Crypto is short for “cryptocurrency” and generally relates to a swathe of cryptographically-secured currencies. These currencies include Ethereum, Bitcoin, Monero and hundreds of others. The crypto trading market is much like forex, where currency pairs such as ETH/USD are bought and sold at an exchange or trading platform. Cryptocurrency pairs will have their price quoted in fiat or other cryptocurrencies (most commonly, Bitcoin). The price of Ethereum quoted in Bitcoin would be listed as the pair ETH/BTC. For simplicity, this example will look at US dollars as the quote currency.
Ann purchases 5 Ether with US dollars. The pair ETH/USD is priced at $298.42 (the price of 1 Ethereum token). Assuming the exchange is highly liquid (see Ethereum Liquidity), a seller of ETH/USD is found at the price and quantity that Ann has asked for. The transaction is completed almost instantly and Ann is now the owner of 5 Ether at the price of $298.42 per ETH. Ann may then sell her Ether at a later date for profit, or she may choose to trade Ether for another cryptocurrency.
In summary, crypto trading is simply the buying and selling of cryptocurrencies with the goal of turning a profit. Traders familiar with the forex market will have no problem getting up to speed with cryptocurrencies, however some areas – particularly around decentralized exchanges discussed further below – are more nuanced.
Ethereum is the second most widely traded cryptocurrency in the market behind Bitcoin. The 24hr volume of trades measured in USD typically reach into the hundreds of millions USD. The exchanges we have listed above are all highly liquid for numerous pairs such as ETH/USD, ETH/BTC, ETH/EUR, ETH/JPY and many others. Trades for Ethereum are open and closed within seconds, and the liquidity of these markets is only increasing as more investors and institutional money enters the market. The only risk to liquidity is further heavy handed regulation as has been seen with the Chinese Bitcoin ban in September 2017. However, such overreach is unlikely to be made from governments in the USA and Europe. Those looking for reassurance about the liquidity of their Ether will be pleased to hear that a number of decentralized exchanges are now emerging. Whilst these exchanges are incompatible with fiat currencies like USD and EUR, they will allow unrestricted access to cryptocurrency pairs such as ETH/BTC and BTC/XRP.
For the time being, centralized exchanges like those listed above, provide a very liquid gateway into the world of Ethereum.
As with any high growth market, new investors feel that they are now “too late”, or that further growth – at least at the same degree – is unlikely. Ethereum trading carries with it substantial risk as the market is relatively new, but its computational blockchain has the potential to restructure financial, real-estate and gambling markets among others. There is some merit to the idea that one day Ethereum may become ubiquitous, whereby the smart contracts which are developed on the Ethereum blockchain are necessary for corporations to remain competitive.
Day traders may not be interested in the long term fundamentals of the Ethereum blockchain, however the volatility of this market is enough for a successful day trader to become extremely wealthy in a very short period of time. Those interested in the trading of Ethereum as a long term investment can rest assured in the fact that relatively very little institutional money has entered the market so far. It is also widely regarded that cryptocurrencies and blockchain based assets are here to stay, and whilst Ethereum may not come out on top, another cryptocurrency almost certainly will; by trading Ethereum today, it will then become clearer how to trade and speculate on other cryptocurrencies that may rival Ether in the future.
There are two main forms of trading Ethereum and each have several key differences. These two forms of trading are CFD trading and buying/selling. When most people think of Ethereum trading, they imagine the purchase and sale of Ethereum tokens (ETH). However, with CFD trading, instead of actually purchasing the tokens for yourself, you purchase a contract which entitles you to the value of the purchased Ethereum. This means that you can buy and sell Ether without having to actually own the cryptocurrency itself. Instead, this type of trading can be analogized to “betting” on the value of the currency. However the differences go deeper than this:
This takes away the risk of theft and the time required to secure purchased tokens.
Rather than individuals trading with each other over an exchange, CFD trading platforms provide liquidity from institutional partners. Buying and selling Ethereum CFDs is often instant.
In some jurisdictions, profits earned from CFD trading may be taxed more advantageously than buying and selling Ethereum directly.
Whilst it is possible to short the market on some exchanges, CFD trading makes it very simple to setup a short position.
When going long or short on Ethereum, the trade will effectively incur a loss of the spread. This is the difference between the buy (ask) and sell (bid) price, which varies between markets. This can be as low 0.5% and as high as 5% of the total trade amount. A commission may also be charged on top of the spread.
As well as the cost of the spread, many Ethereum CFD trading platforms will also levee a fee on trades that are left open overnight. Trades which rollover for days can become costly, and for that reason many traders are incentivized towards higher risk short term day trading.
Ownership of the asset grants access to other cryptocurrency-based trading services including decentralized exchanges, crypto to crypto exchanges like ShapeShift.io and portfolio managers such as Prism.exchange.
Those looking to buy Ethereum can set the price at which they wish to buy and will be matched to a willing seller. There is no spread and the fees are often placed (or weighted towards) the market taker.
Leaving Ethereum on an exchange does put the cryptocurrency at the risk of theft. A number of high profile exchanges have been hacked before and it is likely that more will be hacked in the future. Those wishing to withdraw Ether to their own secure wallet would need to invest time into understanding how to do so.
Centralized exchanges can be shut down by hostile governments. Whilst it is unlikely that funds would be lost; such a move would cause enormous disruption. CFD trading would be unaffected.
This form of trading has not been mentioned until now due to its enormous risk. Binary trading is a form of price prediction which occurs over the very short term – typically minutes. This type of trading is heavily luck-based, and can be extremely difficult to win over the long term. Ethereum binary trading should be considered a form of gambling and used only for entertainment, much in the same way that someone may enjoy the spin of a roulette wheel. If you are looking at trading Ethereum seriously, then we can only recommend that binary trading is avoided.
Margin trading provides traders with access to borrowing in order to purchase larger volumes of Ether. The amount that can be borrowed – “initial margin” – is set by the brokerage and varies in size. For many traders, buying on margin can be extremely lucrative, however its risks are considerable. To stop traders borrowing too much, these margin accounts are limited with a “maintenance requirement”. This maintenance requirement stipulates the minimum amount that the trader must have in equity on their account.
For example, Bob deposits $5,000 and borrows a further $5,000 to purchase $10,000 worth of Ether. The maintenance requirement on his margin account is 25% (set by the brokerage), meaning that if the value of the purchased Ether drops to $8,000, Bob would need at least $2,000 (25% of $8,000) in equity. In this case, Bob has a total equity of $3,000 ($5,000 – $2,000). If the price of Ether dropped enough such that Bob’s total equity was less than $3,000, the brokerage may issue a “margin call” and sell Bob’s Ether in order to bring the account back up to the maintenance requirement.
The process of buying and holding Ethereum can be as simple or as complex as you like. The complexities arise from the considerations that must be taken into account when securing the cryptocurrency yourself. In many cases, an investor may wish to leave their Ether in the hands of the exchange (perfectly acceptable for small amounts), in which case buying and holding Ethereum is very simple indeed. Full details can be found in our guide on how to buy Ethereum.
Cryptocurrencies are often referred to as “alternative investments”; that is to say they are high risk investments sat outside the mainstream audience. Alternative investments are typically set aside for sophisticated investors, however the lack of regulation in the cryptocurrency market opened this asset class to a much wider audience. Many alternative investors would recoil at the thought of investing in cryptocurrency largely due to its enormous volatility and this lack of regulation. Ethereum faces a range of risks that are discussed in some detail here: “What could destroy the price of Ethereum?“. The general consensus among blockchain/crypto traders is that Ethereum and other cryptocurrencies are either headed towards a valuation of $0.00, or a valuation that is extraordinarily higher than it is today. The question is how damaging the inevitable bubbles will be, and whether – as a crypto trader – you are able to stomach the rollercoaster.
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