Ethereum is the second-largest cryptocurrency network after bitcoin. Its native coin is called ether, though most people simply call the whole thing Ethereum. While bitcoin was designed mainly as digital money, Ethereum was built as a platform that other applications can run on, which is why it is often described as a world computer.
How Ethereum differs from bitcoin
Bitcoin’s main job is to be a store of value and a way to send money without a bank. Ethereum does that too, but its big innovation is the smart contract. A smart contract is a piece of code that runs automatically on the network when certain conditions are met. That allows people to build lending platforms, exchanges, games, digital collectibles and stablecoins that run without a central company in charge.
Many of the dollar-linked stablecoins used across crypto markets run on Ethereum. Every time someone uses these applications, they pay a fee in ether, which creates demand for the coin.
What staking means
In 2022 Ethereum switched from mining, the energy-hungry system bitcoin still uses, to a system called proof of stake. Instead of miners competing with computers, holders lock up, or stake, their ether to help validate transactions and secure the network. In return they earn a reward, a little like interest. The switch cut Ethereum’s energy use dramatically and changed how new coins are created.
What moves the price of ether
Ether is driven by a mix of factors. Demand for the network’s applications matters, because more activity means more fees. Flows into exchange-traded products that hold ether can move the price. Regulation matters, as do upgrades to the network.
But in practice, ether behaves a lot like a high-risk technology share. When investors are nervous and selling risky assets, ether tends to fall, often by more than bitcoin. When appetite for risk returns, it can rally hard. This morning it is trading around $2,320 after bitcoin briefly dipped below $80,000 on tensions between the US and Iran, which is a good example of crypto trading with sentiment rather than as a safe haven. Our Morning Market Brief has the latest.
The risks for beginners
Ether is extremely volatile. Moves of 10 per cent or more in a day are not unusual, and drawdowns of more than half from a peak have happened several times. Applications built on Ethereum can be hacked, and some crypto platforms have collapsed, taking customer money with them. If you trade ether through leveraged products, those swings are magnified.
Make sure you understand volatility and use sensible position sizing before trading any cryptocurrency.
The bottom line
Ethereum is a platform for applications as much as a currency, and ether is the fuel that runs it. It has real uses, but its price still swings with market mood, so treat it as a high-risk asset and size any position accordingly.
If you want to find out how you handle decisions like this, and where your own trading could improve, the free Samuel & Co Trading Trader Assessment is a sensible next step.
