Is It Too Late To Buy Ethereum?

But the crypto-verse isn’t made up of just one coin, and developments in other digital assets – most notably the imminent arrival of Ethereum 2.0 – herald exciting times for the blockchain-based sector.

 

Here, we’ll look at one of the challenges facing the cryptocurrency industry, and assess whether the coming changes to the Ethereum network signal a boom-time for the space as a whole.

 

Ethereum is the name given to the open-source blockchain conceived by writer and programmer Vitalik Buterin in 2013.

 

The network is managed as a decentralized distributed ledger, which includes as part of its functionality the ability to host automatically executing smart contracts. The platform’s native crypto-currency in Ether (ETH), a digital asset intended to act as a reward for Ethereum’s miners, who create blocks for the blockchain through a Proof-of-Work protocol.

 

The network is also designed to be used for wide variety of purposes, and has made headlines recently with the popularity of its non-fungible tokens – or NFTs – which run on the network under the ERC-721 standard.

 

The terms Ethereum, Ether and ETH are often used interchangeably.

 

Released in 2009, Bitcoin is the oldest digital currency currently in active use, with ETH, a relative newcomer, only having arrived on the scene much later in 2015.

 

Ethereum is preceded by many other well-know assets such as Litecoin, Dogecoin, Ripple, Monero and Stellar. But despite this, the two largest crypto-currencies by market capitalization today are both Bitcoin and Ethereum, at approximately $715 billion and $300 billion respectively at the time of writing.

 

The primary use case for Bitcoin has historically been its utility as a store of value, with its ability to function as a digital currency coming in as a close second. Alternatively, Ethereum, while still being able to do both those things, is also highly-regarded for its contract source code, which makes it especially useful for things like decentralized finance applications and initial coin offerings (ICOs).

 

One of the difficulties to have arisen as digital assets become more popular is the fact that neither Bitcoin nor Ethereum are particularly well-suited as a form of exchange currency due to limits in their original software architecture.

 

Bitcoin’s network, for instance, can handle around 7 transactions per second, whereas Visa (V), the finance company that specializes in facilitating worldwide electronic money transfers, can handle, on average, about 1,700 transactions per second. Moreover, Mastercard (MA), a business that processes payments between the banks of merchants and their customers, reckons it can handle 5,000 transactions per second.

On the other hand, Ethereum’s capabilities in this regard aren’t much better – the platform is only able to run roughly 15-25 transactions every second, while the average transaction confirmation time also slows things down, with Bitcoin taking about 10 minutes per transaction, and Ethereum a little better at 6 minutes. Given that most major credit card transactions are effectively instantaneous, the performance of the two most prominent crypto-currencies falls well behind expectations.

 

In addition to this, the Ethereum network charges exorbitant gas fees – another term for transaction costs, essentially – with some, depending on the protocol used, being as high as $50 for a single swap.

 

As the transaction problem grew in magnitude, the Ethereum development community started working on a fix. It was hoped that changes made to the way that Ethereum functions would result in the platform being able to handle in excess of 100,000 transactions per second, and the concept of Ethereum 2.0 was born.

 

In time, the community settled on the idea of increasing throughput by using something known as sharding i.e. dividing up the workload on the network into parallel-running blockchains, which would then all share a common consensus blockchain using a proof-of-stake protocol, instead of the pre-existing proof-of-work mechanism.

 

This new approach is expected to lead to an increase in Ethereum’s speed, scalability and efficiency, not to mention the network becoming more sustainable over time. The older proof-of-work method of verification used large amounts of electricity, and was criticized by a wide variety of environmental pressure groups, including crypto-enthusiast Elon Musk.

 

Indeed, activist fund managers have also been concerned about the energy consumption of digital assets, with the move away from proof-of-work to proof-of-stake verification making ETH a more attractive proposition to Environmental, Social, and Governance-oriented investors.

 

The question of diversification in the crypto-space is one fraught with difficulty. The first issue is whether or not digital assets differ enough from one another to make investing in a wide-range of them worth the effort – or, to put it another way, if all crypto-currencies are more-or-less correlated, why buy anything other than Bitcoin, Ethereum, or some other random token?

 

One answer to this quandary is that having a portfolio filled with a selection of assets protects you from coin-specific risk. If one token goes down in value so precipitously that it is near-worthless, then a broad portfolio of currencies saves you from total disaster.

 

However, this doesn’t apply if two currencies – such as Bitcoin and Ether – do actually correlate in reality. So, is this the case for these two coins?

 

To cut a long story short, Bitcoin and Ethereum do correlate with each other in many ways, despite the fact that the two assets do not have the same underlying fundamentals – Bitcoin’s total supply of coins, for example, is limited to a total of 21,000,000, whereas ETH can be mined in perpetuity.

 

To be more precise, Bitcoin’s price tends to follow the same trends as its cost-per-transaction and the total volume of trades. Ether correlates with Bitcoin’s price movement, but with more volatility. This means that if BTC goes up, ETH goes up with added momentum; but if BTC falls, ETH drops too, only much more dramatically. This seems to imply that Bitcoin is the first-mover, with Ethereum hopping along for the ride.

 

The second issue with the “diversification problem” presents itself as a sort of paradox. For example, if an asset is predicted to explode in price, then only a little exposure to it is needed to profit greatly. Conversely, in hindsight, if the asset doesn’t live up to expectations, that small investment turned out to be the right way to go. 

 

The idea here is that, despite your hopes for a crypto-currency or other security, simply taking a small stake in the equity is all you will ever need to do. That whole “buy one Bitcoin and forget about it” advice appears to make a lot of sense – and is equally true for Ethereum too.

 

With the “consensus layer” expected to go ahead sometime in 2022, now might be the opportune time to open-up a small position in the ever-improving crypto-currency. 

 

As the new platform goes live, it will be a case of wait-and-see to find out if the changes expected from the blockchain bring forth fruit. But if things do go ahead as planned, it’s all upside for investors. If not – well, it was only a small position, wasn’t it ?