How ether's market works

Unlike bitcoin, ether is not designed to function as a global digital currency. Instead, it is meant to pay for specific actions on the Ethereum network, with users receiving it for using their computing power to validate transactions and for contributing to its development

However, ether’s market is currently supported by many of the same exchanges and infrastructure that has built up around the bitcoin network. For example, users who have historically bought bitcoin and other digital currencies on venture-backed exchange platforms such as Bitfinex and Kraken can today buy ether on these websites.

But, ether’s market did not develop in the same manner as bitcoin’s market.

In bitcoin, users were once able to process transactions on the network using a home computer, and then eventually, home mining equipment. Bitcoin grew in value as the number of participants in the network expanded. Ethereum arguably developed under different circumstances.

In a bid to galvanize a global development community around its idea, Ethereum launched a pre-sale of ethertokens in 2014, raising more than $14m in what has been called a crowdfunding effort, but bears resemblance to a kind of informal initial public offering (IPO).

Donations collected for this sale were the driving factor behind the initial supply and the rate of issuance that existed after. As a result of this event, contributors of the presale received 60m ether. Another 12m went to the development fund, with the majority of this amount going to early developers and contributors. The Swizterland-based non-profit Ethereum Foundation received the remainder of this amount.

These numbers added up to an initial ether supply of 72m ETH. Following this event, Ethereum’s protocol permitted the creation of 5 ETH for every block mined. In addition, a maximum of 18m ETH were allowed to come into existence every year following this event.

In the bitcoin network, the supply rate is more consistent. Due to hard-coded rules in the software there will only ever be 21 million bitcoins (unless the rules are changed), and the rate at which new tokens are introduced is 25 BTC roughly every 10 minutes today.

Investors should note that such consistency is not guaranteed in the ether market.

The Ethereum Foundation announced at the time of launch that ether’s rules would soon change, and that starting some time in 2017, the network would follow the rules of Casper, a consensus algorithm still being developed.