Things to note before trading Ethereum

Rage Comment : As the digital currency market matures, people are increasingly in need of new investment products. However, so far, only Ethereum can compete with Bitcoin. Therefore, the author writes this article hoping that everyone can recognize the form of Ethereum before trading. The different operating mechanisms and issuance methods of the two markets determine that the volatility of Ethereum is greater than that of Bitcoin. However, it is expected that this situation will be broken after Ethereum releases Casper. The two have similarities in community structure and security risks, and most of the criticisms of Ethereum are focused on its recent appearance. Moreover, the price volatility of Ethereum brings investors the possibility of profit.

Translation: Annie_Xu

As the idea that blockchain technology will impact corporate business becomes more and more established, retail investors and professional investment institutions are looking forward to the market becoming a vibrant new asset class.

However, to date, no digital asset alternative has a value proposition that can be separated from the original blockchain-based Bitcoin.

Bitcoin still attracts investors with high risk tolerance and people who believe that digital currency will become a stable way to store value and a competitive global trade and financial framework. Although people always say that Bitcoin price is volatile, it is still one of the most stable digital currencies, with a current market value of more than $7 billion.

In contrast, many digital currency alternatives with value propositions similar to Bitcoin are more volatile.

In this context, Ether, traded on the Ethereum platform, emerged as a digital currency that could compete with venture capital. Despite a recent slump in the price of Ether, more global exchanges have added Ether to their product lists, driving strong growth in the number of Ether.

Ethereum can provide benefits that other digital currencies such as Bitcoin do not have, but it also has certain risks and factors that need to be considered. Interested investors can learn the basics of Ethereum and other currencies that affect Ethereum price fluctuations, which will help them understand the risks of Ethereum investment.

What is Ethereum?

Ethereum is a platform for developing decentralized applications. Its founder is Vitalik Buterin and it was officially released in early 2014. Buterin has publicly stated many times that he wants to create a system based on different blockchains and provide a high-performance tool library for developers around the world.

Ethereum released its beta version in July 2015 and was released in March this year. The biggest innovation of Ethereum is the ability to run Turing-complete smart contracts and use "if-then" statements to execute the terms of the agreement.

In general, smart contracts ensure that once the preset conditions are met, the corresponding terms in the contract will be executed. It is expected that the Turing completeness factor will allow developers to write more complete codes.

Smart contracts can now run on the public Ethereum blockchain, a distributed ledger technology that keeps track of all related transactions and contracts.

Smart contracts on Ethereum have a wide range of applications because developers can use them to build markets, execute transactions according to contracts, and track the execution status of different contract parties.

The New York Times reports that many users have begun taking advantage of the plethora of options to develop ride-sharing apps, sports betting apps, and even investment programs.

However, as an open source technology, companies can use it to build private chains based on Ethereum for free without using public chains and Ether.

How the Ethereum Market Works

Unlike Bitcoin's global strategy, Ethereum is not committed to becoming a global digital currency. Instead, it hopes to become a means of payment for certain specific activities in the Ethereum network. Users use Ethereum to provide the computing power required to verify transactions and improve themselves.

However, exchanges and infrastructure built around the Bitcoin network are also supporting the development of the Ethereum market. For example, Bitfinex and Kraken, exchange platforms for buying and selling Bitcoin and other digital currencies, have launched Ethereum trading products.

But the development path of the Ethereum trading market is different from that of Bitcoin.

Once users could trade on the Bitcoin network with home computers and mine Bitcoin with home mining equipment. The increase in participants in the Bitcoin network increased the value of Bitcoin; Ethereum's development is different.

In an effort to build a global development community around its ideas, Ethereum began pre-selling ether in 2014, raising $14 million; this fundraising was called a crowdfunding, but it was somewhat similar to an informal initial public offering (IPO).

The funds raised from the presale fueled the subsequent official token sale and the distribution rate later. After the presale, investors received 60 million ether; another 12 million ether became a development fund, most of which were owned by early developers and investors. The Swiss-based nonprofit Ethereum Foundation received the rest.

The pre-sale accumulated to 72 million ethers after the initial public offering; the Ethereum prototype then limited the issuance of 5 ethers for each developed block; the annual issuance of ethers was limited to 18.

The supply rate of the Bitcoin network is relatively more stable. Due to hard-coded rules in the software, there will only be 21 million Bitcoins in existence (unless the rules are changed); the current supply rate of Bitcoin is still about 25 every ten minutes.

Investors should note that the Ethereum market cannot guarantee such a stable issuance rate.

When the Ethereum Foundation was first established, it announced that the rules of Ethereum would soon change. Starting in 2017, the network would begin to follow the Casper rules. This consensus algorithm is still under development.

In mid-April, ether transaction volume reached 3.3 million, increasing the ether supply to 79 million.

How does mining affect prices?

To summarize, the biggest price influencer of Bitcoin is its stable issuance; Bitcoins are paid to computer operators who execute transactions, thereby mining more Bitcoins.

Mining affects the price by increasing the supply and is affected by the decisions of miners to trade Bitcoin. The current version of Ethereum, Homestead, uses a consensus algorithm based on proof of work, which rewards computers that contribute to its security in the same way.

Ethereum.org said that under such a system, miners can build a new block every 15-17 seconds and generate 5 ether. Miners who help find a solution but fail to build a block can get two or three ethers, which are called "uncle/aunt rewards."

This issuance rate will change once Ethereum starts using the Casper proof-of-stake protocol, which is expected to provide a smaller mining subsidy. Under this protocol, nodes can verify transactions and build blocks unless they post a security deposit.

If the protocol determines that a node or “interconnected validator” has produced something invalid, the node loses all security deposits and the right to participate in the consensus process. Currently, interconnected validators do not accept the risk of fines for this.

The change in incentives could make Casper more efficient, but it would also mean that the price of ether would be affected by new aspects of how the network operates.

Security Question

After seven years of development, the major issues have been resolved and the Bitcoin network is now often called the most secure blockchain by its supporters; even the company's business has demonstrated its strong network effects and diversified mining network.

Ethereum has been criticized for potential security issues for many reasons, but most criticisms focus on the software being immature and not old enough. Ethereum has also been attacked less than Bitcoin and therefore has been tested less frequently.

There is also little value in the different structures of Ethereum and Bitcoin mining pools. However, Bitcoin's mining community is sometimes criticized for being controlled by a small number of participants, and Ethereum seems to have the same problem.

According to Blockchain.info, five companies control 81% of Bitcoin hashing power; in mid-April, five companies controlled 85% of Ethereum hashing power.

While the largest Bitcoin miner, F2Pool, accounts for 26% of the digital currency’s hash power; the largest Ethereum miner, dwarfpool, provides 41.8% of the hash power.

Developers will continue to develop new versions of Ethereum, but some critics predict that Ethereum will face greater security risks than Bitcoin. We will have to wait and see how this plays out.

Price Fluctuations

As the Ethereum platform is still immature, the price of Ether fluctuates greatly. As of press time, the daily price fluctuation, monthly price fluctuation and the fluctuation since its issuance are 31%, 16.7% and 53.7% respectively.

While this volatility makes it unreliable to some, it does present opportunities for traders.

Market participants can trade Ethereum with fiat currencies and Bitcoin, and many exchanges support this type of trading.

Due to the sharp fluctuations in the price of Ethereum, many traders have taken a close look at its future price fluctuations, hoping to profit from them. Others use Ethereum to hedge the risk of Bitcoin or as a digital currency alternative.