential challenges you might face when investing in Ethereum:

1. High volatility 
2. Competition from other blockchains
3. Security threats
4. High gas fees 
5. Regulatory concerns  
6. Market Sentiment 
7. Liquidity risk

Let’s now examine some of these challenges in detail to better understand their scope and learn how to manage them.

What Are the Challenges of Investing in Ethereum?  

1. High Volatility 

Volatility is to cryptocurrency as toppings are to pizza—inseparable. And Ethereum is no exception. Cryptocurrency values often fluctuate wildly in a short period. As an investor, you can accrue significant losses from price swings. 

While Ethereum’s volatile nature allows massive rewards, it can swing the other way. Hence, you must weigh the risk well before you enter a trade.

2. Competition from other blockchains

Competition also poses a threat to your ETH investment. A popular example is the Solana Blockchain. The rival chain handles similar ETH transactions per second and with lesser fees. If big chains like Solana and Binance Smart Chain draw developers away from ETH, the interest in the asset will be lower. With this growing interest in other competing blockchains, the demand for ETH might eventually dwindle, causing its value to drop. 

3. Security Threats

Before you invest in ETH, you must be aware of potential security threats. While largely considered “secure,” smart contract vulnerabilities can lead to massive losses. High-profile hacks and exploits have compromised several wallets and applications. 

Although ETH has specific measures to combat these security threats, it helps to know they exist. You can take necessary steps, like stronger passwords and better wallets, to curb the threats.

4. High Gas fees 

Network congestion on the Ethereum Blockchain leads to higher gas fees because a significant drawback influencing investing in Ethereum is the gas fee problems. Since the Ethereum gas fee is high, many investors often consider other cheaper options. The outflow of investors can drive down the price of ETH, which might harm your investment, especially when other options offer better fees for the same services.

5. Regulatory Concerns  

The price movement of Ethereum relies largely on regulations and its legal status. Cryptocurrency regulations are relatively new, and these uncertainties breed a lot of “maybes.” If more countries enforce strict regulations on crypto, it might affect ETH prices

However, you can save your investment by acting proactively. You can closely monitor developments on regulations and make decisions using the news. An example is when the Nigerian government restricted crypto trading, and traders now use platforms like the Breet app to sell their ETH for a seamless experience with competitive rates and low fees.

6. Market Sentiment 

Market sentiment is a critical aspect to consider when researching whether ETH prices will rise or fall. Like other cryptocurrencies, the price of ETH relies significantly on market sentiment.

If the market buzz is positive, many investors hop on the train and buy ETH, pushing its price up. However, bad news like a security breach can lead investors to jump out of their investments, driving the price down. As an altcoin, ETH’s price movements are also tied to Bitcoin. A price drop in Bitcoin might also affect ETH.

7. Liquidity Risk

Liquidity reduces the risk of a crypto investment. A coin’s liquidity is how easily it can be converted to cash. Investors can’t readily convert their investment to fiat currency when a cryptocurrency has low liquidity. While Ethereum has better liquidity than others, it also comes with risk. If Ethereum’s market participation lowers, it reduces liquidity and can affect your investment. 

Risk Mitigation Steps to Take When Investing in Ethereum

Here are risk mitigation steps you can take when investing in ETH: 

1. Use Secure and Reliable Crypto Wallets: When you put your Ethereum investment in secure and reliable wallets, you safeguard your investment against security threats. 

2. Gauge Your Risk Tolerance: Ethereum, like any crypto investment, has an inherent volatility risk. With that in mind, only invest what you can afford to lose. 

3. Keep an Eye on the Market: The market often swings wide. To ensure you are one step ahead, create investment strategies that match your trends and risk tolerance.

4. Monitor Regulations: You need to pay attention to regulations since global factors often drive ETH’s price—this way, you know when to exit and enter the market.

5. Try the Long-Term Investment Strategy: HODLing your ETH investment protects it from short-term volatility. You stand to gain much more by HODLing your investment and only liquidating it when the market is favourable.

Frequently Asked Questions (FAQs) About Challenges and Risks Surrounding Ethereum Investments

Is ETH Good As A Short or Long-Term Investment? 

Ethereum is suitable for both. However, going for long or short-term investment depends on your risk tolerance. If you have a low-risk tolerance, go long-term. If you have a high-risk appetite, you can trade short-term.  

Where Can I Sell My Ethereum for Cash In This Bull Run? 

To get the cash equivalent of your Ethereum, sell it on Breet. Breet is an over-the-counter platform focused on creating quick and seamless trades. In minutes, you get your ETH equivalent in Naira or Cedis. Sell your ETH on Breet for the best rates on the market and automatic trading. 

How does Ethereum 2.0 affect Investment?

Ethereum 2.0 introduced upgrades to the consensus mechanism powering the Ethereum chain. One of the upgrades is the reduction of the gas fee, which helps investors maximize their profitability, especially when selling their Ethereum tokens. 

What Crypto is a Better Alternative to Ethereum? 

Whether ETH is an excellent choice depends on what you are looking for. If you want low gas fees and similar Blockchain functions, you can opt for Solana and Binance Smart Chain. However, the ETH Blockchain offers more opportunities for building dApps and smart contracts. 

BTC or Ethereum, which should you buy?

Bitcoin and Ethereum are the biggest cryptocurrencies with varying use cases. However, the former is more established and recognized, making ETH riskier. However, both coins show excellent prospects. Your choice should be based on your investment goals, risk tolerance, and portfolio diversification strategy.