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Ethereum – The Future of Blockchain Technology?

Although it’s anyone’s guess when it comes to short-term movements, cryptocurrencies as an asset class are only just beginning. Pioneering the exposure and adoption of cryptocurrencies, Bitcoin was merely known as a ‘joke’ currency which was exchanged exclusively by ‘tech geeks’ and internet nerds’ back in 2011. Now, Bitcoin trades just below $10,000 (USD). The digital behemoth’s functionality as decentralised tender and computerized gold appealed to many over the years, and when briefly exposed to the general public, saw heights of $20,000 (USD).

You may hear a lot of diehard cryptocurrency investors criticize banks at any given chance, they’ll also tell you how great Bitcoin is. Yes, Bitcoin is great, but there probably is, and definitely will be something better. Blockchain technology is too innovative to only be applied to payments.

What makes blockchain technology so valuable is the concept of decentralisation. Currently, most if not all of the applications we use are centralised. This means that there is a central governing body which approves what we want to do, and effectively grants us the permission to do so. For example, when we send money to each other through bank transfer, we’re relying on the bank to honour this transaction. This also applies to other processes such as sending emails; we’re relying on our email provider to firstly have a working service, and secondly not to access our personal emails.

Blockchain technology can replace all of these applications through the use of smart contracts. Smart contracts effectively allow the processes previously entrusted to central entities to be operated by code. This concept offers security because the code that the process is built on will be publicly available, so that you know what exactly is happening.

Ethereum (ETH) is spearheading this movement.

Released in 2015, Ethereum arguably fuelled the intense cryptocurrency bull market of 2017. Many people viewed it as the next Bitcoin from an investment standpoint, with expectations that it would gradually overtake Bitcoin’s number one position.

Unfortunately, as a result of this profit-driven mentality, Ethereum’s technological aspects were forgotten and all that seemed to matter was how high the price could go.

The repercussions of this ‘mania’ were very evident when the whole cryptocurrency market took a sharp decline at the beginning of 2018. Similar to Bitcoin, Ethereum also experiences large volatility, and is currently sitting at $850 (USD) after peaking at $1400 (USD) earlier in 2018.

This is nothing to be worried about as since the inception of cryptocurrencies, boom and bust cycles are completely normal; think of any asset cycle but compressed into a smaller timeframe.

So, the question is, in preparation for the next cryptocurrency bull market, should you be holding Bitcoin or Ethereum?

There’s no right or wrong answer here, but the following are some historical events and future predictions based on fundamentals:

  • Cryptocurrency bull markets have traditionally started with Bitcoin increasing in price
  • When Bitcoin increases (or decreases) in price rapidly, investors sell off their other investments into Bitcoin to benefit from the increased exposure
  • Ethereum has greater potential than Bitcoin, it is like comparing a supercomputer to internet currency
  • The Dot Com bubble birthed the world’s current tech-giants: Google and Amazon
  • When Ethereum has increased exposure to the general public, the mania surrounding the asset is expected to exceed that of Bitcoin’s
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Litecoin vs. Bitcoin

If you’ve heard of Bitcoin, chances are you’ve also heard of Litecoin. Created in 2011 by former Google employee Charlie Lee (former Coinbase engineer), Litecoin is a fork (or copy) of Bitcoin with a few tweaks to make it more suited for being a medium of exchange. The similarities between the two has been further enforced ever since Bitcoin rebranded itself to ‘Digital Gold’, whereby investors began calling Litecoin the silver counterpart.

litecoin

 

To begin, here is a side by side comparison of Bitcoin and Litecoin:

Bitcoin, Litecoin

So, why does Litecoin exist if it is essentially just a ‘knock-off’ of Bitcoin?
Bitcoin was designed to be a medium of exchange for peer to peer payments. It was envisioned that it would become the first world currency and be used for day to day payments. However, the poor scaling and slow transactions speeds associated with the currency make it unfit for its designed purpose.
Reasons why Bitcoin is NOT a good medium of exchange:

  • Poor Scaling (3-7 Transactions per Second)
  • Slow Transaction Speeds (In December of 2017 it took Hours to process Bitcoin transactions)
  • Expensive Transaction Fees (In December of 2017 it cost upwards of $50 just to move Bitcoin)

So, if Bitcoin isn’t suited to being a good currency, what can it be used for?

Bitcoin can be used as a store of value. The history and distribution of Bitcoin, in addition to its rarity make it a very decent substitute to gold. It’s certainly easier to transport in comparison to gold, and its mining (or generation) process caps the total supply at 21,000,000 (twenty-one million) and therefore is deflationary over time. In essence, it’s everything that gold is, but just more convenient; although this is a hard concept to accept due to Bitcoin not being a physical object, the fundamentals are there and its only a matter of time before society embraces it.

Litecoin was created due to the concerns surrounding Bitcoin’s scalability, and in its design maintains the same concept as Bitcoin but with a few tweaks to enable greater adoption. It has better scaling, faster transaction speeds and cheaper transaction fees.
Reasons why Litecoin is a BETTER medium of exchange:

  • Better Scaling
  • Faster Transaction Speeds (In December of 2017 it took a few minutes to process Litecoin Transactions)
  • Cheaper Transactions Fees (In December of 2017 it cost less than $1 to move Litecoin)

Summary
Despite the clear contrast in viability of Litecoin and Bitcoin, this does not mean that Litecoin will overtake Bitcoin. Ultimately, the former will act as a medium of exchange while the latter will remain as a store of value. It is important to acknowledge that until there is greater adoption, these are all speculative assets and are very volatile. In the short-term, Bitcoin will most likely remain dominant when it comes to dictating the price movements of other cryptocurrencies including Litecoin, but this may change in the foreseeable future depending on real world use. We should also acknowledge that adoption is a lot closer than most of us expect, with the recent rollout of Litepay, a Litecoin payment system which is due to be launched in 41 countries.

Bitcoin moved up too fast on its initial run to $20,000 (USD), and peak buyers were punished heavily as the imminent pullback saw $6,000 (USD) as a floor. However, a parabolic rise followed by a sharp decline is not unusual, and investors should be cautious entering the market when the charts exhibit a vertical gradient (this applies for both directions).