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Ethereum for Beginners

Ethereum is commonly quoted as a tradable instrument on cryptocurrency exchanges, and many assume that it is just another popular digital currency similar to other well-known virtual coins such as Bitcoin. The launch of Ethereum was announced at the 2014 North American Bitcoin Conference, and it does indeed have similarities with Bitcoin and other virtual currencies. However, there is more to Ethereum, and it is markedly different from other cryptocurrencies in a few important ways. It’s vital that you understand Ethereum if you are thinking of adding it to your cryptocurrency portfolio. Read on to get an idea of exactly what Ethereum is and whether it’s a sound investment for you.

  • Ethereum – Essence
  • Ethereum – Brief History
  • How do you start trading Ether?
  • Ethereum Wallets
  • Advantages and disadvantages of Ethereum

mariela naydenova

pro MEMBER SINCE 2018

Mariela is a former investment banking analyst and has been a cryptocurrency writer with LeapRate and Asktraders for the past two years

10 min read 14th of Oct, 2019
0 0

What is Ethereum?

Ethereum is an open-ended decentralised software platform and also a programming language. It is the largest and most established platform of its kind, running a peer-to-peer network of virtual machines and allowing developers to build and publish distributed applications. Ethereum runs via its own decentralised public blockchain, therefore using similar technology to Bitcoin and other digital currencies while providing users with an awful lot more than a digital currency to trade.

So what exactly is the Ethereum you have probably seen available to trade at cryptocurrency exchanges and online brokers? In 2014, when Ethereum was launched, its founders also launched a pre-sale for a platform-related cryptographic token, or coin, called Ether. Ether is used for a couple of fairly broad purposes. Firstly, it is used inside the Ethereum network to run applications and monetise work done by developers. As Ethereum puts it, Ether can be used to “codify, decentralize, secure and trade just about anything.” It can also be traded on crypto exchanges as a digital currency, and although it is Ether that is being traded, it is commonly referred to as Ethereum, with the ticker (or shortened code) of ETH.

What is Ethereum

To further complicate things, the applications that can be developed via Ethereum can also create their own unique digital currencies, or tokens. This means that on exchanges that have a wide range of altcoins available, you will see other minor digital coins such as EOS, Veritaseum and Iconomi which may state that they are built on the Ethereum platform. Ethereum is, in fact, one of only two major platforms on which new digital coins are developed. The other one is Omni, which is built on top of the Bitcoin blockchain. This means that many of the now 1,000+ digital coins available on the cryptocurrency markets have grown out of the same platform as Ethereum and Bitcoin.

That said, when you see Ethereum (or ETH) available to trade and quoted as the actual name or ticker for the currency, you will be trading Ether, the main Ethereum currency, which is invariably one of the most popular and frequently traded coins when it comes to cryptocurrency trading. ETH tends to stay in the top five most popular traded digital currencies along with others such as Litecoin and, of course, the ever-popular Bitcoin and Bitcoin Cash.

ETH can be bought, sold and traded against other currencies, on online exchanges and through online brokers who specialise in cryptocurrencies or include them in what will often be a wide range of financial instruments. Ethereum, like other cryptocurrencies, really is a virtual currency. Each coin is basically just a computer file with a private key. This means you must store your coins (or your private keys) online in an Ethereum wallet, which we will discuss in detail below.

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What is Ethereum

Ethereum – Brief History

As already mentioned, Ethereum was first publicly announced in 2014, following a 2013 Ethereum white paper published by Vitalik Buterin. The original development team included Vitalik Buterin, Mihai Alisie, Anthony Di Lorio and Charles Hoskinson. The actual release happened in stages, with Ethereum’s “Frontier” released on July 2015 with 72 million ETH pre-mined. “Homestead” (the first stable Ethereum release) went online in March 2016.

Ethereum started to gain in value with sudden price spikes, peaks and troughs like any other digital coin. Just like other cryptocurrencies, Ethereum is highly volatile, meaning it is prone to frequent price changes, and its market value can fluctuate widely. At the time of writing, its price is at around $272 (USD), with a recorded circulating supply of 106,851,084 ETH.

Ethereum is often compared to Bitcoin, and indeed, both have become popular tradable instruments on cryptocurrency exchanges. However, in truth, the two currencies differ significantly in purpose. While Bitcoin was developed as a potential alternative to cash and is, therefore, a form of online payment of interest to the general public, Ethereum was developed as a platform to enable peer-to-peer contracts and applications and allow for monetisation of work within the platform. Ether was, therefore, never intended or designed as a general payment alternative.

Another important difference in the way Ethereum and Bitcoin have been developed is that with Ethereum, there is an unlimited supply. The software Bitcoin runs on was set up in such a way that only a set amount of Bitcoin can ever be mined or created. It is like a real-world resource such as gold or oil in that sense. There will never be more than 21 million Bitcoins available, which is what potentially makes the currency so valuable. With Ethereum, on the other hand, the supply is not restricted. New virtual ETH coins will continue to be created indefinitely.

Ethereum Chart

How do you start trading Ether?

As we have established, there are developers mining ETH and even creating their own unique altcoins within the Ethereum network, but for the average cryptocurrency investor, the only thing of interest will be how to start investing in Ethereum on a cryptocurrency exchange or via an online broker. In order to start trading, you will need to identify a suitable cryptocurrency trading platform and create an account.

There are two main ways to trade Ethereum online. You can easily buy and sell the currency directly on cryptocurrency exchanges, which operate as peer-to-peer marketplaces. It is also possible to trade Ethereum and other cryptocurrencies via an online brokerage as long as they offer cryptocurrencies among their tradable assets. Cryptocurrency exchanges are popular and work the same way as other financial exchanges, allowing customers to trade digital coins with other members of the exchange. They generally operate 24/7 all through the year, which can be a major advantage, bearing in mind how volatile digital currencies can be. Setting up an account is usually quicker and less involved at an exchange than at a broker. Some exchanges will not ask for verification as most brokers will, and they will also facilitate very small trades, which can be attractive for beginners. Brokers may have a minimum deposit that they will require to clear before trading can begin, although to be fair, this is often very low when trading cryptocurrencies.

Cryptocurrency exchanges come in different forms. There are crypto-to-crypto, fiat-to-crypto, peer-to-peer marketplaces and both centralised and decentralised exchanges. Peer-to-peer exchanges (also known as P2P exchanges or P2P marketplaces) let buyers and sellers trade their digital coins directly with one another. These exchanges tend to be very secure, with the exchange itself acting as escrow, holding digital funds until the payment for them has been made and therefore ensuring that if payment is made, the trade is completed. You can also use a centralised exchange, which allows buyers and sellers to place orders and then matches those who want to buy ETH at a certain price with those who want to sell it. Trading on a centralised exchange can be a very similar experience to using a P2P exchange, but more of the work is done for you as you are pre-matched with a suitable seller or buyer. For this reason, fees will be somewhat higher.

Trading Ethereum and other digital currencies through a broker has its own advantages and disadvantages. It is less straightforward than using a currency exchange but may allow you to use contracts for difference (CFDs) to speculate on the value of digital currencies without ever owning the underlying assets. If you’ve traded using CFDs before, you will already know the pros and cons. One pro, of course, is leverage, but crypto traders will find they won’t be offered the leverage they get on fiat currencies or other assets when trading Ethereum and other cryptocurrencies.

Ethereum Wallets

It is important to use a secure online wallet to store your Ethereum. As your coins are completely virtual, this is really a case of storing your private keys associated with the currency you have purchased. Losing your private key is both possible and highly undesirable. Keys cannot be easily ‘recovered’ like a lost password or some other lost data. If you lose or delete your keys, you lose your currency permanently. You can choose from desktop wallets that run on your computer or mobile wallets that can be downloaded to a mobile device, which is more convenient but less secure. It is also possible to store your Ethereum in “cold storage”, which means your keys are held on a device that is not attached to the internet. This is significantly more secure as it is extremely hard to hack a cold storage wallet, making it an attractive choice for storing large holdings or if you want to hold your Ethereum for a longer period of time. There is also something known as a “hardware wallet.” These are small devices similar to memory sticks or cards. Your keys can be stored here and detached from the internet for high-security levels. It is, however, possible to lose a physical hardware wallet like this if it is not stored somewhere safe. Always be aware that you are fully responsible for keeping your private keys safe, and if you lose them or your system is hacked, they are gone for good.

Here are some of the most popular wallets for Ethereum as of 2019:

Ethereum Wallets

Ledger Nano X: This wallet is the newest crypto hardware device that is easy to use, it connects to Android, desktop PCs and iOS.

Jaxx: Jaxx is a multi-cryptocurrency wallet both for Android and iOS use.

MetaMask: This is an ERC20 & ETH desktop wallets, it’s an add-on for FireFox.

Advantages of Investing in Ethereum

  • The platform provides a full-package service and can facilitate very complex agreements as ETH transactions do not necessarily require third-party involvement. It’s also a self-locked system, which means a variety of goods and services can grow together in the blockchain.
  • In addition, it is an open platform that anyone can join, facilitating constant developments and improvements.
  • ETH is a stable and well-planned digital currency. This is often not the case with cryptocurrencies, with many launching and quickly disappearing. ETH has been developed with the future in mind, and there is a clearly laid out plan of how the blockchain will develop over the next few years. ETH also has a lot of support within the business community, and relatively low Ethereum transaction fees will make it attractive for investors to use ETH to invest in new initial coin offerings in the future. Another important advantage to note is that Ethereum is growing in popularity and valuations could, like Bitcoin, rise significantly, making big profits for those who embraced it early on.
  • ETH is currently among the top five most popular digital coins, and its value has risen by around 87% so far in 2019, although this trend could reverse at any time. While virtual currencies are notoriously volatile and price movements extremely hard to predict, many crypto investors are optimistic about the future of Ethereum as a digital currency.

Disadvantages of Investing in Ethereum

  • While digital currencies are generally more secure than many investors assume, there are some security issues with all virtual coin systems, including Ethereum. It is possible, for example, to lose your Ethereum wallet or delete your private keys accidentally and lose them permanently.
  • There is also the problem of security for online Ethereum wallets, which can be a target for hackers. This is mainly a concern for those who store their ETH online.
  • Like other digital currencies, Ethereum is highly volatile and completely unregulated. The lack of regulation around cryptocurrencies is something that has always attracted and excited less risk-averse traders, but it is certainly something to keep in mind when considering investing in Ethereum and other digital coins. Cryptocurrencies are generally decentralised and unregulated currencies, and as such, they carry a complex set of risks as well as a lot of opportunities.
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When it comes to investing in Ethereum, specifically, there are a few extra drawbacks to consider. Ethereum, in short, may simply have too many platforms and functions. It is a ledger, a network, a smart contracts generator and much more. While this is a fascinating concept, many investors believe it makes the platform weaker than, for example, Bitcoin, which is simply a digital coin designed to fulfil one specific function. In addition to this, the platform is much younger than the Bitcoin platform and has had a lot less time to prove itself safe, stable and scalable. The blockchain Ethereum is built upon is newer and less thoroughly tested software, and many investors are understandably wary that there is still a possibility of breakdowns in the system. Another issue that digital currency traders may feel is a drawback is the inability to use it as a payment method, which is an advantage with Bitcoin (although outlets for spending any digital currencies are limited). This could change in the future, however. The fact that the business community is so supportive of Ethereum, is seen by some as a sign that businesses could embrace taking ETH as an online payment option in the future. Lastly, some investors also complain that there are few tutorials focused on ETH compared to other cryptocurrencies. Those new to the ETH blockchain and system may be put off by the limited resources available to help them get started. Again, this is particularly marked in comparison to Bitcoin, which has had a lot more time to generate an abundance of resources aimed at those interested in the currency, and Bitcoin has a further advantage, in that it is a simpler system to understand as well.

Ethereum is just one option among a growing number of virtual coins on the market. Interested in learning more about this exciting and fast-moving market? Check out our extensive archive of articles about cryptocurrency trading.