Bitcoin v. Ethereum in the long term
At the time of writing, Bitcoin and Ethereum are the two front runner Cryptocurrencies. Both have different advantages and disadvantages and knowing how they’ll do in the long term means getting some appreciation for these.
Bitcoin’s advantage is that it’s fundamentally limited in number and doesn’t do much. Which makes it a good place to simply store and transfer wealth independently of any single-country’s currency fluctuations or having to hold a physical resource like gold.
If this ends up being Bitcoin’s destiny then it will be hard to supersede since there’s not really much to improve on and it’ll be almost impossible to overtake its brand and mindshare. It seems to me that it would be a better store of wealth than gold since you don’t have to physically hold it and you can immediately and formally transfer it to someone else.
If you buy and hold gold there’s no escaping the fact that it has to be stored somewhere and you still need to trust that the holder of it will give it to you. If your gold was being stored in a reserve in Estonia and Russia invades Estonia again you then maybe you don’t get to see it again. Unlikely perhaps but we live in changing times. Not so Bitcoin, it’s yours. If global warming destroys national boundaries and you have to up sticks and move country then you can still pocket that zip-drive and take it with you.
What could 1 Bitcoin be worth?
Let’s do some super-rough maths. The market cap of Gold is $7 trillion, 2/3 of annual production is used for Jewellery which means that let’s say $2 trillion is used as a pure wealth store. Bitcoin is (at the time of writing) $67Bn so if Bitcoin eats into 50% of Gold’s market it gets a market cap of $1Tn and its price would go up by 15x to $61,000 (almost all the Bitcoins are now issued and in circulation. Or lost 😭). I have no idea if any of these things are possible but it’s an interesting back-of-the-envelope calculation.
Given Bitcoin’s brand, mindshare and the fact that it is limited in number (Ethereum does not have a finite supply) it seems unlikely that any other currency is going to outdo Bitcoin as a wealth store (although a friend pointed out to me that a fork of Bitcoin, like Bitcoin Cash could potentially overtake it since it shares the same name but is a better, more functional crypto). However just like the cash that’s currently pouring going into it, Bitcoin also going to be relatively dumb money as, compared to Ethereum, there’s not a lot you can do with a Bitcoin.
Crypto’s worthless but so is Fiat
So we’ve got Bitcoin emerging as a new type of wealth reserve. Sure it’s not fundamentally worth anything but neither’s your £5 note either. We left the Gold Standard a long time ago and if Britain totally torpedoes itself on Brexit nobody’s going to give you anything in return for the £🇬🇧 you own except what they think it’s worth. The Bank of England certainly won’t give you gold. It is worth precisely what someone believes it’s worth, just like a Bitcoin.
In Britain, we’re hoping and praying our neighbours still take us seriously. One pound is already buying fewer croissants than it used to and it’s on its way down. Currency is a belief system. Crypto is also a belief system and while you can’t make it into jewellery it’s far better designed for the mechanics of storing and transferring wealth than a kilo of gold bullion.
What could 1 Ethereum do?
Ethereum meanwhile is super-smart money. Or at least super hard-working money. Because you can program it to do things during transactions. Which means you can build new currencies on top of it and even potentially a new, fundamentally stable currency. This could be HUGE and is one of the things I’m most excited about in Crypto. But that’s a longer story.
So Bitcoin is earmarking itself for wealth-reserve but Ethereum is emerging as a very different type of asset. Ethereum has the potential to be the infrastructure for the next generation of financial tools from trading exchanges to currencies. Ethereum could be to the world of Finance what TCP/IP and hard drives were to the world of information — the underlying unit of transfer and storage. It is a highly functional cryptocurrency that allows for sophisticated systems to be built on top of it.
Ethereum is also a well-rounded crypto-currency. It’s like the App-Store of Finance. It comes with a programming platform, payments and computing power all built into the system. It is an infrastructure to build currencies, loyalty systems, share exchanges, deeds-registries and more. It is developing to be a fast, private and flexible cryptocurrency and has a very strong and well-natured developer following helped hugely by its inspirational and leader, Vitalik Buterin. By contrast Bitcoin’s is far more fractured and hostile with no clear leader apart from the now-departed, Satoshi Nakamoto.
Will the dominant Ethereum network be public or private?
Interestingly, it is also going through the exact same proprietary/public wrestle that the internet did when it first began. There is a public Ethereum blockchain but separate, Private Ethereum blockchains are being created by banking consortiums around the world. At the start of the internet, the same thing happened with that network too.
In 1995 Microsoft only had one computer in the entire company that had access to the World Wide Web and that was in a library. The company was betting its networking future on Blackbird which was its own proprietary network. Universities around the world were connected by Janet which was a closed university network of computers.
The “Internet” was the emergence of an interconnected set of networks all playing off the same underlying protocols of TCP/IP, HTTP and HTML. It emerged as a connection between these separate private networks. Again I don’t think it’s inconceivable that the same thing may happen with the different Ethereum blockchains today.
On the internet, public networks like the WWW tended to win out over private networks like Blackbird and public protocols like HTML tended to win out over proprietary protocols like Flash. However while that was true at the start it has in the last decade become less true with things tending to re-centralise into closed, proprietary neworks like Facebook and YouTube.
My guess is that for the moment the banking systems in all but the most forward looking institutions will move onto closed private blockchains but that over the next five to ten years we’ll start to see serious new financial institutions emerge on the Ethereum network and start to overtake those private networks. In 20 years time the dominant banks of today could well be fighting the same fight that todays newspapers are to stay alive. The world will have changed around them.
And then if the web’s anything to go by, a super-sized private network will likely emerge, built in plain sight on top of the public Ethereum blockchain and be the Facebook of Finance. But now we’re basically looking at tea-leaves.
The next ten years will tell
It’s hard at this stage to really grasp how this stuff is going to play out. When the internet first kicked off it wasn’t easy to guess that the dominant players ten years later would be a yearbook company, a lookup service, a bookstore and a second hand shop. So now I think that the emergent Crypto applications that will be around in ten years time will not be the obvious choices from today.
In terms of investment I think it makes a tonne of sense to be holding Bitcoin and Ethereum for the next five years and probably the next ten (though you should keep an eye out in case fast-seconds emerge. It is Google stock, not Yahoo’s that you want to be holding today). There will be more short-term growth in other currencies as they start to bubble up and Bitcoin has the advantage of (relative) stability while Ethereum has more potential given the sheer breadth of what it might power.
We live in very interesting times.
