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Is Ethereum the new Bitcoin?

With Ethereum hitting the headlines, are we looking at the next Bitcoin or just a fad?

Bitcoin
Source: Bloomberg

With Ethereum becoming available to spread bet in the coming weeks, many traders will be wondering whether this is simply a poor man’s Bitcoin or something worth investing in.

One thing is for sure, if holders of Bitcoin were happy at the doubling of its price over the past year, Ethereum has taken it to another level, rising 4100% since the turn of the year. Interestingly, if we look at the market capitalisation (issues coins x value), the total value of Ethereum ($32 billion) amounts to around 71% of Bitcoin ($44 billion). While that is a significant difference, it is worth noting the journey to get here, given that this number was closer to 10% just a year ago. Put simply, Ethereum has had an incredible year and if the recent gains are anything to go by, we could see this alternate cryptocurrency take the crown as the biggest currency out there.

However, with all this talk of market capitalisation, the difference in price is still sizeable, with Ethereum priced around $340 and Bitcoin at $2720 per coin. To some, this is an indication that there could still be a lot left in the tank for Ethereum, but of course just like the cryptocurrencies before them, it is hard to find the true underlying value of these assets. Given the recent price rise and greater press coverage that comes with it, there is reason to believe there may be some truth to that theory. The chart below highlights the ratio between Ethereum and Bitcoin, with the newcomer gaining ground at an increasing rate.

Ethereum versus Bitcoin chart

Much like Bitcoin, Ethereum has some high profile backers, with the likes of JPMorgan Chase and Microsoft interested in the use of Ether to create a new global computer network.

Amid all the hype over incredible returns and the notion that cryptocurrencies are providing the modern day gold rush, it is worth taking a step back to realise the risks involved in trading these products. Firstly, they have disproportionately large margin requirements thanks to the illiquid nature of the market. They are also hugely volatile. While you can get a market rise consistently to build incredible gains, there are also fairly regular moments when cryptocurrencies drop like a stone in an instant. The reasons for this may not be clear, but so far those sell-offs have provided good buying opportunities.

Bitcoin had three major sell-offs in 2017, which saw between 28% and 34% of its value wiped. However, given the ultimate resumption of the trend, it is clear that the weakness like that which occurred just last week have, thus far, provided a good entry point.

Bitcoin chart

We have also seen a very good example of the risks associated with Ethereum trading this week, with a flash crash seeing the price plummet from $345 to $15 in a matter of minutes. While this should serve as a warning of the potential instability that will always be evident in such a fledgling market, it is also worth considering that flash crashes can also happen in mature markets. That being said, this event highlights the importance of stop losses for such a volatile market. Given the illiquid nature of these markets, it could be advisable to utilise guaranteed stop losses where possible. This is available on Bitcoin and will be available soon after the introduction of the Ethereum market as well.

One thing is certain, there is going to be a great deal of interest in Ethereum given the incredible ascent over recent months. Whether we see this ascent continue remains to be seen, but the cryptocurrency space has proven itself to be capable of some incredible feats. Given that we are breaking new ground here, it is very difficult to say where it will end. To some that is the attraction, to others that lack of fundamental valuation is exactly why they do not invest. Either way, IG allows you to take a view, even on cutting edge markets.

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