What is ethereum?
Ethereum is actually the technology this new digital currency is run on. Ether is the currency itself. Like bitcoin, ether is a cryptocurrency operating on a decentralised platform, meaning there’s no need for a central party, like a bank, to intervene.
It’s widely touted as an improvement on bitcoin, because the records proving who has what are created much more quickly, which should make it more efficient at processing transactions.
The other major difference is ethereum allows software to be built on its network. You could compare it to Apple’s app store – but without Apple there to regulate it.
How can you trade it?
One way is the traditional route, where you first create an account on exchange and then transfer in money. This often involves delays, as your identify is verified and your funds are given time to clear.
Once you have an account, you’re free to buy ether tokens and store them in a wallet. Some exchanges will hold them for you. Prices can get inflated above the quotes on the exchange as you pay commissions and inflated prices to get in. Hacks of exchanges and wallets do happen, and exchanges can also suffer outages due to denial of service attacks.
Or you could mine it yourself.
Trading the price using derivatives
Another way to trade ethereum (and bitcoin for that matter) is to use derivatives. With derivatives, you’re trading on the price of ether rather than buying or selling the cryptocurrency itself. You do this by taking out a contract with the opposing party. This contract basically says when the price goes up or down, the difference will be handed over. The end effect is the same as holding ether itself – you profit when you’re right and lose money when you’re wrong.
Why trade the price?
One big difference is you can go short with derivatives if you think the price of ether is on the way down. That’s something you can only do if you’re trading on the price, rather than the thing itself.
Another big positive is the ability to place stops on your positions, which can protect you from changes in price by setting a limit on how much you’re willing to lose.
Finally, your trades would be completely immune to hacking, unlike an exchange or wallet. As you’re not holding any ether, there’s nothing for anyone to steal.
Contracts for difference
One way to trade derivatives on ether is with IG (which is why we’ve sponsored this article). We offer something called CFDs, which stands for “contracts for difference” as a way to trade ethereum. As I’m sure you’ve already guessed, CFDs are the derivative contracts on the price of an asset – the same thing that was described above.
But beware volatility
One of the big dangers of both ether and bitcoin is volatility – both markets experience wild and unpredictable swings.
So if you do open an account and trade CFDs on ether, please make sure you use guaranteed stops on your positions. These mean your risk is capped in case of those sharp price movements.
Also consider taking out a limited-risk account, as every trade you make comes with a guaranteed stop attached. It also means you’re only ever risking the money you put into the account, so you know in advance the maximum you could lose.
