The first thing to learn about Ethereum investments is that there are two strategies. The first involves buying and holding the ETH in a crypto wallet for months or years until selling it to make a profit. The second one refers to day trading and means you’ll bet on the token’s price through derivatives like contracts for difference (CFD)s.
Getting into cryptocurrency is easy – you open an account on a reputable exchange and buy Ethereum with a debit card or other preferred methods. To succeed, though, you can use tools and well-researched advice.
Read on to understand the common Ethereum investment types, the difference between online brokers and exchanges, and why analysis is beneficial.
Understanding the three types of derivatives
You can find several ETH derivatives, but usually, the following three are more commonly used, whether Ethereum is traded on an exchange or brokerage:
- Options. Options are like futures contracts, except you don’t have to close your position and sell your asset on settlement day. There are two types of opportunities. With the put option, you’re entitled to sell your Ethereum at a fixed price. Assuming it drops below the predetermined price before the expiration date, the put option allows you to sell it at a higher price. With the call option, on the other hand, you buy Ethereum at a fixed price. If it rises to or above the predetermined price before the expiration date, you can pay less for Ethereum.
- Futures. Ether futures are financial derivative contracts that obligate parties to buy and sell the token at a future date. You can speculate on your asset’s underlying trend and invest in the cryptocurrency if you expect the price to increase. You make a profit if your prediction is true. Otherwise, you suffer losses. You can trade in Ether futures with a futures trading account on Binance. The first thing to determine is the contract’s duration.
- CFDs. Ether CFDs are a quick and convenient way of trading cryptocurrency without the liability or obligation to own and store the underlying asset. Instead of buying and holding it, you use derivatives to speculate on the price movements. All you need is a trading account.
The difference between owning Ethereum and trading derivatives
What’s the difference between trading derivatives and buying and holding ETH coins? Well, with derivatives, you can access the crypto market without holding any digital currency. These contracts stipulate the date and price of selling and buying an asset and derive the value from Ethereum’s value.
When you choose a broker, ensure it complies with national regulations. This way, you’ll minimise your risk of exposure to fraud or scams. The type of derivatives and associated depend on your country of residence and the country the broker is registered in.
Many newbies to trading choose to copy high-profile traders’ trades, an option many available on social trading platforms. However, this is a two-edged sword. On the one hand, you increase success chances. On the other hand, you lack the trading volume and safety cushion that large-volume traders have. This is why it’s recommended to copy trades carefully, considering your initial capital and ensuring that the move suits your situation.
Observation: Trading in the derivatives enumerated above is quite risky and is for traders with high-risk tolerance.
The ways to Trade Ethereum
You have two options to trade Ethereum: through brokerage websites or derivative exchanges. The online brokerage allows you to trade Ethereum quickly. You purchase a contract that entitles you to your initial investment plus the profits or losses made when the position closes. Pretty much every platform provides crypto derivatives like CFDs, options, and features.
The advantages of using a broker to trade Ethereum include the following:
- You don’t have to manage a crypto wallet
- You don’t have to worry about your assets’ security
- You can make profits in the short-term compared to holding.
The derivative exchanges used only to facilitate the selling and buying of cryptocurrencies, Ethereum included. However, today they offer a wide range of facilities, like crypto derivatives, that you can use for day trading. If you already have an account on a leading exchange like Binance, you probably don’t need to open another on a brokerage website. It will allow you to take advantage of ETH bull runs by engaging in leveraged trading and maximising your profitability. This being said, let’s wait and see when the crypto winter ends.
Among the advantages of using an exchange to trade Ethereum are:
- They’re more versatile and allow you to buy and sell niche assets
- You can withdraw your Ethereum any time
- You’re offered a more varied range of cryptocurrencies for trading
- They’re more user-friendly than brokerage websites
- You get both the services of a brokerage and an exchange in one.
Getting familiar with fundamental and technical analysis
When it comes to trading Ethereum, Bitcoin, or any other cryptocurrency, it’s best to become familiar with the two major types of analysis – technical and fundamental. You increase your chances of opening profitable trades by gathering and analyzing relevant information.
The fundamental analysis is more qualitative and involves the basics, like the following:
- News. Ethereum is the second most popular cryptocurrency worldwide. Everything related to it, from recent news, industry leaders’ opinions, updates, etc. can impact its value and drive a price surge or fall.
- Supply and demand. There are over 120 million Ethereum tokens in circulation at the moment of writing. Changes in the available quantity can also result in changes in price.
- The general rule of economics. Ethereum’s price increases with its demand. Conversely, if it’s the supply that grows, the price falls.
Technical analysis, on the other hand, is about identifying patterns through facts and statistics. Once you learn and master it, you make more evidence-based trading decisions with better chances of making a successful move. Some technical markers can help you with your trading, including the following:
- Moving Averages. It uses previous Ethereum prices at various intervals to calculate an average.
- Relative Strength Index. It measures the direction and pace of recent price changes to indicate Ethereum’s recent trading strength.
- Moving Average Convergence/Divergence. It reveals changes in trend, strength, direction, and momentum.
To trade Ethereum successfully, you must determine your risk tolerance. You can venture into the crypto world with as little as $10. Then choose your trading strategy to maximise your odds.
Bake your way to the perfect street party