Ethereum is a more recent virtual currency, and it started trading in August 2015. Ethereum is currently the second-largest coin in market value, second only to Bitcoin. The reference Crypto when talking about these currencies comes from the cryptography that is used in producing these virtual coins. That is, a coin is produced once an algorithm has performed a series of calculations using computers.
This production process is called mining. However, don’t think you can just turn on your laptop and produce as many Ethereum coins as you would like. Each coin is produced through an algorithm that takes a lot of computer power, electricity, and days to finish calculations. I’m talking about computers of the highest specifications, thousands of kWh per day, and up to 62 days to mine 1 coin.
This is certainly of no impediment if you are looking to be an Ethereum trader, it’s just worth knowing that producing the virtual coin Ethereum is not at all that easy. Miners, as the producers of cryptocurrencies are called, are paid in coins. This creates the supply for coins and is totally independent.
Ethereum is built on a worldwide network of computers. The computer network behind Ethereum is used to power a variety of applications in the financial world. It is also used to run other crypto assets. Each time these applications use the Ethereum blockchain they need to buy some coins to pay for the services. This creates a demand for the Ethereum coins which are also known as Ether and denominated by the letters ETH.
ETH, as with all virtual currencies, is not controlled by any central authority and therefore is completely self-governing. The virtual currency relies on a network of miners and investors, which is widespread and spans all four corners of the world. Probably the most important features are those of incorruptibility and transparency.
These coins are created through an algorithm that continuously adds blocks of data to a ledger. This technology is known as blockchain. Each coin is added to the next and the ledger is encrypted in such a way as to prove unbreakable, which makes it impossible to counterfeit them.
A feature that sets Ethereum apart from Bitcoin is the maximum number of coins that can be created, or supply limit. Bitcoin has a maximum all-time limit of 21 million coins, whereas Ethereum has no upper limit on the number of coins that can be mined. There is a yearly limit on Ethereum set at 18 million coins a year.
Ethereum’s creator Vitalik Buterin didn’t expect supply to surpass 100 million coins within the near future. When that upper limit was reached he issued an Ethereum Improvement Proposal (EIP) to limit total supply at 120 million, the EIP has not been accepted so far.
Choosing the Trading Style That Suits You
As with all assets when you look at trading Ethereum you will be considering firstly what type of trading you will be implementing. Ultimately, this choice will depend on your trading style and appetite for risk. Keeping positions open for only one day will certainly be less risky than keeping positions open for medium or long-term horizons.
Depending on your trading style you will have different requirements when it comes to choosing your Ethereum broker. You will need to take into account how frequently you will be trading and if it suits you better to let your broker or exchange take care of the custody of your virtual coins or keep custody of them yourself. Let’s have a closer look at the concept of custody.
If you are going into this market with a medium or long-term buy and hold investing horizon you will need a place to hold your virtual coins. These places are known as wallets. These wallets are where your broker will place your cryptocurrencies for custody. Most of the top centralized crypto exchanges have wallets available to their users.
These wallets are only accessible with a key, which is like a private password. The downside is that the exchange holds the property of your wallet key. However, they usually offer some kind of insurance in the case the servers of the exchange are compromised and coins stolen.
Not Your Keys, Not Your Coins
This is a common saying in the world of cryptocurrencies. The private key, which acts as a password, is the data that allows you access to your coins. When making a transfer or accessing your funds you will need this key. However, if you are not the owner of this key you do not have independent access to your coins.
This may or may not be a concern for you, but if you are not the owner of the key you are also not in total control of your coins. The owner of your key, usually the exchange providing custody, may implement limits on withdrawals or how you access your coins.
Owning your keys is the only way to have full financial control over your coins, but it does have a downside. If you are the owner of the keys to your wallets you will also be responsible for the security of those keys. If someone were to access them they could steal all your coins without a trace.
Keeping your coins on a centralized exchange and outsourcing the security of your keys at the expense of ownership may be worthwhile for many traders. If you own large amounts of coins it may be wise to cash in regularly not to leave yourself fully exposed.
Ethereum Trading Platform
Now that you have determined what type of trading style you will be following you need to consider which Ethereum trading exchanges will be the right fit for you. There are two types of exchanges, centralized and decentralized.
Firstly we will have a look at centralized exchanges, meaning all user traffic goes through the servers owned by the exchange. This centralization confers the exchanges the ability to maintain the wallets for their users. It also allows for greater liquidity as all trading orders converge to one place, the exchange.
In a way, centralized exchanges act as an intermediary, in the same manner as a stock exchange would. Some exchanges may also offer Ethereum margin trading, allowing you to take on more risk or to short sell. The levels of leverage are much lower than normally seen in FX or CFD markets. The typical leverage might be something like 5 to 1 or less. If they also allow for short selling you will need to borrow the coins.
Consider Ether as an asset, if you don’t own it already but believe the price will go down you can still open a sell position. The exchange will borrow the Ether from one of its users, or lend you the coins it has in its stock. The user lending the coins will receive compensation allowing users to gain an income while the Ethereum is in their wallets.
If you think you may want to offset your Ethereum trade against another cryptocurrency, for example, Bitcoin you will also find that crypto pairs are available on most exchanges. So, you would be able to trade ETH against BTC directly. This avoids trading BTC/USD and ETH/USD, where you will be paying two fees and crossing two bid offer spreads.
Centralized exchanges are obligated to follow Know Your Client (KYC) protocols. This means that for most exchanges you will need an official ID, proof of address, etc. to open an account. I say most exchanges as it will depend greatly on where the exchange is based that will determine how regulated these exchanges are.
This centralization, as a concept, may seem far away from the original idea of cryptocurrencies, however, they offer more liquidity and are easier to use for first-time traders and investors. If you want complete anonymity and control of your wallet keys you may want to consider using decentralized exchanges.
These decentralized exchanges use peer-to-peer technology to close trades among their users. They are also anonymous, and you will not be required to go through the KYC protocol. This also means you will be in control of your wallets and the keys. In theory, you may be more exposed to hackers, as centralized exchanges have extremely high standards when protecting themselves from outside threats.
Probably the feature that distinguishes them from centralized exchanges is that there is no single place of custody or exchange of data. Decentralized exchanges are run by a multitude of computers all over the world. If one server gets hacked it will hardly affect the operability of the exchange. In the case of a centralized exchange, if hackers were able to break into their servers many users could see their coins stolen and their data breached.
Some decentralized exchanges offer Ethereum leverage trading, they may also be able to offer you short selling. Within their peer-to-peer technology, some exchanges can connect short sellers with holders of Ethereum and allow for the holder of the coin to lend to the short seller.
Depending on your Ethereum trading strategy you may find one type of exchange more convenient than another. If you are more concerned with anonymity then your most probable choice would be a decentralized exchange.
Another thing to look into closely is fees. Fee schedules in the world of cryptocurrencies are extremely uneven. Each exchange may have extremely varied schedules compared to others. Exchanges often design their fee schedule depending on trade size, volatility in the underlying coin, or type of cryptocurrency.
Trading Ethereum Through FX Brokers
You could also look at trading Ethereum using forex brokers. Many brokers offer CFDs in the more popular virtual coins. What you may find is that the broker offering CFDs might quote a wider Ethereum trading price. That is the spread between the bid price and the offer price may be wider than some of the exchanges specializing in cryptocurrencies.
However, you are exempt from any possibility of your wallet being hacked as this is a derivative so you will not actually own any virtual coins. You also won’t be paying any fees as the broker will make his fees through the bid offer spread. Depending on your broker you may have limits on exactly how large a position you can open.
Trading Ethereum using CFDs allows you to take advantage of the high leverage applied to CFD trading. Most brokers will apply the same amount of leverage that is applied to the FX and other CFD markets. You will also be able to short sell Ethereum, and not worry about borrowing costs. As these markets are a derivative and no coins are actually exchanged.
Day Trading Ethereum
When looking at how to trade Ethereum you will have to take into consideration other factors that divert greatly from the typical macro-economic narrative driving FX markets. On the other hand, technical analysis still works well on cryptocurrencies, if not even better.
The reason why technical analysis may work better with virtual currencies might lie in the fact that there are fewer fundamentals to look at, or that the ones available are harder to access, giving more meaning to technical analysis.
Whether you chose to trade Ethereum through CFDs or use one of the two types of exchanges, you will need to pay attention to the factors that are particular to this market.
The price of Ethereum may be impacted by what is perceived as a threat or possibility of more regulation by central authorities. This action may drive away some investors or may cause the virtual currency to lose some of its attractiveness.
The essence of cryptocurrencies at its creation was to have a financial tool that was completely unregulated and decentralized. Having central authorities regulate cryptocurrency activity makes it less desirable.
Market manipulation may also be a concern if the market sees large orders placed in one direction causing a squeeze on coins offered or a lack of bids to fill the order. This may be a concern as there is no market oversight, traders could team up and influence the market.
New technological advancement may cause prices to fluctuate. Advancements in transaction costs and mining may cause changes in availability and could send markets higher or lower. Mining tends to be continuously more expensive. This is because as the algorithm continues to produce new blocks, each new block takes more calculations to produce, and therefore more electricity.
Growing acceptance is also a determining factor for cryptocurrencies. Demand for a virtual coin will increase as it becomes accepted across the ecosystem. Acceptance can be from online retailers to high street stores and local governments throughout the world.
Media coverage also plays a role as a price developing factor. Lots of negative media coverage will send prices lower. For example, when an exchange has been hacked or having technological difficulties. Another factor could be central banks forbidding its use or trading. In the same way, positive coverage will send prices higher. For example, when a major retailer announces acceptance of payment with coins, or large international banks announce involvement in cryptocurrencies.
As with many other markets, technical indicators also work well with Ethereum trading. You may find that not all exchanges offer the full scope of indicators that you may find on MT4. However, you will usually find that your MT4 platform account also has Ethereum. Or you can use another free online charting service like Tradingview.
Ultimately, your best bet is to combine technical with fundamental analysis. Technicals will give you plenty of information, however, without having your ears pinned to the ground you may find yourself on the wrong side of some trades surprisingly. You will need to navigate the internet in search of all the latest news events relevant to the crypto world and Ethereum in particular.
Ethereum has been consistently growing in volume and market share since its inception. It is currently second in terms of market value only to Bitcoin. The fact that it has an underlying demand created by users of the Ethereum network balances out the fact that it has an unlimited supply limit. It definitely looks like this cryptocurrency is here to stay.
If you are new to Ethereum and cryptocurrencies in general your easiest choice may probably be a centralized exchange to start trading. These exchanges have plenty of information to guide you through getting onboard and setting yourself up for business.
These exchanges also offer you services such as charts, margin trading, and short selling. They will also provide custody for your wallets, which is where your coins are stored. True, you do not have ultimate control of your coins, but if you are not an expert in the matter, conferring the responsibility of the security of your coins to a centralized exchange may be a good option.
Decentralized exchanges may be an option if you’re a fast learner, or anonymity is your upmost concern. If so, shop around, as some offer features that are close to or the same as those found in centralized exchanges.