A Complete Guide to Ethereum and How to Trade It
To fully understand Ethereum, what it entails and its effect in our society today, we first need to grasp what its core fundamentals are and how they differ from other approaches.
Firstly, Ethereum runs by a decentralized system, meaning that it has complete autonomy from any governing body. A good number of online services and businesses are operated using a centralized governing system. While this approach has, for hundreds of years, proven repeatedly to be flawed and inefficient, it’s application is necessary when the involved parties have a distrust for each other.
A centralized model of operation translates to a single-body control, which also translates as a single point of failure. This is why it is quite risky for apps and online-servers using this system as they are more exposed to cyberattacks and even power failure. Furthermore, most social networks mandate users to provide some form of identification and sensitive information, which is stored on their servers. This invariably means that the data is open to theft by external or even internal bad actors.
Ethereum, which is a decentralized system, has full independence and has no central point of failure. This is because the system is operated from several thousand volunteers’ computers across the globe meaning that it is very unlikely to witness issues like data theft, power failure, or any other downsides associated with centralized systems.
Secondly, it is imperative to know that even though they have been frequently compared with one another, Ethereum and Bitcoin are two entirely distinct projects with different goals and objectives. Bitcoin is regarded as the first-ever cryptocurrency and payment solution, built on a distributed ledger technology known as ‘Blockchain.’
Ethereum took advantage of the technology and idea behind Bitcoin, built on it and made it even better. Ethereum is a whole ecosystem with its internet browser, coding language, and payment system. One explicit feature of Ethereum is that it allows developers to build decentralized applications (dApps) on its blockchain.
The dApp can either be completely novel ideas or decentralized modifications of pre-existing concepts. This attribute essentially eliminates the need for a middleman including all the costs attributed to involving a third-party. For example, profits generated through the ‘liking’ and ‘sharing’ of celebrities’ posts on Facebook are gotten from the advertisements placed on their pages and it goes straight to Facebook. In an Ethereum-based edition of such social networks, both the celebrities and the people liking and sharing would receive rewards for constructive communication and support. Also, in a decentralized edition of ‘Kickstarter,’ instead of just receiving some artifacts for their efforts towards the firm, participants will be rewarded with profits generated in the future by the firm.
As we’ve established, Ethereum is a decentralized system meaning that it adopts a peer-to-peer protocol. All interactions only occur between the parties involved in it. There is no interference or supervision by any controlling body whatsoever.
The whole of Ethereum’s network is supported by a multinational network of “Nodes.” Nodes are volunteers who download the whole of Ethereum’s blockchain (usually worth gigabytes) to their computers and wholly implement all consensus rules of the system, thereby ensuring complete honesty in the network and receive rewards for their services.
The aforementioned consensus rules, including several areas of the network, are directed by “smart contracts.”
Smart contracts are developed to automatically execute transactions and other distinct activities within the network between parties who may not ordinarily have trusted each other. The conditions for both parties to meet are pre-programmed into the contract. The fulfillment of these conditions triggers a specific action.
It is believed that smart contracts are the future and will displace traditional contractual agreements as smart contracts provide superior security compared to its predecessors, cuts down transaction costs, and fosters trust between the involved parties.
Furthermore, the Ethereum ecosystem also provides its users with a feature called the Ethereum Virtual Machine, which functions as a test environment for Ethereum-based smart contracts. It allows its users to securely launch an untrusted code while ensuring that there is no interference between programs. The EVM is separated from the main Ethereum network, making it an excellent sandbox for examining and enhancing smart contracts.
The network also comes with a native cryptocurrency known as “Ether.”
History of Ethereum
In 2013, a young lad by the name Vitalik Buterin penned down his idea, after which he made several copies and dispersed them to a few of his friends. Soon enough, about 30 people contacted Vitalik to discuss the idea. Vitalik expected criticism and for several mistakes to be pointed out in his idea, but none of that happened instead, he received praises and commendations from tech enthusiasts. Fast forward to 2014 when the project was officially launched and consisted of Vitalik and 5 others as members of the executive. Vitalik went on and introduced Ethereum at a Bitcoin conference in Miami, and just a few months later the team launched a crowd sale of Ether, the native token of the network, to raise capital for the development.
Uses of Ethereum
Most importantly, Ethereum enables developers to create and deploy dApps. Also, any centralized service can become decentralized through the utilization of the Ethereum platform. Quite frankly, Ethereum’s platform creates immense possibilities for developers and is limited to nothing but the creativity of the developer.
DApps are revolutionizing the relationship between service providers and customers. Today, many services charge commissions for simply providing an escrow service and a platform for users to carry out transactions. Ethereum’s blockchain, however, can allow customers to track the origin of the products they are purchasing, while the utilization of smart contracts can guarantee secure and speedy transactions between involved parties without the need for an intermediary.
In essence, the Ethereum blockchain can instill its core principles (transparency, efficiency, and security) into any business or industry.
Ethereum is also used to develop Decentralized Autonomous Organizations (DAOs), which are entities that carry out transparent operations completely independent of any form of singular control. DAOs are operated by codes and several smart contracts written on the blockchain. It is designed in such a way that it does not require any form of centralized control whatsoever.
DAOs are held by individuals or groups who buy their tokens. However, these tokens do not necessarily equate to equity or ownership in the entity offering the DAO. Rather, the tokens are a form of contribution which gives the purchasers certain powers like voting rights.
Advantages of Ethereum
The Ethereum platform expresses all the positive attributes of the blockchain technology which it operates on. It is impenetrable by third-party interference, meaning that all dApps and DAOs executed within the network functions free from the control of any sort.
All blockchain networks are created on a foundation of consensus, meaning that every node within the network must agree before any change can be carried out within it. This eradicates every possibility of fraudulent practices and corruption thereby making the network tamper-proof.
The entire system is decentralized, meaning that there are no feasible points of failure. This makes it rather impossible for apps on the network to experience downtime or power failure. Also, the decentralized nature of cryptographic security already predisposes the Ethereum network to protection from probable cyberattacks and illicit practices.
Disadvantages of Ethereum
Even though smart contracts are supposed to make a network flawless, they are, in reality, just as good as the developers writing the code for them. Because humans (the developers) are imperfect, there is always the possibility of error in the code, which if discovered by bad actors could be exploited. In such a scenario, there would be no way to prevent an attack except if a consensus is reached on rewriting the underlying code. Consequently, this defeats the purpose of the blockchain, which is supposed to be an unalterable ledger.
An example of such a scenario happened in 2016 where the 'DAO’ was attacked by hackers who exploited a ‘recursive call bug’ in the system and made away with about 3.5 million Ether tokens. Consequently, users lost trust in the whole Ethereum network which caused the value of the Ether to drop drastically.
How to Acquire Ether
There are two basic methods for acquiring Ether: by purchasing it and by mining it.
The simplest and most common method for procuring Ether is by purchasing it through an exchange. Ether is the second most prominent cryptocurrency after Bitcoin, so finding an exchange to buy it shouldn’t be a problem at all.
Firstly, you will be required to register with an exchange. However, make sure that the exchange you chose operates in your jurisdiction and accepts the currency denomination you wish to trade-in. Most registration procedures require you to send in some personal information. Subsequently, full identity checks will be mandated when it is time to make deposits or withdrawals. To pass these checks, proof of address and photo identification will be required. All these are done per the KYC and AML regulations.
After successfully passing these checks, the next thing to do is to choose your preferred deposit method. Different exchanges accept different methods of payments including wire transfer, credit and debit card payments, or Paypal transfers. Depending on what payment method you're using, there is usually a small fee attached.
Simply put, crypto mining is the process of solving complicated mathematical problems and in return, receiving a set amount of tokens as a reward. Miners, without a doubt, are the backbone of any crypto network as they use their time and computing power to solve math problems, delivering a ‘proof of work’ for the network, which verifies transactions. Ethereum miners receive Ether token as rewards whenever they verify a transaction which means that miners are also responsible for the creation of new Ether tokens.
Mining has become a big deal in today’s crypto industry, consequently, the influx of new miners is at a steady increase. Accordingly, the math problems have become more complicated, this means that more time and computing power is required to verify transactions. Also, the number of Ether being rewarded is
becoming smaller as time goes by, however, Ether keeps increasing in value making the rewards still relevant and substantial. Mining is also seen as a good incentive for supporting the network.
More On Ethereum Mining
For every block of a transaction, miners use their computing power to solve mathematical puzzles. Specifically, miners obtain the block’s distinct header metadata, which consists of a timestamp and software version, through a hash function, which creates a length of case-sensitive random numbers and alphabets.
This ‘string’ is known as a hash. When miners find hashes that match the current mark, the block will be regarded as mined and will be broadcasted to the entire network for modes to validate the transaction and update their blockchain copy.
Ethereum Mining Hardware
To become a miner, you need to select dedicated hardware to assemble a computer for full-time mining. There are two primary selections: Central Processing Unit, which involves using your computer processor and Graphic Processing Unit, which demands the purchase of a graphics card.
It is worth mentioning that using CPU to mine Ether is very inefficient and not beneficial, as even lower grade GPUs are hundreds of times faster than CPUs for mining activities. However, before purchasing a graphics card, you need to put into consideration the cost of the purchase itself and the amount of energy it consumes. More importantly, you need to put the hash rate performance into consideration, which involves how fast a math problem can be solved.
Additionally, you might consider assembling a mining rig, which is a system that comprises many GPUs, to boost your hash rate thereby increasing your chance of mining successfully.
Ethereum Mining Software
After choosing, purchasing, and assembling your hardware, the next thing to do would be to install the software. Firstly, you have to get drivers for your graphics card.
Next, you have to piece your node together and link it to the network. This means you’ll have to download the whole Ethereum blockchain, which is about 21 gigabytes and growing.
Once all this is set, your node gets linked to every other node and the network itself. Subsequently, you can begin mining as well as deploy smart contracts and develop dApps.
Receiving Mining Rewards
Whenever a block is successfully mined, the miner is bestowed with 3 ETH tokens. The miner is also rewarded with the fees linked to the transaction. These fees serve as an incentive for miners as transactions with larger fees are prioritized. The rewards get instantaneously sent to the wallet linked to the miner.
How to Sell Ethereum
After accumulating some Ether, either from purchasing or mining, a time would come when you'll want to sell. Indeed, Ether can be used as a payment option as many businesses accept cryptocurrencies as a mode of payment today.
So, if you don’t plan on using Ether as a payment solution, instead you bought or acquired to offload it in the future after its value has probably surged to realize a profit, here are some ways you can accomplish that.
How to Sell Ethereum on Exchanges
The procedure to sell Ether on exchanges is quite similar to buying it. First, you’ll have to select an Ether-compatible exchange that operates in your jurisdiction. Set up your account by identifying and providing the necessary information about yourself per the KYC and AML requirements.
After this, you’ll have to decide if you want to sell your Ether for fiat currencies or another cryptocurrency.
When you sign up for an exchange, a crypto wallet is addressed to you. Deposit the amount of Ether you want to sell from your external wallet to the exchanges. This transfer occurs almost instantaneously.
Next, you get to select how much Ether you want to sell and in what currency you’d like to trade it for. On most exchanges, this is executed by placing a sell order in anticipation that someone will accept it, or you could look out for an already placed order to fill. The exchange rate is usually determined by the current market rate, volatility, and size of your order.
Alternatively, there is another option for selling (or buying) Ether for those looking to bypass the trouble of registering on an exchange and providing sensitive information. This option is popularly known as the peer-to-peer exchange.
Unlike exchange trading, this method is purely decentralized. Escrow services and arbitrage are accomplished through the undertaking of smart contracts.
There are some recognized P-2-P platforms like Localethereum where users can publish offers or respond to one. This platform usually charges a meager 0.25% fee per transaction. It also comes with an in-built instant messaging service, where users can arrange in-person meetings to exchange Ether for cash. There are also platforms like MeetUp which helps users locate crypto-related meeting spots or environments, where they can sell their tokens safely.
However, worth mentioning is the fact that the P-2-P option is completely unregulated and you’ll be dealing with individuals in most cases and not corporate bodies, meaning that a lot could go wrong easily. Always carry out adequate precautionary measures before meeting strangers off the internet for your safety.
Ethereum Trading Strategies
The buy-and-hold trading strategy (popularly known as HODLing in the crypto community) is the easiest and most common trading approach adopted by investors. It involves buying and holding cryptocurrencies for an extended period (usually several years) and then selling them to realize substantial profits.
HODLers, as they are called, usually go for the more stable and reliable cryptocurrency stocks and hold it notwithstanding what the market conditions may be at that time. For the preferred crypto stocks, investors tend to flock towards Bitcoin and Ethereum as they are regarded to be more stable than others and have far lesser chances of crashing anytime soon. Several hundreds of early Bitcoin and Ethereum investors are reaping huge returns today as their trading strategy paid off. This number is steadily increasing as more and more HODLers join their ranks.
The most beneficial advantage of HODLing is how much time and energy it saves. All you need to do as a HODLer is to purchase your desired amount of Ether and lock it up in safe holding equipment. HODLers do not need to carry out regular fundamental analysis and market conditions in general. Also, HODLing does not require any technical analysis to make decisions. Choosing this trading strategy translates to lower portfolio maintenance, lower psychological tension, and lower transaction fees compared to active traders.
Active trading is where the real art of investing in cryptocurrencies is. It involves a more immersive approach into the crypto market and requires more knowledge, skill, and experience than HODLing. There are countless known active trading strategies, however, because of the nature of cryptocurrencies, a lot of those strategies won’t work effectively.
Active trading involves the speculation of the price of Ether, meaning that you’ll be required to observe technical and fundamental analysis regularly.
The ‘golden rule’ behind active trading is “buy low, sell high.” Essentially, traders wait for Either to drop in price, as the cryptocurrencies are known to be very volatile witnessing drops and spikes occasionally as the price continues on its overall trajectory, so they can buy at low prices and sell when the price spikes up again.
Price action can be monitored using charts, indicators, and several other technical tools (technical analysis). This brings us to the different types of active traders there are and which suits your personality. They include scalping, day trading, and swing trading.
1- Scalping or High-Frequency Trading involves the practice of executing and holding multiple trades for a very short period. High-Frequency Traders generally stay in trades for 1-5 minutes at most. HFT is based on the precept of scraping off tiny profits from price movements to realize a substantial amount at the end of the day. HF traders usually use the 1-5 minute charts to monitor price movement and identify trading opportunities.
HFT is quite risky and requires considerable expertise to pull off.
2- Day Trading, as the name implies, is an active trading method that involves the execution and holding of trades for a few hours to a day at most. Day traders usually focus on the 30 minutes – 1 hour charts to monitor price movements. Day traders also focus on news headlines (fundamental analysis) on Ether to make trading decisions. Although day trading is not as risky as HFT, it requires a consistent presence in the market to stay in-tune with happenings in the market.
Day trading requires a substantial amount of screen-time meaning that this method requires a more immersive approach.
3- Swing Trading is a fine blend between day trading and long-term trading. It involves the execution and holding of trades for a few days to a few weeks. Swing traders usually look for fairly long-term trades that could generate substantial profits at maturation. Swing traders also focus heavily on fundamental analysis and use the 4-hour – daily charts to monitor price movements.
This method has a passive approach to it and can be practiced as a side activity or in leisure time.
Technical vs. Fundamental Analysis
Experienced traders apply both technical and fundamental analysis in making trading decisions. Both markets analyzing methods have their unique functionalities and information sources making it inharmonious to switch one for the other (except in HODLing, where just fundamental analysis would do).
Fundamental analysis is focused on evaluating the asset’s underlying value (in this case Ethereum) and is very efficient for determining long-term actions, while technical analysis is focused on predicting the future movement of price based on historic trading activities and market sentiments.
It is always advisable to gain insight into wallet software and how Ethereum works. There are numerous Ether wallets out there, all under different categories. There are desktop wallets, mobile wallets, offline wallets, as well as an exchange provided wallet.
The exchange provided wallets are probably the easiest to use, however, using this type of wallet to store your funds is the riskiest. Exchanges are always targeted by hackers hence it is unsafe to leave your funds lying around on an exchange. There’s also no guarantee that you will be refunded if such a case were to occur.
The most secure method is by storing your funds on an offline or hardware wallet. This kind of wallet is not connected to the internet and as such is immune to hacking.
Every wallet category requires that you set a passcode, commonly known as private keys, to secure your funds.
You need to secure your private keys adequately lest it falls into the wrong hands which could lead to loss of funds. You also need to guard against forgetting your private key as, without it, your funds will become inaccessible permanently. Setting a two-factor authentication protocol for your wallet is an advisable practice.
Future of Ethereum
Ethereum, just like Bitcoin, has been in existence for many years but is just beginning to gain mainstream media attention. Many crypto enthusiasts believe that this disruptive innovation is not only going to upgrade payment methods but is also going to revolutionize business and industrial systems thought to be the standard for hundreds of years.
Altogether, the overall outlook and expectation for Ethereum are positive and optimistic. However, regardless of Ethereum’s strides and obvious successes, some “old-school” financial specialists still feel it’s a risky endeavor and sooner or later, will come crashing down.
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