What Is Ether (ETH), the Cryptocurrency of Ethereum Apps?

Ethereum and ether (ETH) are terms used for the ether digital currency, but they're not quite the same thing. Ethereum is the blockchain-based platform behind everything from financial transactions to digital art sales, all thanks to its coding language. By contrast, ether is the name of the cryptocurrency that fuels this digital ecosystem.

Understanding the distinction is a starting point for anyone looking to explore the world of digital assets. Below, we discuss the most important aspects of this cryptocurrency.

What Is Ethereum?

Ethereum is a decentralized development platform using blockchain technology. It was created to provide a base for building applications, cryptocurrencies, tokens, and other tasks needing distributed and secure databases.

With Ethereum, you can tokenize various types of information, from passwords and personal data to finances, real estate, and debt. Tokenization requires cryptographic techniques to secure and track ownership within the blockchain databases. The blockchain includes snapshots of the entire database, the cryptographic hash, and places them securely in each new block, making it impossible to alter past records.

Ethereum runs on a global network of computers (nodes) that work together to run programs called smart contracts and decentralized applications (dApps). This distributed network, powered by the Ethereum virtual machine (EVM), evades control of this information within a single system or entity, which is the decentralization blockchain proponents find crucial.

Developers use the EVM to build a wide range of dApps, including those with uses across society:

• Finance: dApps like Uniswap and Compound allow users to trade tokens or engage in decentralized finance (DeFi) directly from their digital wallets without the need for traditional banks. Imagine swapping tokens or securing a loan at any time, even in the middle of the night.
• Gaming: Ethereum hosts games like Axie Infinity, where players breed and battle digital creatures while earning rewards. It also powers virtual worlds like Decentraland, where users can buy virtual land, attend events, and socialize.
• Governance: Ethereum is also a base for decentralized autonomous organizations (DAOs) like MolochDAO. These organizations use smart contracts to make community decisions, which proponents say eliminates the need for traditional forms of governance.

While blockchain offers enhanced security, it's important to remember that Ethereum isn't resistant to every threat.

What Is Ether?

Ethereum, like any complex system, needs resources to function. It's a distributed network, meaning there's no central owner, but the computers (nodes) that keep it running need power and other resources to run. This requires some method of compensating for these costs. Think of it like paying your internet bill—someone has to pay for the service.

That's where ether, Ethereum's cryptocurrency, comes in. When you use Ethereum for an application or transaction, a small fee is paid in ETH. These fees cover the expenses of those running the nodes, like electricity and hardware. They also act as an incentive for people to contribute the use of their computer systems as a node in the wider EVP.

When discussing Ethereum's price, you're talking about the value of ETH. Ether is the payment method in the EVM and is used to pay network participants for the expenses (and a little extra) they incur for securing the blockchain and validating transactions.

Ether Uses

Ether has a market value that can be checked on any cryptocurrency exchange and most financial platforms. You'll often see the name Ethereum, even though the data is for ether, the currency.

You can use ether to pay for goods or services at participating merchants and retailers. Investors, of course, trade ether for speculation, the quest to make money with money. They use strategies like those found in the stock market, such as buying and holding, day trading (buying and selling ETH throughout the day to capitalize on short-term price changes), scalping (making many small trades to profit from tiny price fluctuations), and arbitrage (taking advantage of price discrepancies between different ether exchanges).

How to Buy Ether

Although ether is the native cryptocurrency for Ethereum, it is also found on most cryptocurrency exchanges. You can find it on popular exchanges like Coinbase, Kraken, Gemini, Binance.US, and KuCoin.

To buy ether, you need a wallet compatible with your chosen exchange or use that exchange's wallet. Generally, you link a bank account with your wallet and transfer funds to the exchange to begin trading.

Should You Invest in Ether?

Whether to buy crypto was once only a question for a few tech enthusiasts and early adopters, but now it's commonly asked by many mainstream investors. How you answer depends on what you want to use it for. For instance, if you want to shop online with fewer entities knowing what you're doing, ether is an excellent way to do that. You only need to buy the amount of ether you'll need and spend it at an online retailer that accepts it. However, factor in the transaction fees Ethereum charges—you may pay a few dollars in fees for the convenience, plus sales tax.

If you're considering investing in ether, it's prudent to talk to a professional financial planner and discuss how ether might work as part of your portfolio. Cryptocurrencies are volatile, so it helps to have a professional's assistance. To invest in ether, you could put money into companies developing products using Ethereum. For example, ConsenSys, a blockchain software company, builds tools and applications directly on the Ethereum platform. Others, like Microsoft Corporation (MSFT) and Amazon.com Inc. (AMZN), have been using Ethereum-based products for identification security and supply chain tracking for about a decade. Meanwhile, gaming firms, such as the developers of Decentraland and Axie Infinity, utilize Ethereum to create virtual worlds and digital experiences.

Ether Futures ETFs

It is also possible to gain exposure to Ethereum through an exchange-traded fund (ETF). The most common ETFs hold traditional assets, such as stocks and bonds, but there are also funds that seek to replicate the performance of ether and other cryptocurrencies.

Typically, ETFs track the price performance of an asset by holding them in their portfolio. For many years, the U.S. Securities and Exchange Commission (SEC) prohibited ETF managers from directly holding ether or other cryptocurrencies, but these funds could hold a portfolio of futures contracts tied to the expected prices of ETH. Futures are contracts to buy or sell an asset at a preset price on a given date. By holding these contracts, ETF allowed mainstream investors to speculate on the value of ether without assuming the managerial risk of holding ETH directly.

Ether futures ETFs like the VanEck Ethereum Strategy ETF (EFUT) and the ProShares Ether Strategy ETF (EETH) began trading in October 2023. Their debut was underwhelming. However, once spot bitcoin ETFs were approved a few months later, interest in crypto and the value of ETH spiked. In short order, EFUT and EETH nearly doubled their post-listing returns. Soon enough, though, their value pulled back significantly but still above their October 2024 pricing, demonstrating the volatility of crypto-related securities.

Two notable drawbacks of futures ETFs are higher fees than holding crypto directly (derivatives bringing more managerial complications), which can produce less returns than the target asset. To invest, find a broker that offers these types of ETFs, then open an investment account and start trading.

Ether Spot ETFs

Prior to 2024, ether ETFs could only invest in futures contracts, not ETH tokens. Fund managers like VanEck, Grayscale, and Fidelity sought to change that, and requested a rule change that would allow their ETFs to directly hold ether.

U.S. authorities were reluctant to allow retail investors to gain exposure to cryptocurrencies, citing the risks of volatility and market manipulation. As cryptocurrencies became more popular, the SEC ramped up its enforcement of digital assets (doubling the size of its crypto investigations unit in 2022 and 2023).

However, in August 2023, an appeals court ordered the SEC to review its prohibitions on spot bitcoin products, and the regulator ultimately authorized the first 11 spot bitcoin ETFs the following January. With funds now allowed to hold bitcoin directly, it was widely expected that other cryptocurrencies would follow soon after. On May 23, 2024, the SEC authorized a rule change to allow spot Ether ETFs, opening the door for funds to directly buy and hold ether on behalf of retail clients.

The Bottom Line

Ether is a cryptocurrency used in Ethereum's global virtual machine. It was created to compensate Ethereum participants for securing the blockchain and validating transactions, but it can also be used to pay for various goods and services. People also buy the world’s second-biggest cryptocurrency with the view of later selling it at a higher price. Options for capturing returns from a rise in its price include ether futures ETFs, which trade on U.S. exchanges. Thus far, spot ether ETFs do not. Like other digital currencies, ether's value is volatile.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info. As of the date this article was written, the author owns BTC and XRP.