In this article, we will cover what the Ethereum platform is, how to trade Ethereum, and what technology is on the Ethereum platform.
Ethereum is a crypto platform like Bitcoin. It uses the proof of work protocol to add blocks to the blockchain. It is also a payment protocol.
Yet, it is capable of much more. Ethereum also uses smart contracts for application development. This technology will allow developers to rent computing power from miners on the blockchain.
Trading Ethereum requires traders to research and analyze different crypto exchanges to determine the best investment strategy.
What Is Ethereum?
Vitalik Buterin created the Ethereum crypto platform. It is the second biggest cryptocurrency behind Bitcoin. It is a currency but also a platform where developers can use decentralized computing power to create applications.
The Ethereum platform employs smart contracts using blockchain technology. Crypto miners rent out their resources to developers for a gas fee. Developers and businesses pay ether (Ethereum’s main currency) to Ethereum miners.
There are many nodes across the Ethereum blockchain. It is the most decentralized crypto in existence. This means that there is much computing power available to developers to create decentralized apps or dApps.
Ethereum’s initial coin offering (ICO) raised $18 million in 2014. It has been live since 2015.
The Difference Between Bitcoin and Ethereum
Bitcoin is only a payment protocol. Users and traders can sell or buy bitcoin for purchasing goods or services, or they could trade and invest coins to get short or long-term returns.
Ethereum can do the same, but its potential lies in its use of smart contracts for app development. Though how to trade Ethereum is similar to Bitcoin.
Bitcoin uses the proof of work mining method. Miners use their dedicated hardware to solve complex problems to add more blocks to the blockchain. This requires lots of resources, namely electricity, due to the hardware.
They receive coins as a reward, depending on how complex the problem was. Many companies and individuals created mining farms to get the most out of the proof of work method.
Ethereum, on the other hand, will soon implement the proof of stake method for mining. It does not require any dedicated hardware because it is virtual. There are validators in place of miners. Validators need to put up some of their Ethereum currency (ether) as a stake. Accordingly, they bet on whether a block will be validated and added to the blockchain.
When a validator bets on a valid block, they get rewarded based on the amount of ether they invested in that block.
For now, Ethereum will mainly use proof of work, but every 100th transaction will be proof of stake. Validators choose which blocks to bet on, so it lowers the cost involved with adding more blocks to the chain.
Additionally, validators put up their own ether, so there are low odds for a validator choosing a malicious block. This removes the chances of a 51% attack, where a single group owns most of the world’s hashing power.
What Are Smart Contracts?
Nick Szabo coined the term smart contracts in 1994. Smart contracts are programs that developers write on a blockchain. They are not essential to learning how to trade Ethereum, but developers and businesses can use these programs to define contractual obligations between parties.
It runs on the blockchain, so validators check instructions and conditions of a smart contract, and these are accepted or rejected across the nodes on the platform.
Furthermore, these contracts, once executed, cannot be edited or rolled back. This means that developers and businesses only need to write the program, and it validates and executes by itself.
For example, if a tenant signs a rental agreement using a smart contract, they need to meet the conditions set out by the smart contract. These could be credit rating or monthly income. If they meet these conditions set by the agency or landlord, they could sign the rental agreement.
The entire process is on the blockchain, so there would be no long waiting times for approval from a centralized system like a bank.
Developers use a programming language called solidity. It is based on the IFTTT logic, which follows the IF-THIS-THEN-THAT order of instructions.
To illustrate, if the tenant has enough monthly income, then the smart contract can check the tenant’s credit rating. If that checks out, the agreement is valid. Developers can add many instructions or conditions to this logic. The smart contract will validate and execute these until the end of the contract.
What Is Ether?
Ether is the name of Ethereum’s main currency. It functions as a mode of payment, a store of value, a reward for miners, and staking for validators in the future. It is important to know ether if you want to know how to trade Ethereum.
Ether is a decentralized (not fiat) currency. Therefore, a single institution or economy cannot control it.
Unlike traditional stock markets, crypto markets have no closing times for trading. They remain open 24/7 because there are hundreds of exchanges that allow ether trading and investment.
Cryptocurrencies are volatile on exchanges. They encounter daily price fluctuations, so they provide an opportunity for day traders to receive short term returns on their coins.
Smart contracts also use ether to meet contractual conditions. Developers or businesses that create smart contracts need to pay gas fees to execute their conditions or instructions. They set a gas limit before submitting the contract to miners. If the gas limit is not enough to pay for the contract, it cancels all previous instructions, and the developer needs to pay the miners’ gas fees.
Additionally, developers set a gas limit, but their code (instructions and conditions) might require more computing power than they anticipated, so miners might reject their contract or pass over it. That is why developers need to take care when setting their gas limits.
How To Trade Ethereum
Like with most cryptocurrencies, traders and investors can use two general trading strategies. These are long term positions called holding, and short-term positions called active trading. Each has its advantages and disadvantages but have the potential for providing investors and traders with significant returns on investment.
Traders just learning how to trade Ethereum can use a holding strategy. Traders and investors purchase coins (usually Bitcoin or Ether) and wait for them to increase in value over a longer period. They work on the assumption that coin values will trend upwards, providing them with long-term returns.
Holding saves time and effort. Investors do not need to conduct too much research about the exchange they use or the trends in the market. This is because they are not concerned with daily price rises or drops.
Another advantage is that investors and traders do not need to pay heavy fees for conducting trades. This means that they pay for having their coins on the exchange and transaction fees when exiting the market.
A major disadvantage of holding is that investors and traders cannot gain returns on short term price fluctuations.
Accordingly, investors need to research the appropriate coins to invest in because their entire stake is based on the coin’s long-term performance. They do not need to research minute details, but they should at least choose a reputable and upward trending cryptocurrency (Ether or Bitcoin).
Investors and traders need to know when to exit the market to maximize their profits. They need to determine when to sell, how to sell, and how much to sell depending on the coin.
2. Active Trading
Investors and traders who know how to trade Ethereum and other cryptocurrencies can use active trading. They need to know how to analyze and monitor individual crypto exchanges and cryptocurrencies. They attempt to profit off volatile price fluctuations by short selling or buying the dips and selling the rips.
Therefore, investors and traders need to know how to trade Ethereum during price movements and market trends. They also need to pay attention to market cycles to ensure optimal return on investment.
Short-term returns are a clear advantage for traders. Due to the volatile nature of cryptocurrencies, they could see large profits in a matter of days or weeks. They can short sell their coins, which entails loaning coins from a broker and immediately selling them. They then buy back the coins at a lower price and return them to the broker. The trader pockets the difference.
They could also buy coins when the market is in a downward trend and sell them when the market is trending upwards again. The value of the coin increases during the upward trend, so the trader profits from the price increase.
Ethereum is a crypto platform that functions as a payment protocol and as a decentralized technology with the ability to power software applications virtually.
It has the most nodes of any crypto platform, which means that developers and businesses can rent powerful resources straight from the blockchain with smart contract implementation.
Finally, traders need to learn how to trade Ethereum by either employing a holding or active trading strategy.