Is Ethereum the new Bitcoin?

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.

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.