Why should you care about Ethereum in 2020?
Before diving into buying vs trading Ethereum, various financial instruments and trading strategies, let’s talk about what makes Ethereum worthwhile. Sure, it’s the second-largest cryptocurrency after Bitcoin (BTC). Maybe you have even heard about smart contracts and spotted an occasional tweet about how to trade ETH. After all, social media mentions of ETH have been at an elevated level for the last few months as the price rallied.To appreciate the full potential of Ethereum, we need to understand the concept of a block chain. See, blockchain is one of the key innovations that enabled the creation of Bitcoin in 2009. It allows unrelated parties to interact with each other, without knowing or trusting each other and publicly stores the details of all the transactions so that anyone can verify them. Block chain facilitates the essential feature of cryptocurrencies – decentralization.
Unlike Bitcoin, Ethereum doesn’t just use blockchain to facilitate transfers of value. Instead, through its coding language and native token, it allows developers to build decentralised applications (dApps) on top of the Ethereum network. The ecosystem is not unlike the App Store, but without a central point of authority. Anyone can build on Ethereum, there’s no approval process for apps, the network itself doesn’t collect a share of developers’ revenues, and the apps are accessible to anyone with an internet connection. Another cool feature of the Ethereum network is its smart contract functionality. Smart contracts are governed by code and execute if the underlying conditions are met. They eliminate the need for a third party or an intermediary across a wide range of transactions. We can imagine a whole range of legal and financial contracts that can be automated using Ethereum’s “If This Then That” logic. As such, the market opportunity for Ethereum is enormous.
What drives the price of ETH?
Great, we now understand the big picture. But what is driving the day-to-day price action? There are four distinct cohorts of users of the Ethereum ecosystem, and each is impacting the price. Specifically, there are speculators, investors, developers and users of various dApps built on Ethereum. Speculators are often responsible for price volatility in ETH as they trade in and out of positions frequently, often using leverage. Investors are long-term believers in the technology, who hold ETH over an extended timeframe. They tend to stabilise prices, often adding to their holdings during sell-offs. For instance, during the most recent sell-off in September, the combined holdings of 100 largest Ethereum addresses increased by 886,560 ETH according to research by Cointelegraph Consulting.
Developers and dApp users must have ETH to pay gas fees to interact with the Ethereum blockchain. As a refresher, gas is used to pay for the computational effort. Every send transaction or, for example, deployment of a smart contract by a developer requires computation. As the number of dApps and their users increases, so does the demand for ETH. Let’s take a more in-depth look at the Ethereum ecosystem and on-chain activity. According to the State of Dapps, a curated online directory, there are currently over 2,900 dApps built on Ethereum. In the second quarter of 2020, active users of Ethereum dApps nearly doubled, reaching an all-time high of 1.2 million.
Recently, the majority of the user growth and transaction volume on Ethereum has been driven by decentralised finance (DeFi) applications. According to Dapp.com’s Q2 report, 97.5 per cent of the total dApp volume on Ethereum in June came from DeFi projects, including decentralised exchanges (DEXs) and lending/borrowing protocols. The rapid growth of DeFi applications has been bullish for the price of ETH. However, it also brought high gas prices and network congestion. Daily gas usage, for instance, is at all-time highs. Most DeFi transactions require complex computations, as opposed to a simple send transaction, leading to much higher gas usage. For example, over the last 30 days, Uniswap, a decentralised exchange, has seen the highest gas usage on the Ethereum network.
On-chain activity aside, institutional adoption has always been significant to ETH price action. In that regard, the growth of the Grayscale Ethereum Trust has been reassuring. In another piece of news, the Vienna Stock Exchange listed the BTC and ETH exchange-traded products (ETPs). These products are accessible for retail and institutional investors across Austria, Germany and Switzerland. Similarly, the Singapore Exchange announced that it would launch Ethereum and Bitcoin indices, in collaboration with CryptoCompare. Research by CryptoCompare shows that assets tracking digital currency indices have grown from $220m in 2017 to over $4.5bn in June 2020. These developments point to growing institutional interest in cryptocurrencies.
How to trade Ethereum: all you need to know
There are a few ways to trade Ether, from remarkably simple to quite complex. For starters, investors can buy ETH on an exchange like Binance or Coinbase. However, to do this they need a crypto wallet and there are increased risks connected to cyber-attacks and online thefts. A simpler option of trading ETH is via contracts for difference or CFDs. These are financial instruments that allow traders to speculate on the price of ETH, without holding the actual coin. Thus, you have greater flexibility when you trade ETH with CFDs as you are not tied to the asset; you have merely bought or sold a derivative contract. CFD trading gives you the opportunity to profit from both positive and negative fluctuations: you can either hold a long position, speculating that the ETH price will rise, or a short position, speculating that the price will fall.
Trade Ethereum to US Dollar – ETH/USD CFD
Another advantage of trading ETH with CFDs is leverage. Trading with leverage means that you can open significantly larger positions with a smaller amount of initial capital. However, remember that while leverage provides the opportunity for big profits, it can also result in bigger losses. A more complicated way of trading the coin is by using ETH futures and options contracts. Bitmex and other platforms offer several types of futures, including perpetual futures, with leverage of up to 50x. Due to significant leverage, crypto derivatives carry a high degree of risk and should not be used lightly.
What can you do with your ETH?
Now that we have covered how to invest in Ethereum, what can you do with your ETH? You can trade it day in and day out, using technical analysis and other trading tools. For long-term investors and believers in the Ethereum vision, holding might be a better option. Alternatively, you can use DeFi applications like Maker or Compound to supply your ETH as collateral to earn interest or leverage your position. Or, perhaps, provide liquidity on Uniswap or Balancer and collect trading fees plus any rewards available. In that regard, ETH is a very versatile asset, and the ecosystem is continuously evolving to accommodate new use cases.