Ethereum 101: What investors should know

If Bitcoin is the first and best-known cryptocurrency, Ether, the currency for the Ethereum network, comes in a close second.

Like Bitcoin, Ethereum, which launched in 2015, runs on a “blockchain” – a decentralized digital ledger, like a shared diary, that is stored on many computers around the world. Each time there is a transaction on the blockchain, it is recorded in a “block” that is linked to the one before it using cryptography. Once a block is added to the chain, it cannot be changed without changing every single copy, making it nearly impossible to tamper with.

However, while Bitcoin uses blockchain to store and send value, Ethereum uses blockchain for a variety of innovative applications. Think of it as a decentralized version of the Apple AppStore or Google Play, but instead of a company running it, it runs itself on a network of computers. Developers use Ether to pay for the costs of running applications or processing transactions, covering energy and computing power. But even if you’re not a developer, you can still buy and sell Ether, just like Bitcoin.

Today, Ether is the second-largest cryptocurrency by market cap.¹ There are roughly 121 million Ether, each worth around $2,500, as of June 2025 (although the price can be highly volatile).

Ethereum is sometimes described as a global computer that anyone can use but that no one controls. There’s a physical component to it; the actual network runs on thousands of computers, called “nodes,” running Ethereum software. Developers write code, or “smart contracts,” that run on the Ethereum blockchain. To perform more complex tasks, such as swapping tokens or issuing loans, developers put together collections of smart contracts known as decentralized applications, or “dapps.” Users pay in Ether to cover the costs of running everything.

So far, Ethereum’s most common uses are decentralized finance (DeFi) and non-fungible tokens (NFTs).

• DeFi refers to a decentralized financial ecosystem built on blockchain technology that aims to provide open, permissionless financial services, such as lending, borrowing, and trading, without the need for traditional financial institutions.
• NFTs are unique digital assets, mostly used to prove control or ownership of digital art and other collectibles on the blockchain – acting like a certificate of authenticity. Like other crypto assets, NFTs can be traded through exchanges and transferred from one crypto wallet to another.

Morgan Stanley Wealth Management takes no position on whether investors should buy, sell, or hold Ether. That being said, it is likely they will hear a variety of cases for and against it. Here are some potential pros and cons to know:

Potential pros:

• Bigger market: Because Ethereum powers not just a currency but a whole network of dapps and contracts, it has more uses than Bitcoin and potentially a much larger addressable market. This could lead to wider adoption and demand for Ethereum, potentially increasing its value relative to Bitcoin down the line.
• Limited supply: Ethereum also has some built-in features that limit the supply of Ether. Under Ethereum’s new system, every transaction “burns” a little Ether. If a lot of people use Ethereum, the supply of Ether could shrink, potentially pushing up its price. On top of that, people who run the network have to lock up a supply of Ether, further limiting supply.

Key risks:

• Volatility: Over the last seven years, Ether has been more volatile than Bitcoin and several times more volatile than traditional equities.²
• Concentrated ownership: As of mid-2025, the top 100 addresses held nearly 73% of all Ether. (By comparison, the top 94 addresses for Bitcoin held 18% of that cryptocurrency.) More than half of all Ether is tied up in the “staking contract,” which enables users who deposit Ether into it to create a node that can validate Ethereum transactions. If there is an issue with that contract, it could have an outsized impact on the price of Ether. For the other top accounts, if several of those users decide to sell, it could also have an outsized effect on the price of Ether.
• Software complexity:  There have been more than a dozen major software updates in the past decade. Occasionally upgrades cause “forks,” with some stakeholders going along with the software change and others not. This can create confusion or split the value of the currency.
• Limited scalability: As more smart contracts and dapps are deployed, Ethereum’s blockchain grows rapidly. This increases hardware demands on the network’s nodes, potentially making it harder for individuals to participate and concentrating control in the hands of a few. That would make the network more complex and centralized, potentially compromising its stability or security.
• Regulation: This is a looming wildcard. The cryptocurrency industry has come under growing regulatory scrutiny that could affect demand for Ethereum-based dapps  – and, by extension, demand for Ether, potentially weighing on its value.
• Competition: Cheaper or faster blockchains like Solana or Binance Smart Chain are challenging Ethereum’s dominance. Ethereum could lose market share despite its early lead if developers and users migrate to these platforms. If other networks become more popular, there would be less demand for Ethereum and, by extension, Ether, which could weigh on the cryptocurrency’s price.  

While Bitcoin and Ethereum have historically had low correlations with other asset classes, Ethereum is often more correlated with the S&P 500 Index than Bitcoin.¹ That means replacing some Bitcoin exposure with Ether could make a portfolio more correlated to US equities.

Ether and other cryptocurrencies are still quite new, and the long-term outlook for Ether is yet to be seen; new challenges are likely to come up. Investors should become familiar with the various uses for cryptocurrencies and risks before buying. 

Article Footnotes

¹ "Ethereum," Fortune Crypto, accessed July 24, 2025: https://fortune.com/crypto/crash-course/ethereum/

² Source: Bloomberg data, Morgan Stanley Wealth Management

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