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Before we discuss how to buy and trade Ethereum, we should begin with explaining how Ethereum came about. The infographic below traces the history of Ethereum and identifies the key events that led it to, currently, the second spot on the cryptocurrencies market share league table. The only real competition for Bitcoins crown at the moment.
The crypto market has seen a lot of volatility recently and given how new it is, it's not that surprising.
Ethereum has been burdened with a lot of this volatility, often characterised as the digital currency that moved the most, we look to examine why this is the case and exactly what Ethereum is? Why it's worth paying attention to and why we think it could be the first cryptocurrency to overtake Bitcoin in the market cap table.
Below is what we will discuss:
The term 'Ethereum' works the tongue when pronouncing it but it is a word we must become accustomed to if we intend to understand the next wave of blockchain technology.
It is the decentralised platform that runs the smart contracts. Developed by the Ethereum Foundation, a Swiss non-profit, who has some of the sharpest minds when cryptocurrencies are the topic.
The platform is where all applications run as they were programmed, with no fraud, no third-party interference or any downtime. This is unique to Ethereum.
The blockchain is a revolutionary way of recording and transferring data without the need of a middle man.
Data is stored in blocks, each block containing its individual data. The consistency of one block to the next is checked by randomly assigned members (nodes) of the network. Anyone with enough fire power in their computer can join the network of validators, these guys are known as miners. Miners are rewarded with tokens for securing the network (adding blocks) of the system in question.
It is this decentralisation that makes the technology incredibly exciting and why understandably there is a buzz around the word cryptocurrency at the moment. The beauty of the system is that the ledger of data and the way the network operates is ridiculously difficult to adjust because it needs consent from everyone. Should it be adjusted, the whole system would be faulty.
Miners are incentivised to act honestly, it makes no sense for them to sabotage the system because the system pays them for their honesty.
Blockchain application potential is huge, not only are they an innovative idea for cryptocurrencies, but they can be applied to real-world solutions. Who doesn't want a super secured database?
Blockchains do not have an Achilles heel, but for a successful attack on a blockchain would have to be a globally orchestrated attack or for someone to switch the internet off. Both seem unlikely.
Blockchains have been limited to finance to date however Ethereum's applications potential is endless, currently it helps create markets, store registries of debts and move funds in accordance with past instructions.
In short, Ethereum is the platform or network and Ether is the 'fuel' that drives the network. Ether is a platform specific cryptographic token that functions similar to a currency.
Given the growing space of blockchains and cryptocurrencies, there is an ever-growing vocabulary but here is are current key terms you should be aware of.
DOA - 'Decentralised Autonomous Organisation' is a set of smart contracts on the blockchain that automates the workings of an organisation.
Decentralised Application - A service that operates without a middle man. Ethereum requires direct interaction between users and resources, meaning there is no need for a third party or institution.
Digital Identity - Comparable to voting in a 'real world' scenario, it is a set of cryptographically verifiable transactions using the same public key.
Escrow - This is a technology that holds funds until both parties have completed the transaction procedures they are required to. Once both parties complete their side, funds are transferred. This is essentially the technology that is ridding cryptocurrencies of centralisation. Most online payments are made through Escrow.
Ether - AS highlighted earlier, this is the Ethereum network's medium of exchange or fuel that drives the network / platform.
Ethereum - This is the decentralised platform that runs smart contracts. Better described as a service that facilitates cryptocurrency exchange using blockchain technology.
Ethereum Client - When you run the Ethereum software on your computer, you are creating a blockchain, which can be accessed by connecting through client software.
Ethereum Wallet - This is where you store your Ether. You will be given a public and private address made from 40 hex characters. This connects you to the blockchain network.
Identity - This is a verifiable interaction that the creator can pinpoint when called upon.
Miners - These are users who have nodes, these nodes receive, propagate, verify and execute transactions. Once they create a block, they are rewarded with Ether tokens.
Smart Contract - This is a computer program that executes the terms of the contract when the contract conditions are met.
Given the huge price swings Ether and all the cryptocurrencies are experiencing at the moment, there is a lot of money to be made timing your trades correctly. That said, the opposite is also just as true. There is a lot of money to lose.
As of all forms of trading, there are risks involved. To trade Ether, the challenge is to either understand key fundamental factors that drive the price or to have a technical strategy that allows for precise entries and exits.
For those who believe in the Ethereum project but do not want to spend lots of time thinking about the price on a daily basis, then perhaps investing/buying Ether is better suited to you. This is often referred to as a 'buy and hold' strategy. It allows you to forget about it and come back to it years down the line, to hopefully see it have increased in price. This is similar to investing in stocks.
Trading Ether requires a more day-to-day understanding of what goes on with the currency and taking advantage of small price movements.
Essentially, deciding on whether you want to buy or trade Ether, comes down to your timeframe.
There are a number of ways to buy Ether but perhaps the easiest way is to use the exchange Coinbase. This is one of the first exchanges on the market and has since cemented itself as a leader in the field. It only allows three cryptocurrencies to be traded on its platform and lucky for us, Ethereum is one of the three. Bitcoin and Litecoin complete the list.
Coinbase allows you to buy Ether with a credit card. It is one of the options you can choose when you are required to add a payment method.
unfortunately, due to the costs of using legacy payment systems, there are fees involved when using a credit / debit card. The plus is that the purchase is instant, no waiting time.
You will also be required to verify your card, confirming to Coinbase that it belongs to you. This usually involves sending a proof of address statement.
Coinbase also has a limit on how much you can buy, the more you buy over time to more verification you will need to give. However, on the flip side, once you have proven to be a trustworthy user you have a license to buy more per individual transaction.
Coinbase support for Paypal is currently in the trial period and only available in the US. Should this prove successful Coinbase intends to roll out to other countries.
If you are from the US, you can link your account to Paypal, again this will require verification. Once linked, you will be able to pay for Bitcoin, Litecoin and Ether directly from your Paypal account and also withdraw fiat currency into your Paypal account.
Small fees will be involved in these transactions but for this you will be getting extremely secure payment methods.
As highlighted previously, trading Ethereum and buying Ethereum are different. When you actually buy Ethereum or Ether, you are buying and owning the product. You need to have a wallet that can accommodate the cryptocurrency and if you intend to trade it for other currencies, you must have wallets that can accommodate those other coins.
When buying Ethereum to trade, you are banking on the price to increase so you can buy sell it at a higher price and take the difference as profit. This means that once the market has topped and you have sold, you need to wait for the market to retrace before buying it again, and that is assuming the market continues to go up.
The other method to trade that is becoming available to the masses, is to trade Ethereum and other cryptocurrencies as a CFD or other forms of derivatives.
This involves opening a broker account and then trading on leverage. Trading on leverage is used on many other asset classes and can be very profitable, but again as with any investment, the risks are equal.
Trading on leverage involves borrowing a certain amount of money needed to trade an asset. The broker is the lender in this case and results in one of two things; you are able to leverage the size of your position so you can you earn more from the trade or you only need to front a portion of the position, leaving the rest of your funds available for different investments or trades.
Another advantage of trading on leverage is that it opens more trading opportunities. This is because using the broker, again as leverage, allows you to sell a market or asset without owning it.
Simply put, the broker lends you something that you then sell. Should the price go down, you buy back at a profit and return the amount you borrowed from the broker. This allows you to take advantage of the market both going up and down.
To begin trading CFDs you will need to open a broker account, it is important to use a trustworthy brokerage. Below is a list of brokers we would highly recommend.
The biggest difference between Bitcoin and Ethereum’s technology is the inclusion of smart contracts. They are self-executing contracts that depend on certain conditions being met, therefore they do not require mediation. They also have the ability to punish participants who fail to meet the conditions of the contract.
These smart contracts open a huge amount of possibilities and functionalities that they can be used for. The development of these blockchains are still arguably in the beta phase, where we are still learning about the possibilities and their eventual purposes.
People are being drawn to ideas of digital identity, keeping records (imagine medical records that automatically update across the network), voting and even property ownership details.
Many cryptocurrency enthusiasts argue that Bitcoins decentralised nature is its biggest plus, as it dramatically improves security of the network.
The founder of Bitcoin is a bit of an enigma, they go by the name of Satoshi Nakamoto when they initially published and discussed the system. Since then however they have pretty much vanished.
Meaning that there is no conductor that steers or guides the path that the technology should follow. All changes to the code must be agreed via a consensus via validators of the network.
Ethereum differs on this point. There is someone who is leading the project. Vitalek Buterin was 19 when he came up with his brainchild Ethereum.
Buterin and his team (Ethereum Foundation) continue to push for improvements to the functionality, which in turn increases the number of potential uses for the blockchain, above that of a cryptocurrency.
Their vision is to help improve global efficiency and work towards solutions to the largest issues that face blockchains. The big two issues that arise are; the principle of scalability and the impact of using powerful computer systems to mine and validate the network.
Another key difference between the Bitcoin and Ethereum networks is that on the Ethereum network, decentralised applications (dApps) can be built on top of the network. This then gives creative developers free reign over what they can use the network for. As we speak, there are decentralised gambling applications, global supercomputers and cloud based storages solutions on the network. I see this just being the beginning.
If you were to think back to when the internet first cropped up, users thought email was the peak. Low and behold, we find ourselves reliant on it for almost everything. Back then, looking to what we have now would have been inconceivable.
To learn more about the small intricate details that differ between the blockchains, we would recommend using sites such as GitHub and Reddit.
Let’s recap with a few advantages Ethereum has:
- Ethereum users can design and issue their own cryptocurrency that can be exchanged on the platform. These can be used to represent virtual shares, asset, in fact anything the user fancies.
- Users can create contracts and a source for funds without any financial institutions sticking their noses in.
- Ethereum’s potential application use is only limited to the level of the developer and his or her imagination. The list is really endless.
- Ethereum’s GHOST protocol is considerably quicker than Bitcoins, 12 seconds vs 10 minutes respectively. Transactions are quicker and blocks are added quicker.
- Ethereum uses a proof-of-work algorithm (Ethash) to reward the miners. Basically, you do the work, you get the reward, simple.
So, can Ethereum de-throne Bitcoin. There is ample evidence that it can, the future use is unlimited.
Some of the largest businesses are already showing interest in Ethereum’s technology rather than Bitcoins. The likes of JP Morgan, Toyota and Microsoft have already raised their hand. Interest from these types of companies certainly bodes well for the cryptocurrency and thanks to the bustling ecosystem of dApp developers, the chances of a really disruptive solution increases by the day.
If a dApp managed to reach the mainstream, Ether price would go through the roof because each decentralised application would use Ether to process the information. Imagine if names like Uber or Air BnB adopted Ethereum’s blockchain for their databases. Not too hard to imagine, is it?
With so much innovation on the network, the platform must be dynamic to keep up. With the leadership it has, it is not averse to necessary changes to keep the platform running smoothly.
Bitcoin differs here, the decentralised nature and immutability is a blessing for the network whereas for Ethereum it would be a curse.
Changes may need to be made in the future and Ethereum’s continuous 'work in progress' demeanour suggests that it is malleable and will adapt to anything thrown at it. That is assuming the Ethereum Foundation continue to lead.
Ethereum has not had a smooth ride. Users biggest concern is potential security problems. In June 2016, nearly $50 million worth of Ether was compromised by an anonymous group, which raises huge questions. These questions resulted in a fork, where Ethereum Classic was born.
Subsequent attacks have occurred since, which has seen improvements to its security procedures and thwart further spam attacks from hackers.
The other issue is the reliance on the Ethereum Foundation, should anything happen to that, what would happen to the platform and the cryptocurrency.
Ethereum has recently forked, and it is still up for debate about whether this is a con for the cryptocurrency or if it acts as a platform for continued growth. Either way, as a result of the DAO project collapsing we saw the Ethereum fork and the birth of Ethereum Classic. For more information, here's a guide to Ethereum Classic.
Bitcoin has proven to be a store of value and has rode attacks along the way, not to say the recent China attack. Its simplicity is one of its greatest assets. Ethereum attempts to tackle a different set of objectives and this certainly gives it a brighter outlook going forward.
The adoption by some of the world’s largest companies serves as another boost to Ethereum because these companies chose Ethereum technology over Bitcoins.
To date, Bitcoin has been the market leader, where it goes, the rest tend to follow. It has also seen its value sky rocket, only just missing the $5,000 a coin value. So, despite what we have highlighted regarding Ethereum, Bitcoin will not give up its crown easily.
Over time our conclusion is that the underlying technology that Ethereum has will see it overtake Bitcoin as the leading cryptocurrency and take the majority of the market share. If the current road map of development is to continue then we will likely see this happen by the end of 2018.