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My colleague Joshua Mahony posed the question in late June on whether Ethereum was “becoming the new Bitcoin”.

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Source: Bloomberg

The idea that the market cap of Ethereum could accelerate past that of Bitcoin, a notion which is now referred to as ‘flippening’, was actually looking like a good bet up until 13 June, when the market cap of Ethereum was over 80% that of the market cap of Bitcoin and Ethereum was absolutely flying.

However, with the benefit of hindsight, it appears the answer to that question is really not anytime soon, although that trend may well still change in the months ahead. There are a number of reasons behind the strong underperformance of Ethereum relative to Bitcoin since mid-June, but the fact the market cap of Ethereum sits at $19,225,197, half that of Bitcoin, suggests Ethereum is not ready to take the crown as the primary crypto currency. Ethereum has easily cemented its place as the second largest player in crypto currency space, with around 23% of the total market share and some 14 percentage points above the next big player, Ripple.

In terms of daily trading volume, Ethereum actually competes with Bitcoin on a very even playing field, which given its far lower price suggests that the actual level of transactions would be greater than that of Bitcoin on any given day. In fact, recent analysis by The Cointelegraph found search volumes in Google Trends was actually double that of Bitcoin. Perhaps that’s a reflection of its more youthful standing and the increased notion of choice and the ability to diversify one’s cryptocurrency portfolio. Perhaps it’s a reflection of the greater volatility you see in Ethereum (over Bitcoin), where volatility tends to make news and increased interest from market participants, especially those who like to trade with a shorter-term time frame.

Volatility, when married with Ethereum’s rise as an alternative to Bitcoin has seen a surge in demand from clients to offer this as a tradeable product. The ability to take a position without putting down the full face value of the position is an attraction, especially when traders are purely speculating on price movements and by not actually taking delivery of the coins this mitigate the possibility of the coins being hacked or stolen. Traders also have the ability to utilise IG’s complete range of risk management tools, including the guaranteed stop, which is well worth looking into given the risk of price gapping higher or lower on the re-open of the exchanges.

Being able to assess position sizing to account for volatility, while being able to effectively manage the risk in the position helps to create an edge when trading any financial market, and even more so those that can have more extreme moves, such as Bitcoin or Ethereum.

The introduction of Ethereum as a trading vehicle has been led by demand, but it should be seen as a recognition that there is now more than one player in the space. We can go back just to March when Bitcoin was effectively the market, but the times they are a changing and with it, we have seen increased choice for traders who want to trade in this space.

If a trader has a lower risk tolerance but wants to express a view that cryptocurrencies could see their acceptance increase within the likes of internet retailers in the years ahead then Bitcoin would be the vehicle of choice. Ethereum is for those with a higher risk tolerance, as the volatility is currently far greater and that will attract a trader with an increased tolerance for risk. The bottom line is traders want choice, as Ethereum is clearly a viable player in a market that continues to divide the optimists from those more pessimistic and who feel the market is one great “bubble”.

The fact is there is a long way to go before either Ethereum or Bitcoin become mainstream, despite commanding the front pages of some prominent financial publications or being talked up by certain high profile celebrities (such as Aston Kutcher, Richard Branson and Pitbull). But in the same vein a mining company who is in exploration phase in its cycle, price can still move aggressively in anticipation or disappointment.

Others have even floated the idea that we could see investors buying crypto currencies as a substitute for gold, but I feel long-term investors in the space ultimately want to see far greater acceptance than the lowly three Internet Retailers (of the top 500 online merchants) who currently allow the use of coins. In the meantime, though speculative activity will remain high and this is very attractive to both those with a positive and negative view of the space.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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