Date: 5/04/2021
Author: Mr. X
Yes, I know Elon Musk will be appearing on Saturday Night Live. I know he will probably say something about Dogecoin. I’ve said it will hit $0.45 this week at least (it may have already done so by the time you’re reading this.) It’s worth a play through Friday. But like Alec Baldwin said in Glengarry Glen Ross, “Let’s talk about something important.” We need to talk about Ethereum.
First though, we need to discuss Bitcoin. One year ago, May 4, 2020, Bitcoin cost just over $8,900. As of this writing, it is over $55,800 – and that’s after a significant decline lately. Few other investments could provide such a return.
What is Bitcoin? Simply put, it is a digital store of value that allows money to be transferred without fees and outside the control of a single authority. Balances on a transparent ledger and a fixed supply maintain its value and integrity. The blockchain – a database that clusters information in blocks chained together in chronological order – holds immutable, unchangeable information. This has a certain value.
Yet that is not why Bitcoin has its current worth in dollars. Bitcoin is building on a legacy that, in online terms, is positively ancient. It was produced during a time when the Internet was more independent and less censored than it is today. That gives it a certain authenticity. Its creation is something of a legend – the concept was described by “Satoshi Nakamoto,” and no one knows who that actually is.
Bitcoin is sometimes called “digital gold” and the comparison is apt. Gold is not valuable because it is particularly useful – gold weapons or tools weren’t practical in ancient times. Even the golden guns beloved of the late Saddam Hussein wouldn’t work very well.
Gold is valuable because it is the most malleable and ductile of metals as well as being aesthetically pleasing. You can reshape it and get it from one place to another without much trouble. Today, gold has some industrial uses, but that wasn’t true for most of human history. A tribe with gold but no steel is just a target to a tribe with steel but no gold.
Bitcoin has some inherent utility, but it mostly is valuable because people agree it is valuable. Once that initial agreement is made, Bitcoin becomes “digital gold,” something that can be transferred quickly and accepted universally.
Yet there’s not much you can actually do with it beyond a certain point. The blockchain is an exciting concept, but it’s not private. The whole point of a blockchain is that it can be read by anyone. If you are looking to send and receive payments that can’t be tracked, Bitcoin isn’t for you. It’s also of limited utility when it comes to creating something – you might use the blockchain, but it doesn’t fundamentally change the way things are done except in rare cases.
Ethereum is different. It has not only broken $3,000, but it is above $3,200. Some are suggesting it might make it to $5,000 within a week. Last May, it was under $245. If you had done nothing but put $10,000 in Ethereum a year ago, you could buy a house (even in this market.)
What makes Ethereum important is that it is a platform and a protocol. Unlike Bitcoin, Ethereum is not tied to a certain supply, but there won’t be inflation for Ethereum as long as more people keep using the protocol.
Why would people keep using it? Ethereum isn’t just “digital gold” but offers a kind of hyper-utility – the promise of an entirely new kind of Internet.
To explain it simply, Ethereum is the currency used by parties who are building applications on top of a decentralized network. Ethereum is valuable because it allows the creation and verification of “smart contracts” – programs or transaction protocols that automatically execute the terms. Ethereum cuts out the middleman.
Ethereum matters because it builds on the blockchain concept. It’s not just that you can send something valuable to someone. You can create programs or databases that are totally decentralized and can’t be controlled by a single authority. No one can “silo” the data.
Instead of a Big Tech monolith that controls data, you could theoretically build something that is used by everyone but isn’t controlled by anyone. Decentralized exchanges that operate via the Ethereum protocol are open-source and can be independently verified. Though this description might shortchange Bitcoin somewhat, I’d put it this way – Ethereum allows you to create new value with decentralized applications, whereas Bitcoin is best suited to exchanging existing value.
It’s rather amusing that we know exactly who gave us this vision of a decentralized world. Unlike with Bitcoin, we know who proposed Ethereum. You can read the 2013 introductory whitepaper today. The author was Vitalik Buterin. Incidentally, he is now the world’s youngest crypto billionaire.
I’ve said that readers of Rogue Investing Daily should always be steadily investing in the “Big Two” – Bitcoin and Ethereum – for the long-term. Except for the occasional stop loss, don’t try to make tons of money in the short term by speculating here or thinking short-term. Don’t outthink yourself – if you had put about $1,000 into Ethereum in 2015, you’d be a multimillionaire today. Setting a small amount each week and forgetting about it will pay greater dividends in the long run than trying to decode every twist and turn of the easily manipulated cryptocurrency market.
I believe in Ethereum for the long-term because it has utility. It is possible that something superior will be created, but right now, it looks like independent producers are building on top of this protocol. More significantly, major institutions are also moving into it, just like they were moving into Bitcoin not long ago.
Does Ethereum’s rise mean Bitcoin’s fall? Not necessarily – they aren’t really “competing” currencies the same way the dollar competes against the yuan. They have different roles.
But for now, Ethereum has more room to grow. Its mainstream acceptance has just begun. And though I don’t believe Ethereum will reach Bitcoin’s price levels, I’m not ruling it out. Ethereum’s main danger would be somebody creating a superior protocol. People would also have to find it so compelling that they would abandon what’s already in place. That won’t happen overnight.
Unless you’re a programmer or an engineer, explaining what cryptocurrency does is often harder than explaining cryptocurrency as an investment. With Ethereum, we don’t really have that problem.
Think of it as the infrastructure for a new kind of decentralized Internet. We’re at a time when commodities are soaring. Imagine Ethereum as something akin to pipelines, power lines, and transportation networks. It’s the basic stuff you need before you can “build back better.” If you think there are a lot of people who want a decentralized Internet that will cut out predatory middlemen, you want to be in Ethereum – and you might want to learn how to use it.
Of course, while you’re at it, there’s no harm in putting your loose change into Dogecoin. After all, it is fun. Perhaps Elon Musk is right and “fun” will be what determines the currency of the future. But if history is any guide, it will be the one that is most useful. Right now, that looks like Ethereum – but when it comes to crypto, never put your full investment into just one coin. Stack the big two, speculate with DOGE or other alt-coins with money you can afford to lose.
