What is ethereum?

'Ether' is the digital currency used on the Ethereum network. Like Bitcoin, Ethereum works via a public blockchain network; while Bitcoin is used to track ownership of currency, the Ethereum blockchain focuses on running the programming code of any decentralized application.

These applications can include security programs, voting systems and methods of payment. Like bitcoin, Ethereum operates outside the mandate of central authorities such as banks and governments.

The idea behind Ethereum was created by Vitalik Buterin. He launched the first version of the platform in 2015, with the help of several co-founders. Since then it has become the second largest cryptocurrency and has helped prompt an increase of new rivals to bitcoin.

Dapps are open-source software that use the blockchain technology. Unlike traditional apps, they don’t need a middleman to function. As they are still a relatively new concept, it is difficult to pinpoint an exact definition, however, noticeable common features include the fact that they are open source (governed by autonomy) and decentralised.

Groups of smart contracts are used to create dapps. Smart contracts are scripts of code which can facilitate the exchange of money, shares, content, or anything of value. Smart contracts are formed using the Ethereum Virtual Machine (EVM). Once a smart contract is running on the blockchain, it acts like a self-operating computer program. They run as programmed, without censorship, downtime or influence from a third party.

Ethereum itself is essentially not a cryptocurrency – the word ethereum refers to the digital platform. The actual tokens (used for payment on the network) are called ether. In other words, ether is the ‘crypto-fuel’ (or cryptocurrency) for the ethereum network. When it comes to trading, the prices you see will refer to ether. Nonetheless, you will commonly see the cryptocurrency referred to as ethereum.

Ethereum’s blockchain technology is similar to bitcoin’s, however Bitcoin only uses one specific application of blockchain technology. Ultimately, it’s an electronic cash system that enables online bitcoin payments. The Ethereum blockchain does track ownership of digital currency, but also focuses on running the programming code of a range of decentralised applications. 

Other key differences include:

• Ethereum allows developers to raise funds for their own applications. They can set up a contract and seek pledges from the wider community.
• The limit of Ethereum works slightly different to Bitcoin.  Yearly issuance of ether is capped at 18 million per year, which equals 25% of the initial supply. Instead of mining for bitcoin, miners of the Ethereum blockchain work to earn ether.
• They cost their transactions in different ways. With Ethereum it is referred to as ‘gas’. Costs of transactions depend on bandwidth usage, storage requirements and complexity. With bitcoin, transactions compete equally with each other and are limited by block size.

When you buy Ethereum tokens (ether) on an exchange, the price will usually be quoted in a traditional currency (such as USD, EUR, GBP). In other words, you sell an amount of currency to buy ether. If the price of ether rises you will be able to sell for a profit, and if the price falls and you decide to sell, you would make a loss. 

With CMC Markets, you can trade ether via a CFD account. This allows you to speculate on its price movements without having to own the actual cryptocurrency. You aren't taking ownership of ether. Instead, you’re opening a position which will increase or decrease in value depending on ether’s price movements.

Open a long or short position

CFDs allow you to trade on both rising and falling prices.

Efficient use of capital

Leveraged trading means you only deposit a percentage of the full value of a trade in order to open a position. Remember that both profits and losses will be magnified, and you could lose more than your deposit.

No exchange account or wallet

Unlike trading the underlying ether, there is no need to open an exchange account or wallet. This means no waiting for approval from the exchange, no concerns about keeping your wallet secure, and no fees if you want to withdraw funds later.

Trade with an established provider

CMC Markets is a regulated provider. We have over 28 years of experience in the industry and also offer support for all our clients whenever the markets are open.

Ethereum’s price is affected by different factors to those which affect traditional currencies. It is less exposed to economic and political influences, but is affected by factors such as:

Availability – Unlike bitcoin there is no limit to the supply. However, units of ether are still added and lost over time, causing its availability to fluctuate.   Regulation – Ethereum is currently unregulated by both governments and central banks. If this starts to change over the next few years it could have an impact on ethereum’s value.   Media – Negative media coverage, particularly around security and longevity, can have an impact on price.   Technological advances – The future of blockchain technology is unknown. But, its integration into areas like payment systems and crowdfunding platforms could raise its profile.

Learn more about cryptocurrency trading.

Read the next articles in our cryptocurrencies series

• What are cryptocurrencies?
• What is litecoin?
• What is bitcoin cash?