Ethereum

Ethereum’s price has had a wild ride; in 2016 and 2017 it was the darling of the crypto world, and then in 2018, it came crashing back to earth. There are several reasons to keep an eye on this cryptocurrency as it may offer numerous trading opportunities in 2019. Ethereum’s unique position in the blockchain industry and current developments on the platform imply that sentiment may swing wildly in the next twelve months, and this can create opportunities for patient, savvy traders.

While many traders prefer to use technical analysis to trade Ethereum, those who develop an understanding of the narrative and sentiment driving the price may well have an advantage in the coming months. For Ethereum, information is everything and understanding the bigger picture will be key in 2019.

What is Ethereum?

To understand the issues driving ETH’s price, it’s important to know how Ethereum got to where it is. Ethereum was launched in 2014 as the first smart contract platform. That means whilst  it is a blockchain with a native cryptocurrency just like Bitcoin, the network can also be used to run programs called smart contracts. In effect, the Ethereum network is a very large decentralized smart computer.

Ethereum was originally funded by holding the first Initial Coin Offering, or ICO. This funding model was then used by thousands of other blockchain projects, which are themselves decentralized organizations with their own tokens. The majority of these projects run as smart contracts on the Ethereum network. This was the first reason Ethereum’s price began to climb. The second reason was that many of these ICOs required investors to buy their tokens with ETH. This increased demand caused the price of ETH to rise from $17 at the beginning of 2017 to over $1,400 by the end of the year.

This was also what caused ETH’s price to crash to below $100 in 2018. All ICO projects that received ETH had to sell some of their holdings to fund their businesses. Eventually, many of these projects had far less than they raised and had to close shop.

Anyone running a smart contract on the Ethereum network pays transaction fees using ETH – this is what drives demand. For demand to rise, projects on the network need to grow their user base, or more projects need to join the network. The growth in current projects and the number of new projects will ultimately drive the price of ETH.

Smart Contract Competitors

Ethereum’s novel idea and its success lead to several other smart contract platforms being launched. There are lots, but the largest and most well-known include EOS, Stellar, NEO, Hyperledger, and Cardano. Each has its unique features, advantages, and disadvantages, but nevertheless, each of these is potentially a competitor for Ethereum. If these platforms manage to make technical breakthroughs and begin attracting Dapps (decentralized applications), this will potentially be bad news for Ethereum. Likewise, if these platforms cannot maintain momentum, Ethereum may benefit in the long run.

EOS, which managed to raise $5 billion in its own ICO is the one to watch. Despite some initial problems, EOS has a strong team behind it and a lot of capital to invest in projects that help it grow its ecosystem and token economy. EOS and Ethereum will be competing head-on in the next year and investor sentiment is likely to shift back and forth between the two.

Challenges

The biggest challenge facing Ethereum is its ability to scale. When compared to other blockchains, ETH is relatively slow in terms of the speed at which transactions are processed. For the Ethereum network to become large, and valuable, processing speeds will need to be improved, and this is the main area of focus for the network’s developers at the moment.

A series of upgrades known as the Constantinople Hard Fork recently took place on the network and these upgrades should improve Ethereum’s ability to scale and improve transaction speeds.

The other challenge facing Ethereum, and many other digital currencies, is the inefficiencies inherent in Proof-of-Work (POW) blockchains. POW requires ever-increasing amounts of computing power and electricity to process transactions and mine new coins.

The alternative method of giving miners access to a network is POS or Proof-of-Stake. Rather than rewarding miners who invest in electricity and computing power, POS rewards miners who invest in the cryptocurrency itself. Miners are then incentivized to act honestly to protect their investment in the currency.

The team behind Ethereum are planning to move the network to a POS system in the future, and the recent upgrades were also designed to pave the way for this to happen.

Not everyone in the crypto community agrees that POS is the way forward, and the POS Vs POW debate is also likely to impact Ethereum’s token price over the next year. If support for POS grows, Ethereum is likely to benefit, at the expense of networks like Bitcoin that have no plans to move from a POW protocol. Rising energy costs, government intervention or growing concerns about the energy being consumed by crypto mining could all be good news for ETH. This topic will be a major factor for investors considering Ethereum vs Bitcoin.

Conversely, security breaches or governance issues on other POS networks may swing sentiment in favour of POW networks, and Ethereum may suffer.

The Future

The biggest factor to watch with regard to Ethereum is whether any projects on the network manage to gain widespread adoption. To date, there has not been a blockchain equivalent of Facebook or YouTube in terms of user numbers. But that day may be just around the corner, and if a product built using Ethereum smart contracts takes off, the future potential of the network will have been proven and the price will rocket.

Conclusion

Traders can employ lots of different cryptocurrency strategies. However, before jumping in based on some positive Ethereum news today, you should make sure you understand how it fits into the big picture. You can start trading in Ethereum on One Financial Markets’ online trading platform. However, it is recommended that you start out with a demo account first so that you can practice your strategies and skills without any risk.