1. An Introduction to Ethereum – ‘The New Bitcoin’
Bitcoin has become the center of many an online trader’s strategy in recent years. Its volatility as an investment asset and explosive growth as a technical innovation make it incredibly attractive to day-traders.
And with Bitcoin now on the cusp of entering mainstream investment markets, which could stabilise its price and dilute its appeal, traders are now hungrily searching for ‘the next Bitcoin’.
We’re going to explain to you the similarities and the differences between Bitcoin and Ethereum in more detail in this guide.
We’re going to explain to you the similarities and the differences between Bitcoin and Ethereum in more detail in this guide.
For now, we’ll summarise by saying they use the same fundamental blockchain technology, where digital data is distributed rather than stored centrally, but Ethereum has the capacity to be applied to a lot more than ‘just’ currency and online payments.
It could become the foundation of a whole new internet.
When Bitcoin and blockchain technology first emerged it very quickly had investors clamouring to own chunks of it. Bitcoin was available for just a few cents back then and investors realised that it could become the future of global online payments, making it incredibly valuable in years to come.
Investors now want to buy up Ether (the currency equivalent of Bitcoin) at a low price and sell it in several years’ time for a huge profit, just like they did when Bitcoin first came on the scene.
Ethereum is still niche. It’s not widely understood. This gives you the opportunity to get ahead of the crowd and perhaps even trade and invest Ether before the mass market becomes aware of its astonishing capabilities.
Next, we’re going to look at exactly what Ethereum is and explain how it works so you can understand its true potential and identify the commercial developments that might accelerate its value.
Acquiring such knowledge could help you know when to buy and when to sell your Ether to lock in a profit.
2. Under The Hood: How Ethereum Works
Ethereum, like Bitcoin, uses blockchain technology. With blockchain, digital data is distributed, not copied. It doesn’t exist in one central place and isn’t owned by one person, so there’s no single point of failure.
It’s the foundation to a new type of internet and it’s what Bitcoin, a digital currency, relies on as a new way of paying for things. Ethereum meanwhile uses the same blockchain technology but applies it to lots more things.
It allows developers for example to build apps using the blockchain approach.
With Bitcoin, blockchain is used to track ownership of a digital currency – the Bitcoins – but with Ethereum, blockchain runs the programming code of any decentralized application.
In simple terms think of it as a bit like having a shared google document, where many members on your shared network can see and / or edit the document, but on a greater scale and in a much more sophisticated way.
In the Ethereum blockchain, instead of mining for Bitcoin, miners work to earn Ether, a type of crypto token that fuels the network.
Ultimately developers using Ethereum blockchain can create apps and systems in this way that cut out the need for any central intermediary. Imagine, for example, a world where we don’t need the banks to service loans, or estate agents for property, or insurance brokers, or even government departments.
With Ethereum apps, you cannot in theory have one person corrupt, tamper or destroy the data because it effectively exists across multiple places on the network. It can be more secure and there can be zero, or close to zero, downtime.
The potential is mind-boggling. No wonder it’s caught the imagination. But that’s a long way off, which makes it even more appealing to some investors who may see it as an opportunity to get on board now while it’s still early days and therefore can be purchased at what might be seen as a very low price five years from now.
Next, we look at the key differences between Bitcoin and Ethereum.
3. Ethereum v Bitcoin: The Key Differences
We’ve looked at the important similarities between the current giant of the crytopcurrency landscape, Bitcoin, and the young challenger to its throne, Ethereum.
Let’s now highlight the key differences. Understanding these may help you become a better trader or investor of Ethereum.
1. Ether was not created to replace currencies
While Bitcoin was conceived as a form of alternative payment, the Ether currency was initially created to serve the users of the platform, as an Ethereum wallet to use with the apps they develop.
2. Ether’s supply is infinite
While the supply of Bitcoin is finite – it’s scheduled to cease in the year 2140 - Ether strictly speaking has no top limit, with its currency supply driven by its creators and miners.
3. Bitcoin is a lot slower
A Bitcoin transaction takes some 10 minutes to complete, but Ether transactions are processed in around 15 seconds, which contributes to its liquidity and volatility.
While almost all of the Bitcoin in existence was mined by early adopters, Ether’s launch was crowdfunded, meaning most of the currency is owned by people who purchased it. It is predicted that the balance will shift in favour of the Ether miners in about five years.
4. How and Where To Buy & Sell Ether
There are a few different ways you can acquire your Ether. It’s still early days so it’s not always that simple and straightforward.
First of all, you can download an Ether wallet from the likes of Github, or MyEtherWallet.
This may sound like the easiest and most direct way of getting Ether but they are not the most user-friendly of interfaces or processes, so you might prefer going to one of the more established Bitcoin exchanges, most of which now offer Ether as well – somewhere like Coinbase or Kraken.
You can usually use credit or debit card to make payment on the exchange sites or you can buy Bitcoin and use that to pay for your Ether. It’s worth shopping around the different exchanges as the fees for buying and selling can vary quite a lot.
Be prepared to upload several documents too, as robust proof of ID and address will be necessary. If you’re technically minded you can also mine for Ether, just like you can Bitcoin.
Or, for a really simple way to trade and invest in Ether, use eToro. On eToro you can buy CFDs (Contracts For Difference) which allow you to trade against the price of Ether without having to actually buy and own it as an asset.
You open a trading position via a CFD – the contract - and close it to make a profit or cut your losses.
Ethereum can be appealing as a long term investment where you buy now in the hope its value will go up astronomically in several years’ time, just like Bitcoin, or you can look at short-term day-trading to make quick profits.
Ethereum is a very new technology that has got some people very excited and this in turn makes the marketplace for Ethereum very volatile, which increases the interest for short-term traders.
When they see an emerging technology or company innovation that’s based on Ethereum they might buy quickly, knowing its value could increase significantly if that innovation were to really take off and become mainstream.
5. A Short History of Cryptocurrencies
If we want to picture how the Ethereum marketplace might evolve, we could do a lot worse than look to the short, colourful history of Bitcoin, the leading light of the fledgling cryptocurrency industry, for clues.
Bitcoin – A sign of the times
· 2007 – Work begins on the concept of Bitcoin by Satoshi Nakamoto, rumoured to be not one individual but a collective pseudonym for a number of people on the project.
· August 2008 – The domain name bitcoin.org is registered by anonymousspeech.com.
· January 2009 – The first Bitcoin transaction takes place.
· October 2009 – The first Bitcoin exchange rate sets a value of US$1 = 1,309 BTC.
· May 2010 – The first real-world payment using Bitcoin. Laszlo Hanyecz in Florida pays 10,000 BTC for a pizza, around US$25 at the time.
· August 2010 – A bug in the Bitcoin protocol means 184 billion Bitcoins are generated in a transaction and sent to two addresses on the network.
· June 2011 – Wikileaks starts accepting Bitcoins as donations.
· January 2012 – Bitcoin is featured in a fictionalised trial on CBS legal drama The Good Wife.
· October 2012 – Bitpay announces it has more than 1,000 merchants accepting Bitcoin.
· February 2013 – Coinbase reports selling US$1 million on Bitcoins in a single month.
· October 2013 – The FBI seize 26,000 BTC from website Silk Road.
· October 2013 – The world’s first ever ATM is launched in a coffee shop in Vancouver.
· November 2013 – University of Nicosia starts accepting Bitcoin as payment for tuition fees.
· December 2014 – Microsoft accepts Bitcoin as payment for Xbox games and Windows apps.
· January 2015 – Coinbase raises US$75 million as part of its series C funding.
· July 2016 – Uber in Argentina switches to Bitcoin after the government blocks credit cards.
· September 2016 – There are now 770 ATMs in the world.
· March 2017 – The SEC refuses an application to launch the world’s first Bitcoin ETF. As the decision deadline approaches, the price of Bitcoin surpasses the spot price of an ounce of gold for the first time, topping US$1300.
6. What The Experts Say : Cryptocurrency Trader, Jay Smith
eToro Popular Investor and experienced trader, Jay Smith, 28, has been trading and investing in Bitcoin for several years. He’s one of eToro’s Popular Investors and is regularly copied by others on the eToro global network of six million users.
In his own words, this is what Jay has to say about Bitcoin, Ethereum and the future of the crypto-currency markets.
When did you first discover cryptocurrencies?
At £12! That was the price of the first Bitcoin I bought. And I still have it today. I’ve moved it around quite a lot but I still own it.
I was introduced to it quite naturally, because I work with technology as an e-sports manager and that’s where my interests lie, in technology and innovation. I understood it quickly and liked the opportunities it had for future industry and as an asset to trade.
You need to know how cryptocurrencies work and realise their potential to successfully trade in them.
How much do you focus on Bitcoin compared to other assets on eToro?
I have a very split approach, so I use Bitcoin for day-trading and with tech stocks I look mid to long term. So a lot of my time now is dedicated to Bitcoin where I can make short-term profits.
Why are traders and investors so drawn to the cryptocurrency markets like Bitcoin and Ethereum?
It’s partly because of the volatility. You can make quick profits in volatile markets if you know what you’re doing. That’s not to say there isn’t risk involved though! You can lose money too, of course.
There’s also a big attraction to it because it’s new, cool and techy. Philosophically it attracts a certain community, the kind of people who like the innovative and revolutionary aspect of cryptocurrencies and blockchain technology.
Where do you see the future of Ethereum and the other Bitcoin-type exchanges?
There are some 700 cryptocurrencies out there. We’ve seen a lot of spin-offs from the Bitcoin model. Many will prove to be rubbish and some will become big. Ethereum is a good one, it offers something different.
The traders who like volatility will go there and to similar cryptocurrency markets as Bitcoin continues to grow and stabilise because it will probably lose its volatility.
7. Alternatives to Ether and Bitcoin
Bitcoin and Ethereum are quite clearly the two big guns of the blockchain world right now. They’re certainly the ones you’ll be able to trade and invest in most easily too. But there are plenty of others that are worth keeping an eye on and that could still yet emerge from their shadows.
Here we take a look at five of them.
Steem is a blockchain-based platform built around content and social media interactions where anyone can earn rewards. You up-vote other people’s stories, much like you do on Reddit or Facebook and you can earn Steem Dollars the more you engage, similar to how miners are paid by Bitcoin. Their co-founder and CTO resigned early in 2017 creating much speculation as to where Steem will go next.
The open-source Litecoin is often billed as a companion to Bitcoin. It is effectively a peer-to-peer online currency that you can use to make instant payments at near-zero cost to anyone in the world. Transactions are super-fast. It has a lot of industry support, decent trading volume and good liquidity.
One of the more innovative and interesting of all the new cryptocurrencies is Primecoin. Although heavily derivative of the Bitcoin model it has a unique proof-of-work based on prime numbers adding security through its mathematical intelligence.
Namecoin was the first fork of Bitcoin. It is an experimental open-source piece of technology that now strives for a greater level of security and decentralization than you get with Bitcoin. Namecoin has also been praised for its potential to create a web that’s more resistant to censorship.
Dash (DASH) is a digital currency that focuses on privacy as its main distinguishing feature. You can make instant, private payments online or in-store using its secure open-source platform hosted by thousands of users.