How to trade Ethereum

Written by: Rael Tooch | Expert Financial Writer

Reviewed and edited by: Caroline Tidman | Head of Content

What is Ethereum?

Ethereum is a decentralised, open-source blockchain platform that enables the development of smart contracts and decentralised applications (DApps) without intermediaries. It was conceptualised by Vitalik Buterin in 2013 to extend blockchain technology beyond Bitcoin's original purpose, and was officially launched in 2015.

Unlike Bitcoin, which primarily functions as a store of value and medium of exchange, Ethereum offers a broader infrastructure designed to support programmable contracts and complex applications. By acting as a global, decentralised supercomputer, Ethereum allows developers to build trustless and secure digital agreements that execute automatically when conditions are met.

Ethereum's native cryptocurrency, ether (ETH), powers the network. It is used to pay for transaction fees (gas fees), incentivise network participants, and facilitate decentralised finance (DeFi) applications.

Key features of Ethereum

Ethereum stands out due to several unique features that enable a variety of use cases across multiple industries:

1. Smart contracts

Smart contracts are self-executing agreements with the terms written directly into the code. They run on the Ethereum blockchain and execute automatically once predefined conditions are met.

What are the benefits of smart contracts?

• Eliminate intermediaries: No need for banks, brokers, or third parties.
• Increase security: Immutable and tamper-proof due to blockchain verification.
• Enhance efficiency: Automates processes in finance, supply chain management, real estate, and legal contracts.

Real-world examples of smart contracts

• Decentralised finance (DeFi): Enabling lending, borrowing, and trading without banks.
• Tokenised assets: Representing ownership of real estate, art, or company shares.
• Gaming & NFTs: Smart contracts facilitate non-fungible tokens (NFTs) and in-game economies.

2. Decentralised applications (DApps)

Decentralised applications (DApps) run on the Ethereum blockchain, rather than being hosted on centralised servers. These apps offer greater security, censorship resistance, and transparency.

Key advantages of DApps

• No single point of failure: They run on multiple nodes, making them more resilient.
• User control: Unlike traditional apps, users often control their own data and digital assets.
• Programmable finance: Enables innovative lending, trading, and asset management solutions.

Examples of DApps

• Decentralised exchanges (DEXs): Platforms like Uniswap enable peer-to-peer crypto trading without intermediaries.
• Gaming & virtual worlds: Games like Axie Infinity and metaverse platforms run on Ethereum.
• Identity solutions: Some DApps offer decentralised identity verification, reducing fraud risks.

3. Ethereum’s transition to Proof-of-Stake (PoS)

Initially, Ethereum operated on a Proof-of-Work (PoW) consensus mechanism, similar to Bitcoin, where miners competed to solve cryptographic puzzles to validate transactions. However, this process was energy-intensive and challenging to scale.

In 2022, Ethereum completed The Merge, transitioning from Proof-of-Work (PoW) to Proof-of-Stake (PoS), a major upgrade to improve scalability, efficiency, and sustainability.

Why was the transition important?

• Energy efficiency: PoS reduced Ethereum’s energy consumption by over 99%.
• Scalability improvements: PoS paves the way for future upgrades, such as sharding, which will split the network into smaller parts to increase transaction speed and reduce costs, improving overall performance.
• Security enhancements PoS reduces the risk of 51% attacks, where a malicious entity could control over half of the network’s mining power. By shifting to PoS, Ethereum makes it more difficult for any single entity to gain this control, increasing the network's resilience and overall security.

How PoS works on Ethereum

Instead of relying on miners, Ethereum now uses validators, who stake their ETH to participate in network security and earn rewards for validating transactions.

Ethereum’s growing ecosystem

Ethereum has become the foundation of many key blockchain innovations, including:

• DeFi (decentralised finance): Lending, borrowing, yield farming, and stablecoins.
• NFTs (non-fungible tokens): Digital art, collectibles, and gaming assets.
• DAOs (decentralised autonomous organisations): Community-led governance structures.
• Layer 2 solutions: Technologies like optimistic rollups and zk-rollups enhance Ethereum’s scalability and lower transaction costs.

Ethereum continues to evolve and expand, paving the way for Web3 applications, enterprise blockchain adoption, and next-generation digital economies.

Deciding how to trade ether

Buying ether outright

To buy and sell ether, you need access to a cryptocurrency exchange. There are two main types:

• Centralised exchanges (CEXs): These platforms include Binance, Coinbase, and Kraken. They provide high liquidity, user-friendly interfaces, and security measures but require users to trust a third party for managing funds and transactions.
• Decentralised exchanges (DEXs): Uniswap and Sushiswap allow peer-to-peer trading without intermediaries. They offer greater privacy but may have lower liquidity and higher fees.

When selecting an exchange, consider the following:

Trading volume and liquidity

A high trading volume and deep liquidity ensure tighter bid-ask spreads, reducing slippage and allowing for faster trade execution. More liquidity means easier buying and selling at desired prices, particularly for large trades. Low liquidity can lead to price manipulation and greater volatility.

Security measures

Robust security is critical when choosing an exchange. Look for platforms that offer:

• Cold storage for most funds to reduce the risk of hacks.
• Two-factor authentication (2FA) for enhanced account protection.
• Withdrawal limits and whitelisting to prevent unauthorised access.

Choose exchanges with a solid security track record to safeguard your assets from breaches.

Fees (trading, deposit, and withdrawal costs)

Fees vary by exchange, and understanding them is important to avoid unexpected charges eating into any returns. Consider:

• Trading fees: Maker-taker models where fees are based on liquidity contribution.
• Deposit & withdrawal fees: Some exchanges charge for moving funds on/off-platform.
• Hidden costs: Slippage and spread differences can also affect trade expenses. Always compare fee structures to maximise cost efficiency.

Regulatory compliance

Some exchanges follow strict regulations, offering enhanced consumer protection and legal recourse. Others have minimal oversight, which may increase risks like sudden shutdowns or frozen assets. Choosing a regulated exchange can provide peace of mind, especially for long-term trading.

Understanding conversion rates and fees

Transaction fees: Most exchanges charge a trading fee, typically a percentage of the transaction value. These fees vary by platform, with some offering discounts for high-volume traders or native token usage.

• Gas fees: Transactions on the Ethereum network incur gas fees, which fluctuate based on network congestion. Higher demand increases transaction costs. Users can choose slower transactions with lower fees or faster ones with higher fees. Layer-2 solutions such as Optimism and Arbitrum help reduce these costs.
• Deposit and withdrawal fees: Some exchanges charge fees for moving funds on and off the platform, varying by asset and method (crypto vs. fiat). Bank transfers and certain payment methods may incur additional fees.

Trading CFDs on ether

Contracts for difference (CFDs) enable you to speculate on ether's price movements without owning the asset. This trading method offers unique advantages and risks compared to traditional exchange trading.

Benefits of CFDs:

CFDs allow you to trade cryptocurrencies without a digital wallet, enabling quick and simple transactions.

You can go long (buy) or short (sell) without owning the asset, profiting in both rising and falling markets.

CFDs offer leverage to amplify returns (and risks) and provide easier access for those avoiding direct cryptocurrency management.

However, the leverage associated with CFDs can magnify both profits and losses, potentially exceeding your initial investment. This makes them a high-risk product. Unlike owning ether, CFDs don't provide ownership or control.

Find out more about trading CFDs on ether with a trusted global broker.

Understanding ether trading pairs

Ether is traded against various fiat and cryptocurrency pairs, including:

• ETH/USD: The most liquid pair, allowing traders to measure ether’s value against the US dollar.
• ETH/BTC: This pair tracks ether’s performance relative to Bitcoin.
• ETH/Stablecoins (ETH/USDT, ETH/DAI): Trading against stablecoins reduces exposure to volatility.

Liquidity is a key consideration when selecting a trading pair. Pairs with high trading volumes offer better price stability and lower slippage.

Types of Ethereum trading strategies

Day trading

Day traders enter and exit positions within a single trading day, aiming to profit from short-term price movements.

• Pros: High potential for quick profits; does not require overnight exposure.
• Cons: It requires constant monitoring and incurs frequent transaction fees.
• Example: A trader buys ETH at £1,800 and sells at £1,850 within hours, profiting from short-term volatility.

Swing trading

Swing traders hold positions for days or weeks to capture larger price swings.

• Pros: It is Less time-intensive than day trading and is suitable for traders with other commitments.
• Cons: Requires patience; can be affected by sudden market shifts.
• Example: A trader buys ETH during a market dip and sells after a sustained rally.

Holding (HODLing)

Long-term investors buy Ethereum and hold it for extended periods, betting on its future value appreciation.

• Pros: Minimal effort, no need for active trading.
• Cons: Requires strong conviction; vulnerable to market downturns
• Example: An investor buys ETH and holds it for several years, benefiting from long-term growth.

Performing technical analysis

Charting and indicators

Technical traders rely on various indicators to identify trends and potential entry/exit points when trading Ether. Here’s a breakdown of some of the most commonly used indicators in Ethereum trading:

• Moving Averages (MA): Moving averages help traders identify the overall trend direction. The Simple Moving Average (SMA) and Exponential Moving Average (EMA) are most commonly used to smooth out price data and track the momentum of Ether prices over time. Traders often use crossovers between short- and long-term moving averages (such as the 50-day and 200-day) to signal buying or selling opportunities.
• Relative Strength Index (RSI): RSI measures the magnitude of recent price changes to evaluate overbought or oversold conditions in Ether. An RSI above 70 typically indicates that ETH is overbought (a potential sell signal), while an RSI below 30 signals oversold conditions (potential buy signal). This can help traders assess whether Ethereum is likely due for a price reversal.
• Fibonacci retracement: Fibonacci retracement levels are used to identify potential support and resistance levels during price corrections. By analysing past price movements, traders use key Fibonacci levels (23.6%, 38.2%, 50%, 61.8%) to predict where the price of ETH might pull back before continuing in its original direction. These levels often act as price targets or points of reversal.
• Bollinger Bands: Bollinger Bands measure market volatility by plotting two standard deviations above and below a moving average. When the price of Ethereum moves outside of the bands, it often signals a significant price movement or volatility spike, which can be useful for timing entries or exits in ETH trades. The distance between the bands can also provide insights into market conditions; tighter bands suggest low volatility, while wider bands indicate higher volatility.

Reading market trends

By analysing historical data, traders can anticipate future price movements in Ethereum. Certain market signals, such as candlestick patterns, volume analysis, and trendlines, provide invaluable insights into ETH price behaviour:

• Candlestick patterns: These patterns show the relationship between opening, closing, high, and low prices. Certain candlestick formations, such as doji, engulfing, and hammer patterns, predict trend reversals in Ethereum prices.
• Volume analysis: The volume of trading indicates the strength of a price movement. High trading volume during a price increase suggests strong buying interest in ETH, while volume spikes during price drops may signal capitulation or a trend reversal.
• Trendlines: Trendlines are drawn along the highest or lowest lows to visualise the market's direction. Identifying whether Ethereum is in an uptrend, downtrend, or sideways market helps traders decide when to enter or exit positions.

Managing your risk

Like many cryptocurrencies, ether’s price is highly volatile, with rapid price fluctuations influenced by market sentiment, regulatory developments, and macroeconomic trends. It’s important to manage your risk carefully, by monitoring your trading – or using automation software to do this for you.

If trading on leverage with a product like CFDs, you can protect yourself if the markets move against you by adding stop-losses to your trades. These will automatically close out your position if the market moves past a set level that you specify. Please note that you might not be closed at the exact level you specify if the market moves quickly or gaps. This is known as slippage.

Staying informed about regulatory changes, adapting to market conditions, and practicing secure trading habits are also crucial. Always conduct thorough research, use trusted platforms, and never invest more than you can afford to lose.