Ether is one of the hottest cryptocurrencies at the moment…and for good reason. Aside from Bitcoin, Ethereum has the most promise to deliver short-term, real-world benefits.
But if you are still trying to figure out how to trade Ethereum, then this post will show you exactly what you need to know to get started. We will also give you an understanding of how the Ethereum Network works, the risks involved, different trading strategies and how to place your first trade.
To learn more about cryptocurrencies in general, read this blog post before you continue.
Let's do this…
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What is Ether?
I think that the Ethereum website says is best…
Ether is the crypto-fuel for the Ethereum Network.
In other words, Ether is the “money” that used for payment on the Ethereum Network. So you're not actually learning how to trade Ethereum, you are learning to trade Ether. What does this money buy, you ask?
It can pay for software services on the network, in addition to being a real-world currency.
Therefore, in order to understand the value of Ether and what can potentially make the price go up and down, we need to have a basic understanding of how it works.
What is Ethereum?
This is where things get exciting…
Ethereum is basically a software platform, like Microsoft Windows or macOS. But online. The goal of Ethereum is to allow people to build decentralized applications on top of the Ethereum platform.
So it would be like when Dropbox builds an app on top of macOS. Dropbox hosts your files, in exchange for a monthly hosting fee. On the Ethereum network, the fee for a similar storage service is paid in Ether, instead of US Dollars or British Pounds.
The difference between Ethereum and current web application solutions is that these apps (and the currency) are open to everyone, free from censorship and much more secure than existing solutions. This is because Ethereum apps are decentralized.
What makes these apps decentralized?
The network is built on a database that is hosted on many computers around the world. Each computer has a copy of the database and multiple computers have to agree on a change to the database, before it is implemented.
Although everyone stores this data, you need to have a special password (or a private key) to unlock your data. The private key is as close to unhackable as you can get in the online world, so the data is probably even more secure than if you stored it on a cloud-based service.
This database is called a blockchain.
What is a Blockchain?
A blockchain is a different type of database.
It's actually more like an accounting ledger…that has levels of trust. Once a transaction is confirmed by the network, it gets added to this ledger. Then newer entries get added on top of that entry.
The best analogy that I've heard for a blockchain is a fly caught in amber.
When a fly gets caught in the amber, it is like an Ether transaction that gets recorded on the blockchain. As time passes, more layers of amber get added and it is impossible to change the position of the fly in the amber, or insert a different insect into that part of the amber. The deeper the fly is in that amber, the more confidence you have that it is a fly from a long time ago.
In the cryptocurrency world, that ledger entry on the blockchain can be seen for as long as the blockchain remains in existence. As time passes, more “layers” or transactions also get added to the blockchain and those older transactions become even more trusted.
So unlike traditional databases that can be erased or changed, older blockchain entries are a permanent record of transactions or events.
This is why people are investing in this technology.
Total Float and Coin Inflation
Trading is all about understanding supply and demand. Either on a chart or by analyzing fundamental reasons. So no trading guide would be complete without a look at Ether supply.
One key difference between Ether and Bitcoin is: Unlimited supply.
There are never going to be more than 21 million Bitcoins. That is how the software was setup and that is what makes Bitcoins potentially so valuable.
Simple supply and demand.
On the other hand, the same amount of new Ethereum will continue to be produced every year..forever.
At first glance, that may seem like a bad thing. But if we think about it for a minute, that is actually a good thing.
It all comes back to the purpose of Ethereum. That's why it's important to understand at least a little bit about how each cryptocurrency works.
The purpose of Ethereum is to build a network of decentralized computer programs. However, there will be a certain amount of cryptocurrency that will be lost every year.
Cryptocurrency can be lost when computers crash, people lose their paper wallets or forget their account passwords.
That is another thing that will make Bitcoin even more valuable in the future. This is great for a cryptocurrency like Bitcoin, whose sole function is to serve as a way to store monetary value.
Not so great for running applications on networks like Ethereum however. If the money on the network gets more and more expensive, then it will become harder to host and use the applications on the network and eventually the network will fail.
That is why the same amount of Ether is produced every year. Eventually, the amount produced every year will become a smaller percentage of the total outstanding Ether. At some point, an equilibrium should be reached between the amount of Ether being lost and the amount being produced.
Therefore, from a fundamental analysis standpoint, you need to understand what types of applications are being built on the network and how much demand there is for them. The quality of the applications will be one factor that determines the value of the Ether.
Tokens Built on Top of Ethereum and Crapcoins
Now here's where things get a little weird. The applications that can be built on top of Ethereum can also create their own currencies. These are called tokens and will become an increasingly big part of the cryptocurrency trading landscape.
This is a current screenshot from CoinMarketCap.com. four out of five of the top five currencies, by market capitalization, are built on the Ethereum platform. The other big platform is Omni, which is built on top of the Bitcoin blockchain.
The great thing about tokens is that anyone can create one.
But that is also a bad thing.
Some startups will bolt-on a token to their existing app and use that as a way to raise cash, instead of going to investors. That's great if the token serves a genuine purpose.
However, in the coming months, you are going to see a ton of crapcoin launches (initial coin offering or ICO) that have nothing to do with value and everything to do with making a quick buck. One example, in my opinion, is the upcoming Kik ICO.
I don't see any reason for a messaging app to have its own currency. Where are you going to use that currency outside of the app? Nowhere, it's a dumb idea. But they will raise a ton of money and investors will probably lose their investment.
You see these ICO ads more frequently nowadays.
Be very wary. A lot of ICOs are just trying to take advantage of the hype and are just launching coins to make money. If not controlled, these crapcoins could damage the reputation of Ethereum and possibly affect the price.
Of course, some of these ICOs will succeed. But I think this will be a very, very small percentage.
The Asian Connection
Ethereum a big deal almost everywhere, but it's absolutely huge in Asia, especially China. So in order to understand how valuable Ether will become in the future, we need to keep an eye on the applications that are coming out of China.
Organizations like the ChinaLedger Alliance are pushing Ethereum technology forward, so that is a positive sign for Ether traders and investors.
How to Trade Ethereum / Ether
Alright, now that you have some background on how Ether works, let's get to the trading bit.
Buying Ether has become fairly easy. Here is how to do it.
Step 1: Sign Up for an Account on an Exchange
There are several good exchanges out there, so do your research. The exchange you use will depend on where you live, governing laws and personal preference.
Luckily, many exchanges allow you to purchase Ether directly. Other smaller cryptocurrencies require you buy Bitcoin first, then exchange it for your target cryptocurrency.
Here is a list of the more reputable exchanges out there. If you want to get $10 in Bitcoin (which can be traded for Ether), just by signing up for Coinbase, then click this link. I don't know how long that offer will last, so if that link doesn't work, you missed out.
You may have to provide some proof of identification when you sign up on some of these exchanges. This is to prevent money laundering, so just to it.
There are also exchanges that don't require you to sign up for an account.
These are more for if you have other currencies that you want to convert to Ether. In that case, these exchanges make it super easy to do the conversion. No password to remember and you don't have to provide any personal information. It feels pretty sketchy when you first do it, but I have never had a problem with it.
Step 2: Fund Your Account by Buying Ether with Fiat Currency
Next, fund your account with a credit card or bank transfer. Usually, the credit card option is faster so I would recommend using that. Getting money into your account with a bank transfer can take as long as a week. The upside with a bank transfer is that your deposit limits will usually be higher.
Ether Trading Strategies
There are two basic trading strategies, when it comes to trading Ether.
- Buy and hold
- Active trading
Here's how to do both…
Buy and Hold
Since there is a lot of upside potential in cryptocurrencies, there are many traders that are taking a buy and hold approach. So if that is your strategy, you would just buy some Ether and store it in a safe place.
This is called putting it into cold storage.
What is a safe place?
Well, there are two options, paper wallets or hardware wallets. I would not recommend storing Ether in mobile apps, computer wallets, exchanges or online wallets for any length of time. Those options are great for short-term transactions, but are not safe for long-term storage.
Ether Paper Wallets
- Cannot be hacked online
- Can be stored in a safe off-site location like a safety deposit box
- Don't have to worry about computer failures
- Can be accidently thrown out or destroyed
- Once you lose the paper wallet, your money cannot be retrieved
- Someone can possibly steal your password while the wallet is being created
To create your first paper wallet, follow these steps:
- Buy a “dumb” laser printer like this. You want a laser printer that has a very small memory capacity and USB connectivity. Hackers can potentially steal your wallet password from the memory of a printer or intercept it from a WiFi transmission. So buying the simplest printer you can find is the best security precaution. You also don't want to buy an inkjet printer because the ink will smear, if it gets wet.
- Speaking of water, buy waterproof paper like this. Make sure that it is specifically designed for laser printers. Losing hundreds, or even thousands of dollars in Ether, just because your paper wallet got wet, is just plain stupid. That type of waterproof paper is also tear-proof. So it can survive almost anything, short of a fire.
- Use a wallet generator to create your first wallet. This is one, but there are others out there. You may need to be online to start the process. But once you have the first wallet address, disconnect from the internet, then generate a new address before you print out the wallet. This is a safety precaution because there is always the potential that the website might transmit the wallet information back to a hacker.
- Then print out the wallet, making sure that you generate a new wallet every time. It takes a couple of tries to figure out how to get the front and back to line up. But once you get it, you can start churning out wallets. You can also print out your wallets to PDF and store them on an encrypted flash drive. But remember that the more backups you have, the more ways someone can steal your Ether.
- Finally, fold up the paper wallet so the private key is hidden. This is the password that will allow you to spend the money in the wallet, so protect this at all costs.
- Optional: If you want to get fancy, you can order tamper evident seals so you know if someone has been peeking at your private key.
When you are done, it should look the picture at the beginning of this section.
Once your currency is on paper, store it away in a safe place. When you are ready to cash in the currency, use an online wallet or mobile wallet app to get the coins from the paper to your exchange of choice, or your bank. Some exchanges may give you the ability to go straight from the paper wallet to the exchange's online wallet.
To get the detailed Ether paper wallet guide, read this.
Another good option for buy and hold investors is the hardware wallet. Trezor is the most popular one right now.
The website says that it is a Bitcoin wallet, but it stores Ether too.
- Compact, all your Ether in one place
- Cannot be hacked online
- Hard to hack offline
- Easy to use
- Backup your wallets and restore them later, even if your device is lost or stolen
- Water resistant and durable
- Can store multiple cryptocurrencies at the same time
- Susceptible to the vulnerabilities of any electronic device
- Since all of your Ether is in one place, if someone has your PIN, it is easy to steal
- If someone gets your recovery card, they can reset your PIN
The ideal buy and hold solution would probably be a combination of paper wallets and a hardware wallet. But it's just a personal preference.
Learn more about the Trezor here.
Speculation / Active Trading
Active trading is a little tough because not all exchanges give you the ability to set pending orders and stop losses, like with Forex brokers. But exchanges like Poloniex do allow you to set stop-limit orders.
However, if your exchange does not allow this, you have to setup alerts, so you are aware of market movements and can place trades manually. Exchanges like Coinbase don't allow pending orders.
To setup alerts, you can use TradingView. Alerts are only available in the Pro plan, but if you are an active trader, it is well worth it.
Start by searching for the ETHUSD currency pair in the search box. Add it to your watchlist and click on it. The chart will come up.
Then right click on the chart where you want to add an alert. In this example, let's say that we want to add an alert near the last high, around $400, because we want to sell our long position.
This is what it would look like. You could also add another alert to let you know when prices are low and it might be a good time to buy.
Locking in Profits
Another potential risk with Ether trading is that not all exchanges allow you to store money in your local fiat currency. Or you may need to jump through a few hoops to be able to do that. So if you sold some Ether that you own, you may have transfer the money back into your bank account in order to lock in your profits.
Then you would have to send the money back to the exchange to buy again.
The problem is that each time you transfer money to and from your bank, that can take up to a week!
Terrible for active traders.
So what can you do about this? Well, that's where our friend Tether comes into play.
As I wrote about here, Tether is not a cryptocurrency that you invest in or trade to make money.
Because it is pegged to the US Dollar. So one Tether will always be worth about $1 USD.
…a little hard to make money that way.
But Tether is fantastic for locking in your gains on an Ether trade. Simply trade your ETH for USDT and you have locked in your profits (or stopped the bleeding).
Then when you are ready to buy Ether again, simply trade it back on the exchange. No extended waiting times.
Now let's dig a little deeper into Ether trading and look at technical and fundamental analysis.
Technical Analysis of Ether
Ether trading is still in its infancy, so we don't have many reference points to do proper technical analysis. As I wrote about here, we have only seen the first big wave of cryptocurrency speculation, so I believe that there is still a lot of potential for the currency to go up.
It's just a matter of when.
So before you break out your Gann Fan, Fibonacci retracement tool, or star charts…remember that we are trading a very immature market. I believe that there is a lot of potential in this technology, but we also need to limit our risk. It could blow up tomorrow, or best case scenario, there will be a lot of volatility in the currency price.
Therefore, simple support and resistance should be good enough to trade Ether. Buy low, sell high.
When we look at the chart, $140 seems like the best support level, right now. As you can see, price has already bounced off this level.
Could the price go lower than $140? Of course.
But based on our very, very limited data set, that seems like the best technical level to watch right now. The first target would of course be a move up to the previous high of around $400.
Also notice the flash crash that happened in June. You should setup an alert, in case that ever happens again.
Fundamental Analysis of Ether
The success of Ethereum will depend on the quality of the apps that are launched on the platform, the decisions that the development team makes and the public perception of the tokens that are launched on the platform.
So keep an eye on all of these things. Some useful resources to track are:
So that is everything you need to know about how to trade Ethereum…I mean Ether.
Again, I can't stress this enough…there will be a ton of volatility in Ether, so be sure to pick a strategy that matches your personality and get into trades for as cheap as possible. Cryptocurrency trading is NOT for the faint of heart.
Ether has retraced over 70% from its highs, so keep that in mind before you decide to get involved.
If I missed something or you have a question, let me know in the comments below…
Whew, this guide took awhile to write. So if you found it helpful, feel free to send me a tip in Ether, to this address:
Thanks and happy trading!
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