The past few weeks have been a stream of concerning news for Bitcoin, and by default, the cryptocurrency world. China has become the world’s first developed government to put restrictions on initial coin offerings (new coins raising money), close local Bitcoin exchanges (which all also exchanged other, smaller “alt” coins) and now there are rumors it may regulate or temporarily shut down mining operations happening in the country.
The news caused Bitcoin’s price to come down from nearly $5000 to sub $4000 with prices hitting the low $3000 late last week. There have been bumps back up across Bitcoin, Ether, and other coins thanks to a slew of good news and optimism from elsewhere in the world, but investors are still waiting on Chinese news as its obviously swaying the markets. For context: depending on how it was measured, Chinese Yuan was either the most or second most exchanged worldwide currency with Bitcoin (with Japanese Yen as the other). It’s a big deal.
Meanwhile, as focus has been on Bitcoin as it alone represents over 45% of the entire crypto pools’ value, Ethereum—the second most valued coin—has quietly been making significant advancements and headlines with its technology.
The Rise of Ethereum
For the uninitiated, Ethereum is a blockchain technology (same as Bitcoin) designed by Vitalik Buterin that operates as a protocol more than a currency. It can be a currency, in that it has a token of exchangeable value called “Ether” and represented as ETH in the crypto world.
Ethereum has risen to be the second most valued asset in cryptocurrency, with a total market cap of over $27billion, or about 40% of Bitcoin. Its price was $8 on January 1st, 2017. It hit $400 at its peak on some exchanges, and now sits somewhere just under $300. Although different than Bitcoin in what it can do, it has traded almost parallel to its older “brother” and sways with Bitcoin news as it has not detached itself in the minds of everyday investors and traders. Or said another way: people still do not see Ethereum succeeded unless Bitcoin does.
But I think that could change and change as soon as the end of this year. This has to do with its technology as a protocol, its various other use cases (many of them tradeable coins themselves), and it not bearing the same regulatory headaches that Bitcoin has and will likely keep enduring. This article goes more in depth on the differences beyond that, as well.
Let’s start with its technology and purpose. While Bitcoin is meant to serve as a currency for the digital age (de-centralized, autonomous, etc…), Ethereum is meant to utilize the underlying technology (blockchain and its ledger) and open it up for a series of actions, most notably the idea of smart contracts. Smart contracts, simply put, are coded agreements that can self-execute. Think of your mortgage being auto-paid based on any rate (fixed or adjustable) whenever needed from a pool you have of a set of currency. And that’s the simplest method. Lawyers are already started to postulate about what this might mean for transactional agreements in the future. And governments, like the State of Arizona, are already suggesting a readiness to utilize this technology.
Ethereum Is A Technology That Goes Beyond Crytpocurrency
What this means is that Ethereum is a piece of technology rather than a currency built on technology. It’s more akin to investing in the internet itself rather than one website. And while that’s exciting, it also means that a dot-com type crash could crash Ethereum the way the entire internet’s inherent value would have crashed too. The investment potential in ETH, then, becomes valuable as ETH is needed to run this protocol, and ETH is paid to either miners or “stakers” (folks that fold on to ETH for confirmation of value), who make sure transactions hit and stay in the blockchain ledger.
And there are more similarities because Ether powers other coins (called ERC20 tokens) to come to market using its technology. These coins come with the ICO—and other countries potentially following China’s ban on these will be important, though there are already dozens of ERC20 tokens out there working to become mainstream. Each of their success means more penetration for Ethereum’s technology and the value of ETH as its infrastructure and conduit for transactions. And some are already succeeding like OmiseGo (OMG), the first billion dollar ERC20 token, which has rumors of enormous use cases in Thailand, its home country. The biggest of these is McDonalds (NYSE: MCD) using OMG as a payment channel in Thaliand.
And that’s the big difference. Bitcoin needs to be fit into the world economy—and without a nation (and, let’s face it, an army) behind it, it faces an uphill battle as a decentralized piece in a centralized, regulated world. But Ethereum? It just needs to fit into the world’s desire for growing and utilitarian technology. And technology is already—though not completely (see Google (GOOG) in China)—decentralized across national borders. If Ethereum can power the next breakthrough in coding and its blockchain powers the “next internet”, it breaks through and countries will have a harder time blockin a protocol than a currency.
Okay, so what does this mean for its price going forward? It means that Ether will contain to develop while Bitcoin investors wait for China and other countries (like the United States) to decide if and how they want to regulate, as they see their own currency flowing outward. Ethereum does not need citizen investors to find value since it is not simply a commodity or value-backed item.
Ethereum Is Advancing With Upgrades And Scaling Solutions
So if we can pin the value of ETH to the technological advancement of Ethereum itself—taking into account penetration into value markets—then we must focus on updates to the technology itself. And there’s a lot to be excited about there.
Vitalik himself spoke on Monday at Techcrunch’s famed conference Disrupt. He spoke with the founder of OmiseGo, further pairing those together (OMG as a payment network that could be a competitor with Bitcoin and Ethereum as the base technology). He spoke of the future of Ethereum, especially on scale as it seeks to displace some worldwide protocols. One scale issue is transaction load. For reference, Bitcoin processes 3 transactions per second, Ethereum does 5, but Visa does in the thousands. Ethereum will have to get to that point, and the team plans to get there.
One way they’ll do that is through a implementation called ‘Metropolis’ — expected to come in the next few weeks. This will help provide much needed infrastructure for scaling, as well as some important news in security. As this article explains:
The upgraded Ethereum blockchain is to also ensure a higher level of security through masking such that users will be able to determine the address for which they have a private key. Additionally, it will be able to withstand hacking even from quantum computers.
Lastly, the change will change how Ethereum is “mined” or how transactions are confirmed. As it scales, the idea is that holders of ETH will be compensated (the way miners are) for holding their ETH as a value backer. This is called proof-of-stake, and the outlook is positive for price. As this author says:
The demand for ETH is expected to witness a significant rise as the date for update approaches despite the fact that we are yet to see any significant increased demands with announcements in this regard thus far.
In the remaining months of 2017, more attention is going be drawn into cryptocurrencies. CEOs, magazines, managers, etc.. are chiming in what this could mean going forward. We’re not going back from here, but we could crash if value as seen as totally artificial and without promise. I don’t see that happening with Ethereum as it does not necessitate a consumers, businesses, or governments, to confirm its meaning the way they would with Bitcoin. If its technological succeeds in replacing, disrupting, or upgrading existing protocols, it will provide value and that could rise exponentially.
Q4 is going to be the coming out party for Ethereum where it distances itself from Bitcoin as more learn about what it plans to do and technologists (not bankers or presidents) find the pathway to implementation. All through that, holders of ETH will benefit from a price increase as ETH’s limited supply pushes against increased demand. The time to buy is now while everyday investors are still hesitant about “crypto” at large due to Bitcoin news.
Disclosure: I am/we are long ETHEREUM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.