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Beginners Guide to Trading Ethereum

Ethereum has been making headlines in the investment community due to it's explosive growth, and potentially revolutionary technology of enabling smart contracts. In the world of cyptocurrencies, Ethereum is currently second only to Bitcoin in market capitalization at over $25 billion.

What is Ethereum?

Ethereum is a a distributed public blockchain network. A blockchain is a distributed database that is used to maintain a continuously growing list of records, called blocks. Each block contains a timestamp and a link to a previous block. A blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. By design, blockchains are inherently resistant to modification of the data. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks and the collusion of the network. Functionally, a blockchain can serve as "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way. The ledger itself can also be programmed to trigger transactions automatically

More importantly, Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.

The ability to create smart contracts on the Ethereum platform is what has attracted the interest of large multinational corporations, and what may ultimately give Ethereum an advantage over the older and more established Bitcoin blockchain. The Enterprise Ethereum Alliance includes large corporations like Accenture, BP, Deloitte, ING, J.P.Morgan, Microsoft and UBS - all who have expressed interest in developing projects on the Ethereum platform.

Ethereum also has allowed startup companies to raise capital via initial coin offerings (ICOs) powered by the Ethereum network. Buyers fund the startups by purchasing the startup's tokens with Ether.

Ether (ETH) is the cryptocurrentcy that "fuels" the Ethereum platform, so when you buy/sell/trade you are buying Ether coins/tokens.

How do you buy Ether?

Well if you live in the United States, the company that is often mentioned first is Coinbase, not only do they run one of the largest exchanges GDAX, but they also have tried to simplify the process for beginners looking to invest. The signup process is quick, easy, and fairly straightforward. You provide some personal information, take a picture of your driver's license, and link one or more bank accounts. They also have a mobile application.

All that simplicity comes at a cost, the Coinbase fees are generally far higher than dealing directly with an exchange - including their own exchange GDAX. Coinbase charges U.S. customers 1.49% on both buying and selling Ether - plus there is a spread of around 50 basis points or more - essentially you are paying slightly more for the convenience of a guaranteed trade occurring at a particular price. Thus every time you buy or sell Ether on Coinbase, you are essentially paying a 2% fee.

Coinbase's exchange GDAX by comparison charges 0% for makers (orders not immediately filled and placed on order book), and 0.1 - 0.3% for takers (market or immediately filled orders). So essentially you are paying a 1.7% premium on each buy/sell order for using the simplified Coinbase interface rather than the more complicated, yet more robust GDAX advanced trading platform.

So my advice to maximize profits and minimize fees would be to setup a Coinbase account, and then login and use GDAX instead. Both use the exact same login as they are related user systems - although account wallets are separated but transferable.

Due to popularity of the platforms, both Coinbase and GDAX have experienced horrible growing pains  - highlighted by system outages that occur at the absolute worst times - when volumes and user levels peak during volatile cryptocurrency price swings - you maybe unable to login and sell at peak highs or buy at lows.

They also had a well publicized "flash crash" debacle driven by margin trading, margin calls, and stop orders. The flash crash was caused by an extremely large sell order which lowered prices dramatically due to the limited depth of the order book, and that automatically triggered margin calls and stop loss orders which lowered prices further to crazy low levels upon which buyers immediately bought in large large volumes before the price jumped back up to normal. This all happened in under a second. Ultimately, they reimbursed users who were effected by the recent "flash crash", but the lessons learned would be - don't trade on margin and don't use stop loss orders (only use limit orders, or stop limit orders).

There are other annoying glitches in the Coinbase system like fluctuating maximum ACH bank transfer values, unclear ability to wire transfer even after you have verified your identity, links indicating you should verify identity after you already have uploaded your driver's license on their mobile app, etc.

Hopefully, they will get all their technical issues sorted out and can improve their scaling under heavy loads, as the GDAX exchange in particular has a nice looking interface with valuable tools.

So traders might want to look at a slightly smaller volume exchange to trade Ether. The Gemini exchange, owned by the Winklevoss twins, is generally regarded as a quality New York licensed cryptocurrency trading exchange that hasn't suffered the technical difficulties or recent blackeyes that Coinbase has. The very reasonable fees are 0.25% or lower based on your trading volume. The identity verification process takes a bit longer on Gemini - so you should anticipate it taking around one week before you can trade.

If you are already trading Bitcoin, or have access to Bitcoin funds, there are other large exchanges like Poloniex where you can buy Ether with Bitcoin - but you cannot buy Ether with "fiat" (like U.S. currency).

Other Tips When Buying Ether

  • Remember that while the different exchanges generally have similar Ether prices, you are essentially only trading with others on the particular exchange being used. So the prices will vary slightly from exchange to exchange.
  • All United States exchanges will require identity verification and all have varying money transfer policies in place to comply with anti-money laundering laws.
  • Traders should also seek tax advice on how to report short and long term capital gains on cryptocurrency, and keep detailed records of all trades.
  • Finally, person's interested in buying Ether should realize that all cryptocurrencies are currently extremely volatile with prices that can go up or down dramatically at any time - while this might provide an opportunity to make some quick gains, there is also the risk of incurring substantial losses.

Hopefully the above advice will simplify your journey into the world of trading Ethereum.