Ethereum is one of the top-5 cryptocurrencies by market capitalization. For a long time, it has followed Bitcoin. ETH may overcome BTC one day. At the same time, Ethereum is much cheaper than Bitcoin that makes it highly attractive for investors. High volatility allows traders to make significant profits if they apply the right trading strategies. Let’s consider how to trade Ethereum to limit losses and increase potential profits.
What Is Ethereum?
If you are a novice trader, you may be confused trying to answer what Ethereum is. We will uncover all major points you should be aware of when dealing with this cryptocurrency.
Ethereum is an open-source blockchain with its own Ether (ETH) cryptocurrency. Ethereum technology serves as a platform for hosting other cryptos through the ERC-20 compatibility standard and execution of smart contracts. According to Ethreum’s website, it is home to digital currencies, global payments, and apps.
The cryptocurrency market heard about Ethereum in 2013 when Vitalik Buterin, a well-known name for crypto enthusiasts, and his partners released a whitepaper. ICO was held in summer 2014; that time, ETH cost only $0.311. It was counted that Ethereum provides a 270% annualized rate of return on investment.
Ethereum blockchain appeared only in July 2015 and has been updated several times since then. The goal of the Ethereum network is to be a global platform for decentralized applications so that people worldwide can run software without censorship, downtime, and fraud.
Let’s talk more about the ETH. ETH, Ether, or Ethereum is a native cryptocurrency of the Ethereum blockchain. ETH is used to pay fees when using the Ethereum network. The fee is delivered to miners as a payment for processing and verifying what you are doing on the blockchain. Miners also get rewards with newly-issued ETHs.
ETH helps the network to secure Ethereum if you stake your ETH. ETH is also used as collateral to create other cryptocurrency tokens. ETH is available for borrowing, lending, and earning interest on ETH-backed tokens. ETH enables users to pay and receive funds in real time, so streaming ETH. The most interesting feature of ETH within this article is its ability to be traded with other tokens and fiat money.
Why Is Ethereum Unique?
Ethereum technology was the first to offer a concept of a smart contract platform based on blockchain. Smart contracts are computer programs that allow the automatic execution of actions needed to provide an agreement between parties online. The technology aims to avoid trusted intermediates, which leads to lower costs and higher reliability of transactions.
The Ethereum community managed to build a digital economy and create new ways to earn online. To deal with the Ethereum network, you only need access to the internet.
As we have mentioned, the Ethereum blockchain is used to host other tokens. Almost half of the top-100 cryptocurrencies by market cap were launched on the ERC-20 standard.
Ethereum and Bitcoin: Where Differences Lie
In the next block, we will talk about the factors that affect the ETH price. Support will be one of the key elements of the Ethereum price actions. Thus, it is vital to know how many Ethereum tokens can be created. Ethereum isn’t deflationary, which means that its total supply is unlimited while the BTC supply is capped at 21,000,000 Bitcoins.
To be honest, Ethereum wasn’t supposed to compete with BTC as it’s just an additional way to use a blockchain that supports the Bitcoin network. However, as the Ethereum network managed to cover numerous popular areas, including DeFi apps, NFTs, gaming, and technology, its market capitalization surged. It made ETH one of the leading cryptocurrencies, attractive to traders especially.
Another difference is the purpose of each cryptocurrency. If Bitcoin was created to become an alternative payment method and replace national currencies, Ethereum was launched as a platform for programmatic contracts and applications facilitated by its own cryptocurrency.
In 2022, Ethereum is expected to move to the proof-of-stake protocol from the proof-of-work one that is used by both Bitcoin and Ethereum. As a result, Ethereum will be more secure, sustainable, and scalable than Bitcoin. Moreover, the proof-of-stake protocol will make Ethereum mining less power-consuming.
What Drives Ether’s Price?
Although trading allows making a profit on both the rise and fall of the asset price, it’s vital to know what events can drive the ETH price in either way. Ether is unique in some extensions, and factors that affect its price direction also differ.
Supply and Demand
No matter what asset you trade, supply and demand will always be a major factor that affects the price direction. As Ethereum’s total supply isn’t limited, a supplement of new Ether units and loss of them will increase the ETH price volatility. Traders should keep in mind that increased supply always pulls the price down, while a shortage of supply raises the asset price.
A degree of demand is an even more important factor for cryptocurrencies than for any other financial instrument. As there is a wide range of crypto in the market, investor interest is what determines how expensive a digital currency is. The more people are interested in cryptocurrency, the higher its value is.
Whales
Still, such an interest leads to market manipulations. There are so-called whales who buy and sell significant quantities of an asset, determining the price in the market. It’s difficult for a newbie trader to open a trade as they don’t know the plans of the whales. It’s a significant pitfall of an unregulated crypto market.
New Areas
Integration of the Ethereum technology in such popular areas as NFT and DeFi apps affects the ETH value in a positive way. Moreover, internal developments that make the Ethereum network faster, secure, and more sustainable will attract more users, thus raising the ETH price.
State Regulations
Government regulations affect the overall cryptocurrency market. If any state puts restrictions on digital currencies, the market sentiment turns negative, and crypto prices move down. At the same time, a wider acceptance of cryptos in any country or worldwide will push the value of all cryptocurrencies.
Market Sentiment
Every trader should follow market news as events in the crypto sphere affects not only certain tokens or exchanges but the whole market. For instance, news about hacks and the bankruptcy of cryptocurrency exchanges can pull the price of all cryptos down.
Why You Should Trade Ethereum
As with anything in the world, there are always pros and cons. Ether trading is not an exclusion. If you are still unsure whether you should trade ETH or it’s too complicated a cryptocurrency, check the following factors that can help you make a decision.
Promising Aims
As we mentioned above, Ethereum was created not to replace traditional currencies but to create a platform that enables immutable, programmatic contracts and decentralized applications. When the Bitcoin network centers on BTC, Ethereum is more about the development and creation of new technologies that will improve transactions and ways of earning online. Ethereum is more interesting for developers with different skills. Thus, it will develop for a long time.
Up-to-Date
Ethereum technology tries to cover all new industries, including decentralized finance and non-fungible tokens. It’s worth remembering that Ethereum was a pioneer in decentralized computation that enables smart contracts.
Strong Network
You should not forget that over 280,000 tokens have been created on the ETH blockchain. If ETH disappears, it will lead to cryptocurrency market collapse.
Big Names
If you think that Ethereum is interesting only for newcomers who want to develop a token or dApps on its platform, it’s not like that. Microsoft, Cisco, Intel, J.P. Morgan, UBS, and Santander are highly interested in the network.
For instance, Microsoft’s Azure Cloud offers an Ethereum-based Coco Framework. The platform allows customers to use alternative database structures.
The more big names implement Ethereum technology, the more reliable ETH becomes for traders and investors.
Relatively Low Price
Although Ethereum is second in the list of top cryptocurrencies by market cap, it has a relatively low price compared to BTC. The all-time high is just $4,891.70 (November 16, 2021), while BTC has already traded above $60,000. Although traders can open both long and short positions, the crypto price is vital for an initial deposit.
High Volatility
Ethereum price is highly volatile. High volatility sounds scary for newbies. However, it’s not like that. Significant price fluctuations are risky for sure, but if you have a reliable cryptocurrency trading plan, you can make the most out of it.
Why You Shouldn’t Trade Ethereum
Although Ethereum is a promising and reliable network with ETH expected to exist for years, you should be aware of the disadvantages that you can face when trading Ether. It will help you to pay attention to certain things and make the right decisions on what trade to open.
Hacking Attacks
As Ethereum is more about technology than cryptocurrency, you should keep in mind the pitfalls that the Ethereum network can have. Although Ethereum smart contracts have been proved and checked, some of them failed or were hacked. Such events are usually reflected in the news and lead to increased volatility with a price fall. Thus, an ETH trader should check the news constantly to be up-to-date.
The Proof-of-Stake Transition
In 2022, Ethereum plans to move from the Proof-of-Work (PoW) to the Proof-of-Stake (PoS) mechanism. Although it’s a positive event as PoS has numerous advantages over PoW, including a higher efficiency of resource usage for providing the function it does, the transition will lead to uncertainties and increased price fluctuations.
A High Level of Network Congestion
As Ethereum has been used to create over 280,000 tokens, its network can suffer a high level of congestion. It’s vital to know all network issues as the price can plunge significantly if investors worry about the network’s reliability.
How to Trade Ethereum
There are several ways to make a profit on Ethereum. You can either buy a cryptocurrency and hold it until its value skyrockets, or you can trade it via an online broker using CFDs. It’s the easiest way to deal with a cryptocurrency. CFD stands for contract for difference. It means that you speculate on price changes but don’t own the cryptocurrency. CFD trading allows earning opening long (buy) and short (sell) trades. If the brokerage firm provides leverage, you can start trading having only $100, even if ETH costs around $5,000. Remember that leverage raises not only potential profits but also multiplies losses.
Step 1. Find Your Cryptocurrency Trading Platform and Open an Account
With NAGA you can trade not only Ethereum but other cryptocurrencies.
Step 2. Learn
Before you start trading, you should be equipped with technical and fundamental analysis tools. Learn as many indicators as you can and try them on a demo account. Check how the news affected the price in the past. Apply different trading strategies and check how they work.
Step 3. Research
Before you open a trade, you should do your own research. Check all the latest news, apply reliable indicators, and determine the best price to enter the market.
Step 4. Open a Trade
You should remember that there are two types of orders. A market order allows you to open a trade immediately at the current price. Keep in mind that it’s not the best option if the market is highly volatile as the price changes too fast.
At the same time, if you see the price hasn’t reached the level that your trading strategy determines as promising, you should place a limit order. The trade will be executed if only the price reaches a certain level. If the level isn’t reached, the trade won’t be executed.
Your trading strategy should include take-profit and stop-loss orders. If you aren’t a day trader or scalper who stays in front of the monitor during the day, you should set a take-profit level, so your profitable position will be closed before the market turns around. Stop-loss will prevent you from losses you can’t bear.
Where to Buy ETH
As mentioned above, you can buy ETH to hold it and sell it later when its price increases significantly, so that it will be profitable for you. There are several ways to purchase ETH.
Centralized Exchanges
Cryptocurrency exchanges are the most common way to buy cryptos. On an exchange, you can purchase digital money by using traditional currencies. Centralized exchanges store Ethereum that you buy before you send tokens to your own digital wallet.
Decentralized Exchanges
Decentralized exchanges comply with the idea of cryptocurrencies - they don’t provide control of your funds to any centralized company. Using a decentralized exchange, you buy ETH peer-to-peer.
Wallets
It’s possible to buy Ether via wallets. It’s not the most common option as geographical restrictions apply. Using a wallet option, you can purchase ETH with a debit or credit card, bank transfer, or Apple Pay.
Tips for Trading Ethereum
Ethereum trading can be highly profitable if you follow our tips. Keep this list to have successful trades.
- Start with risk management. No matter what asset you trade, you should always count your funds and risk only what you can bear. This rule is even more important if you trade with leverage. Leverage raises your potential profit and increases the amount of money you can lose. The best risk/reward ratio is 1:2 or 1:3, which means that your potential profit from a trade should exceed a potential loss at least two or three times.
- Apply fundamental and technical analysis. It’s believed that there are two types of analysts/traders: those who use technical analysis and those who rely on fundamental analysis. However, the best way to analyze the market is to combine them. Technical analysis includes indicators, chart and candlestick patterns that help define a price direction based on historical price movements. Fundamental analysis includes news and data research and analysis of the market sentiment. As technical tools can’t evaluate market mood, the fundamental analysis should always be applied to consider the current situation.
- Control your emotions. There are numerous problems caused by uncontrolled emotions. One of them is FOMO, or fear of missing out. It happens more often with newbies when they see a price skyrocketing and try to increase their position or buy an asset when the price is already high. Another thing that can lead to losses is a closure of a profitable trade. It can happen if you don’t trust your own strategy. As the market is highly volatile, a price can change its direction several times before you gather your profit. Novice traders like checking their trades constantly, and when they see the price moves in the opposite direction, they worry the trade is already losing, so they close it. However, it can be a short-term correction. Thus, it’s vital to set stop-loss orders to allow the price to move in the opposite direction to a certain degree.
- Balance our portfolio. Although ETH can be an attractive investment choice or trading option, you should not put all your funds only in Ethereum. You should diversify your portfolio with alternative assets, including currencies, metals, and even stocks.
Final Thoughts
Ethereum is in the list of top-5 cryptocurrencies by market capitalization. The Ethereum network covers all popular areas, including DeFi and NFT. The ERC-20 compatibility standard is used for the creation of a huge number of utility tokens. All this proves that Ethereum has investment potential and it is an interesting asset for trading. Still, you should always keep in mind the factors that can affect its value and test trading strategies.
It is not enough to be good at trading. You should find a reliable trading platform. NAGA is a perfect option for you. This platform offers a demo account that you can use to test your strategies, apply new indicators, and consider how efficient chart patterns are when determining a price direction.
