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What is Ethereum?
Ethereum is a decentralized platform created to support financial applications and that works with its own token, the Ether, which is also called Ethereum. The original idea is to overcome the limitations of the Bitcoin network, where only sending and receiving cryptocurrencies can be executed.
That is why Ethereum is a programmable platform, which can support other cryptocurrencies (including Bitcoin), smart contracts and decentralized applications or dapps. And the latter are not limited only to the financial world since, we can also find games or small social networks that take advantage of the Ethereum network.
So, as these applications run on the Ethereum blockchain, there is no way to prohibit the use of a dapp or censor it. So, according to the organization itself, if Twitter ran on Ethereum, no one would be able to block an account or stop a user from Tweeting. To which are added the other features of cryptocurrencies such as anonymity and transparency.
Relationship between Ethereum, smart contracts, dapps and the Ether
Every transaction on the Ethereum network must pay a fee to complete, although it is more of a token payment because of how small they are. So just like sending money is a transaction, uploading or executing a smart contract on the Ethereum network is a transaction.
And all transactions over the Ethereum network, even if you are sending Bitcoin, must pay a small fee in the native cryptocurrency: the Ether. This commission is mainly for the network participants who validate the transactions, i.e. the miners.
A dapp is an application whose code was executed on the Ethereum network as a smart contract. This makes the application completely transparent, everyone can verify its code, it is always available and no one can ever modify it in any way.
Therefore, a financial type dapp that channels loans, for example, must pay a commission in Ether for each transaction made. Similarly, following the example of a Twitter on Ethereum, each Twit would be a transaction, even if extremely small.
The future of Ethereum and its cryptocurrency Ether
As we have seen, the Ethereum network is far superior to that of other cryptocurrencies and the number of dapps is increasing all the time.
This causes the number of transactions to increase, thus increasing the demand for the Ether cryptocurrency and with it its price. This is why we can see the evolution of its price in the cryptocurrency market.
Finally, while blockchain technology and cryptocurrencies are here to stay, Ethereum is perhaps the one with the most promising future.
What financial instruments can you trade?
ETFs or Exchange-Traded Funds are a kind of passively managed fund, similar to index funds. They can be described as a combination of stocks and mutual funds, including the best features of both. They can be traded like regular stocks, but include a wide diversity of assets and have lower fees.
About Contracts for Difference
If you already have been on this broker, you probably realized that the initials CFD appear frequently. Before we come back to this, we must say that CFDs on this broker are only possible if you go short.
If you are interested in day trading cryptocurrency or other advanced trading operations, later on you will also find out about concepts such as short-selling and leverage.
With CFDs you can operate on the platform even if you are not “in the black” or having a negative balance. Let's say that you have the certitude that the Ethereum will go down, so perhaps it is obvious to think “if it is going to depreciate or go down in price, I'll just wait and bet when it has gone down”. But if you really think that it's going down, why not making some profits out of it?
You can do by “going short” which consists in something like this:
- Someone lends you, let's say, 100 units of Ethereum, with a total value of $ 5,000 (these numbers are imaginary)
- Next, you sell them at their market price, $ 5,000
- The Ethereum devaluates from $ 50 to $ 30
- Again, you purchase the 100 units, but at the current value, $ 3,000
- You pay back the 100 units to whoever made the loan
- There: the $ 2000 difference is yours
It is far more simple than it may seem. Just take into account that by trading in Ethereum on this broker, with CFDs you can make a profit if you anticipate downs in the price.
How to use leverage when trading Ethereum
In case you still don't know what “leverage” is, we'll put it short: it is the possibility to invest a higher amount than you actually have. For example, if you start with $ 100 and you leverage x2, your initial investment will be $ 200.
Leverage, Take Profit and Stop Loss
Let's pretend that you are confident that Ethereum will rise, and you consider “going long. You have $ 1,000, but you actually can invest more and make more money.
You could consider requesting a credit, but you must know that all the process takes time, and by the moment you finally get the money, Ethereum might be already so expensive (if your guess was right) that trading wouldn't be convenient anymore.
With leverage, you can obtain that amount really easily. It's just like a loan, but much better: you will get it from the broker, which lets you invest a lot more than you have on the platform. Before trading, you will be able to choose between the different leverage options as in the screenshot below:
When trading in different markets you can use higher leverage. The reason is that leverage is most common in short-term operations or day trading, and cryptocurrencies tend to be a medium or long-term investment. But let's deepen a bit more on how all this works:
- If you decide to invest $ 1,000 and you use leverage x2, you will be starting with $ 2,000 (remember that$ 1,000 was borrowed from your broker).
- Then, turns out that Ethereum does rises, as you assumed, and now the cost of your investment is $ 2,400 (20% more), so you decide to sell back.
- Once the $1,000 from leverage is returned, you will have $ 1,400 left; which means the net profit is $ 400, since the other $1,000 was yours from the beginning.
By starting with $ 1000 and getting $ 400, you'll be earning 40% of your investment.
It may sound too good to be true. The trick is that the risk of losing out is also there. If everything goes according to plan and the price goes up, you will make more money in less time; but if the value of the asset goes in the opposite direction, you will also lose more in less time.
For instance: if the price falls by 10%, you won't lose $ 10, but twice (the leverage) that figure, that would be $ 20. That is why the concepts of Take Profit and Stop Loss are crucial when using leverage.
Take Profit is used as a form of reducing risks when trading. When you enter, you can set a profit limit and ask that your position is automatically closed when the asset reaches a price.
If you purchased Ethereum at $ 100, you program the broker to close once it reaches $ 120. That way, you make sure you won't change your mind and decide to wait a bit longer in case it keeps going up, which could be a mistake since the price could go down again.
Also, if you use leverage you absolutely need to place a Stop Loss order (take into account that any small loss is greater with leverage). Take into account that your broker will recommend a limit for Stop Loss, but you should set it closer to current price than that.