Trading Ethereum

Whether or not one has the intention to speculate on Ethereum when one holds it for a period of time, holding such a volatile asset like Ethereum does involve at least some degree of risk. If one encounters risk, it is preferable to at least be aware of this risk than not.

One of the limiting factors on the growth of cybercurrencies such as Ethereum as currencies is the much higher degree of risk that is involved in holding them, especially versus traditional currencies such as the dollar.

If one acquires a certain amount of money, U.S. dollars we’ll say, then one can be confident that they will still have that amount of money in a few days or even a few years, net of inflation that is.

With Ethereum, one cannot be so confident, as the price of Ethereum can move significantly over a period of days or even hours, where one may be exposed to trading losses of up to 30% in a single day. In addition, Ethereum and other cybercurrencies also involve other trading costs, especially having to pay a spread.

If you receive a certain amount of value from a cybercurrency, you will have to convert it into another currency to spend it, and exchanges don’t provide this service just out of the goodness of their hearts. If they did, they would be out of business. Unless you are getting paid in a foreign currency, conversion fees don’t really come up, but they sure do with cybercurrencies.

There are, of course, people who intentionally speculate on the value of Ethereum and other digital currencies, where these risks are more transparent, but anyone who looks to acquire Ethereum must be aware of the additional risk that they are exposed to.

For the most part, up until very recently that is, the mega volatility of Ethereum hasn’t been something that people have minded generally, as even though it has had its ups and downs it’s been on the rise for the most part. People may have ended up kicking themselves for not holding on to it, but these losses are only theoretical, lost opportunities in other words, and they don’t bite as much as real losses that occur when it becomes sold at a lower price.

Ethereum’s History is Too Short to Even Consider it An Investment

There are assets, like stocks, which have a long history for us to fall back on, and many people find it reasonable to invest in them, meaning taking a long term position in them with the expectation of long term profits.

Ethereum has only been around for a couple of years now and no one has much of a clue how it will perform long term, and therefore, while long term investing may be suitable for some assets, we cannot even know how suitable it is for this one.

This doesn’t mean that people haven’t bought Ethereum with the expectation of long term value, but given that is virtually unknowable, this strategy cannot be a very good one. These are the people that the gloom and doomsayers are worried about, when they speak of bubbles bursting and such.

Trading EthereumBubbles don’t really burst, where one minute Ethereum is worth $1400 and the next it is worth $10, retracing an entire year’s worth of advances in an instant or even in a day, as we know that such declines are a result of selling pressures, where downward momentum takes time to play out.

Sharp traders, for instance, would view the prospects of a bubble bursting with much excitement, as they would look to reverse their positions and take advantage of both the bubble forming and it bursting.

Most people involved with Ethereum are not sophisticated enough to perhaps even know that such a thing can be done, especially since this sort of trading isn’t widely available, going short Ethereum as well as long. There are certain contracts for difference brokers that offer you this, and trading on the short side is currently limited to that, although one day soon we may see a futures market for Ethereum like we see now with Bitcoin.

It isn’t really necessary to need to trade Ethereum from both sides though to trade it successfully, and one can just be in or out of the long side to accomplish this, and do pretty well at it if one is skilled enough. However, this does go beyond the holding and hoping strategy that many people use with it, which is actually no strategy at all.

Successful Trading Must Be Managed

When one looks to trade Ethereum or any other asset, it is not just important to manage one’s trades, that’s what trading is essentially. People can get away with not managing their positions if they are investing long term, if they are lucky that is, but this is not a plan that has been shown to work with Ethereum, and arguably isn’t a good plan in the first place, as it exposes the investor to unlimited risk as well as not actively managing the upside either.

Managing trades mean planning both entry and exit points, and doing so well does require a fair bit of skill, with more skilled traders tending to outperform lesser skilled ones overall. Refusing to use any skill is the worst approach though, which leads to using criteria to both enter and exit trades which are based not upon market performance, but on emotions.

Emotions are the enemy of good trading, and relying on emotions too much is the downfall of a great many traders, and mastering your emotions to the point where they are excluded is the goal of good traders, or needs to be. When you are relying on is your emotions exclusively, this is the absolute worst way to trade.

Rather, we need to use objective analysis to guide our trading decisions, and this is the first and most important lesson in learning to trade correctly. Most traders fail, in other words give up before they learn the proper lessons, and this is the one they tend to not learn sufficiently the most.

Once that is in place, then we can look to coming up with analysis that actually works, that produces an edge leading to making money rather than losing it. The better our analytical skills, the better we will do over time.

The third essential element is learning to manage our money properly, which means managing risk essentially. Even a profitable strategy can fail if it exposes us to too much risk and that risk does us in or causes significant damage to our trading portfolio.

To the extent that we get all of these three elements right, we will at least put ourselves in a position to succeed in trading, and we will succeed over time to the extent that we’re able to manage our trading.

Ethereum Really Ups the Stakes

The ironic thing about all the people who essentially have decided to hold Ethereum to speculate on it is that a lot of these folks really don’t have anywhere near the skills necessary to trade anything very well, yet they have chosen an extremely challenging asset to trade.

It’s not that Ethereum is all that difficult to trade if you do know what you are doing, and the biggest concern by far among skilled traders is ensuring they actually do manage the much higher risks, or don’t place themselves in positions where the risks of a given trade are too large, in spite of the appeal of bigger profit potential.

More casual speculators may not be even aware of how much risk they are taking on with Ethereum, or may be but may consider this higher risk a necessary evil of their speculation, with little or no idea of how to manage it.

The main concern with managing risk is managing the risks of particular trades, and although we also need to manage the risks of a strategy overall, meaning the cumulative risks of it, this starts on a trade by trade basis.

This is not just a matter of saying that you only want to risk a certain amount of money or a certain percentage of your portfolio on a given trade, although for many people that at least would be a start, and preferable to looking to ignore such things until the pain of losses simply become unbearable.

The proper way to manage risk is to start with a level of loss that you are comfortable with, and not exceed that, then let the market decide your exit points. It is actually foolish to use criteria like one’s profit or loss in a trade to decide your exits, and this should only be used as a safety net, a point where the risk of staying in the trade becomes excessive.

Otherwise, the price of Ethereum doesn’t account for or care how much you are up or down in an Ethereum trade, meaning the market will do what it does with no regard to your particular positions, and therefore it is always wiser to let market performance guide your trading decisions.

If a given strategy involves needing to take on more risk than you are comfortable with, then this strategy simply does not fit, in spite of how good it may be.

The general principle of the longer the trade, the more the risk, applies to Ethereum trading as well, and applies even more given the much larger volatility of cybercurrencies. While one must decide on a timeframe that fits one’s skills and objectives, it does bear to keep in mind that longer ones involve larger commitments because they will need to be given more room, meaning that the longer the period, the larger the loss one must be willing to accept.

Trading in general is not for the uninitiated, and there is certainly a learning curve involved if one seeks to do well over time, and not just get lucky, like many have thus far with holding Ethereum.

Now that things have reversed, just buying and holding for a while and watching it gone up is no longer enough, not that it ever was really, as we always need some sort of exit strategy with a trade, especially one with such high downside potential as Ethereum.

The important thing for those who are currently or are planning on speculating on Ethereum for any real amount of time is to be aware that timing is everything, and timing is even more important with this asset. With anything that moves this much, there will always be money to be made, but trading Ethereum is certainly a game of skill.

Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: andrew@marketreview.com

Areas of interest: News & updates from the Consumer Financial Protection Bureau, Trading, Cryptocurrency, Portfolio Management & more.