Trading ETH/GBP: An Overview
The ETHGBP pair is a trading instrument used to take a position on the price movement of Ether. Ether is the base currency and it is paired against the British Pound. In effect, it is like buying the Ether and selling the Pound at the same time. Ether as a cryptocurrency is open to price swings. This means that when trading this currency pair, trade carefully. It also means that there are plenty of trading opportunities which arise from its volatility.
Ether (ETH) coins are considered a ‘utility currency’ only intended to be ‘spent’ to pay for the computational power of the Ethereum platform and not in exchange for general goods and services. GBP, the other half of the pair, is the Pound Sterling, the United Kingdom’s currency and one of the most traded fiat currencies in the world. Along with the US Dollar, Euro, Japanese Yen, Canadian Dollar and Swiss Franc, the Pound Sterling is considered one of the fiat ‘majors’.
Why Include ETH/GBP in an Investment or Trading Portfolio?
UK-based cryptocurrency traders are the most obvious holders of this pair as they are most likely to have trading accounts whose base currency is GBP. The Pound Sterling, being the traders’ primary fiat currency, simplifies this trade as it eliminates the additional currency risk and complexity of having to first buy GBP from another base fiat currency before opening the position.
Day traders hoping to profit from volatility are those most suited to GBP, or other fiat to crypto pairs. In 2018, Ether’s volatility dropped from its daily peak of 10%-20% early in 2018, to 5%-10% which was still much higher than that of fiat currencies. The average daily volatility of GBPUSD, for example is around 0.6%. Ether’s volatility offers the opportunity for significant profits on low leverage and makes cryptocurrency to fiat pairings such as ETH GBP attractive to aggressive traders. High volatility also, of course, comes with heightened risk if a trade moves in the wrong direction, but for experienced day traders able to manage this risk, there is plenty of appeal.
Long-term Investors/Traders: the daily volatility of cryptocurrencies also translates into significant price changes in the longer term. Between August and December 2017, Ether gained over 400%. Over the 8 months after that peak, it fell around 300%. Longer term trends are often considered easier to forecast than short-term movements that can be triggered by news and sentiment that cannot be fully predicted, such as a cryptocurrency exchange hack or change in regulations. Over a period of several months, investors can make significant gains, or losses, on the price movement of pairs such as ETHGBP without employing any leverage and making a call on the macro picture around cryptocurrency traction and use of the Ethereum blockchain platform.
Ethereum Believers/Sceptics: a trade on ETH GBP could also be made by blockchain enthusiasts with an understanding of the technology and opinion on the future traction of the Ethereum platform. Will it consolidate its market leading position as the blockchain of choice for smart contracts and DAPPs or is it vulnerable to the appearance of new rival blockchains and cryptocurrencies offering an alternative? This overlaps with the long-term, fundamental approach to taking a position on the ETH/GBP pair.
Major Drivers of the ETH/GBP Price
Cryptocurrency market sentiment/price trend: the price direction of different cryptocurrencies is highly correlated and while volatility levels can vary to some extent, it is rare for the major cryptocurrencies to take different directions. If Bitcoin’s price is rising or falling, it is almost certain that the price of Ether and other major cryptocurrencies are mirroring that pattern. As such, general sentiment around the wider cryptocurrencies market is one of the most influential drivers of Ether’s value. Developments around traction, adoption and regulation are, in turn, the primary drivers of market sentiment.
Ethereum platform traction: the volume of DAPPs, ICOs and other smart contract-based uses of the Ethereum platform all influence the price of Ether. The more that the blockchain is used, the greater the demand for the Ether, so the more users will pay for its computational power. At this stage of the market’s development, this is more of a longer term driver of value rather than one that has a strong impact on daily price fluctuations.
GBP price dynamics: the value of fiat currencies is driven by factors such as quantitative easing policy, interest rates, balance of trade, economic sentiment and other macro economic factors and policies of the central bank issuing the currency. How these dynamics impact a fiat currency is made more complex as price direction in comparison to other fiats, means that these drivers of GBP value are also influencing the value of other major currencies. The value of fiat currencies ebb and flow as part of the bigger, interconnected matrix that connects them all through global trade and financial markets. If the Bank of England increases interest rates, which would normally drive up the price of Pound Sterling, but so does the Fed, then GBP could actually lose value against the USD. USD is the base fiat currency in which cryptocurrencies are denominated so GBP/USD also influences ETH/GBP.
When trading ETH/GBP, it makes sense to track the economic drivers of Pound Sterling’s value. However, practically speaking, because the price of Ether is many times more volatile than GBP, even during periods of heightened volatility for the latter, the price dynamics of the former is what will drive the pair.
Conclusion: the ETH/GBP trade
As should be clear, for the foreseeable future, the ETH/GBP pair is a trade on the direction of Ether’s price rather than that of GBP due to the much higher volatility of the cryptocurrency side of the pair. This pair will mainly be traded by those with an account where GBP is the base fiat currency.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 62% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
This content is intended for information and educational purposes only and should not be considered investment advice or investment recommendation. Past performance is not an indication of future results.