at its peak, Ethereal (ETH 1.36%) it had a market capitalization of just under $550 billion. This day, Bitcoin (CRYPTO: BTC) and Ethereum combined have a market capitalization of less than $550 billion. There is no sugarcoating the fact that the cryptocurrency sell-off has been swift and brutal.
That Ethereum is down almost 80% from its peak is a compelling reason to consider buying it now. An even better investment thesis, however, is the multi-decade growth that Ethereum could achieve if it transitions from a crypto industry-specific utility to real-world applications. Here is a simple explanation why Ethereum might be a good buy now and a better investment than Bitcoin for some investors.
For now, Bitcoin and Ethereum have proof-of-work consensus mechanisms that use computing power to mine tokens, verify and complete transactions, and support and power the network. Ethereum’s native currency, the ETH token, is used to pay for what are called “gas fees.” The gas feeds the network. ETH is used to verify transactions and is the currency of Ethereum. BTC, the native currency of Bitcoin, works similarly to the ETH token. However, Ethereum is moving from proof-of-work to proof-of-stake, which should speed up transactions and lower costs (more on that later).
Although they work more or less the same, the practical use cases of Bitcoin and Ethereum have expanded in recent years. Bitcoin is more suitable as a store of value and medium of exchange. But Ethereum is what is really driving a lot of the growth and development in the cryptocurrency industry. You have probably heard of Bitcoin as digital gold. Ethereum is more like digital energy.
Differentiating factors of Ethereum
The Bitcoin whitepaper was formed out of the collapse of the financial system in 2008 as a global medium of exchange that could function independently and without interference from sovereign nations. The people who launched Ethereum built on where Bitcoin started by realizing that the blockchain, a distributed public ledger, can be used for much more than just transactions and payments.
At the core of Ethereum’s utility are smart contracts. A smart contract is executed automatically based on a predetermined set of terms. Put another way, “if x happens, do y.” Examples include insurance contracts, loans, real estate contracts, etc. But smart contracts can be used in virtually every industry. The biggest advantage of smart contracts is that they are fair, transparent and instant, which saves administrative costs and speeds up the payment of claims.
Ethereum is also the currency for most non-fungible tokens (NFTs). The second largest is Solarium.
The vast majority of current decentralized finance (DeFi) protocols run on Ethereum. However, many of these protocols and decentralized applications (dApps) are still in beta or are primarily used to help other crypto projects perform better. Like the Internet in its early days, cryptocurrencies have so far failed to penetrate the lives of everyday consumers.
So while Bitcoin provides a better store of value, Ethereum is more like a hub around which most of the creativity and venture capital funding in the crypto world revolves. Ethereum is a much better investment for people who believe that decentralized blockchains will eventually have practical utility, such as through smart contracts that automatically execute an insurance policy. On the other hand, Bitcoin is more suitable for investors who believe that blockchains are best used as a form of security against centralized institutions and as a path to wealth ownership and control.
Some risks to be aware of
Unlike Bitcoin, which is virtually unopposed in terms of security and longevity, Ethereum is a higher risk, higher reward asset. Sunshine and Cardano are just a few of the many Layer 1 blockchains that compete with Ethereum. Like Ethereum, these blockchains provide the foundation on which Layer 2 protocols can be built. You can think of Ethereum as a smartphone, Layer 2 protocols as applications on the smartphone, and the creation and execution of smart contracts as things that those applications do.
To become more competitive, Ethereum has been planning an upgrade, formerly known as Ethereum 2.0, which will transition Ethereum from the previously discussed proof-of-work consensus mechanism to proof-of-stake. It should make the network faster and more secure while drastically lowering gas rates. However, the project continues to be delayed. And if it goes wrong, it could pose a threat to the security of Ethereum.
Also, a competing Layer 1 blockchain could one day outperform Ethereum and offer a better all-round package. There is only one internet. And many people believe that in the end there can only be one Layer 1 blockchain. However, until now, these blockchains have been able to co-exist and grow. We could see multiple Layer 1 blockchains co-exist and offer different advantages in terms of speed and security.
Reasons not to buy Ethereum
The liquidation of Ethereum coupled with the growing investment in DeFi provides an exciting investment opportunity. But if you don’t believe in the practical use cases of layer 1 blockchains or just want the network to become more sophisticated, it’s perfectly understandable to stop buying Ethereum or maybe buy Bitcoin instead.
Ethereum has only been around since 2015, which feels like forever in the crypto space. But in reality, it is still in the early stages. Cryptocurrency liquidation provides a great stress test for the long-term stability of cryptocurrencies and the exchanges that support them. If cryptocurrencies can make it through another prolonged bear market and then re-enter a period of growth, it will go a long way in building confidence that cryptocurrencies are not just a fad.