Bitcoin has exploded in value over the last year, making gains of around 1000%. While Bitcoin has dominated the headlines, Ethereum has posted even crazier returns, with a rise in value of almost 5000 percent. Both Bitcoin and Ethereum futures will be available on Wall Street in 2018,likely bringing an even greater surge in value.
Bitcoin’s incredible rise throughout 2017 will undoubtedly go down in history. Beginning the year at around $1,000 and closing it at about $11,300, Bitcoin’s insane surge in value will feature in history and economics textbooks for generations. Whether 2017 represents the end of the beginning or the beginning of the end for Bitcoin remains to be seen, but there’s an excellent chance that the textbooks of the future will mention Bitcoin in the introduction to a chapter on Ethereum.
With all the hype and news articles surrounding Bitcoin’s march to a $11,000 valuation, many people would probably be shocked to realize that Ethereum’s growth in 2017 was even more impressive. The second most popular cryptocurrency began 2017 trading at around $8 and enters 2018 at closer to $500. So while Bitcoin experienced 1,000% growth in 2017, Ethereum’s increase was approximately +5,000%.
The next year will see both Bitcoin and Ethereum futures traded on Wall Street. Many predict that this will attract even more investment into the cryptocurrency sphere and push values up even higher. But even the most optimistic cryptocurrency investors are cautious, as a substantial downswing could follow a surge in value. The central question that most long-term cryptocurrency watchers are asking is whether that downswing will represent the bursting of a bubble or a momentary dip before reaching new all-time highs.
The billionaire guru of speculative investment, Warren Buffet, famously said that it’s only when the tide goes out that you can tell who’s been swimming naked. When times are good, and prices are shooting skyward, everybody looks like a genius and every innovation seems revolutionary. Until the bull run ends, nobody can be sure whether cryptocurrencies such as Bitcoin and Ethereum are worth what people are paying for them.
If you want to make an educated guess on what the future holds for Bitcoin and Ethereum, you need to understand their past and purpose.
Bitcoin: From a Borderless Currency to Digital Gold
Bitcoin was created by an anonymous entity using the pseudonym Satoshi Nakamoto in 2009. The original intention was to use blockchain distributed ledger technology to create a borderless currency that was beyond the control of central governments. Bitcoin’s early popularity came as a medium of exchange on the dark web, where it enabled the buying and selling of illegal goods without requiring users to link their purchases to their bank account.
Scandals such as the US government crackdown on dark web marketplaces and the theft of more than $450 million worth of Bitcoin from the Mt. Gox exchange crushed Bitcoin’s reputation and destroyed its value in those early years. After peaking at above $1,000 in late 2013, the Mt. Gox debacle sent Bitcoin into a four-year depression. The value plummeted to almost $200 during this time and didn’t reach $1,000 again in 2017.
It’s interesting to note that Bitcoin’s earlier rise to $1,000 was based on its utility as a medium of exchange. Alongside the dark web activity, bars and cafes appeared in tech-savvy cities such as Tokyo and Berlin which accepted payment in Bitcoin. But as Bitcoin’s popularity grew, slow transaction times and high fees made it an extremely inconvenient method of paying for everyday purchases.
Many other cryptocurrencies have appeared which solve Bitcoin’s problems and are far more useful as a form of payment. Attempts have been made to overcome Bitcoin’s fundamental flaws by forking it into new currencies such as Bitcoin Cash and Bitcoin Gold. The Bitcoin community widely rejected these efforts as the innovator of cryptocurrency has found a new role.
Today, many people refer to Bitcoin as digital gold. Just like precious metals, Bitcoin has a limited supply. While the whole concept of “mining” Bitcoin is a reference to gold, it was never originally intended to function primarily as a store of value. However, as the true Bitcoin believers’ slogan “Just Hodl It” shows, a store of value is just what Bitcoin has become. And so the question is no longer whether Bitcoin is a viable form of currency, but whether it has a future as a long-term store of value.
Ethereum: Bitcoin 2.0
Almost as soon as Bitcoin launched, imitators began popping up. Early efforts such as the Kanye West-referencing Coinye and the canine-themed Doge Coin were little more than Bitcoin clones with a novelty value. But the blockchain technology underpinning Bitcoin had the potential to offer so much more.
Vitalik Buterin was a programmer and Bitcoin Magazine writer who saw the potential that Bitcoin and blockchain offered. If only it could be made possible to program applications on top of Bitcoin, the possibilities were almost endless. Buterin proposed building a programming language on top of Bitcoin to make this possible. When Bitcoin’s core developers failed to agree over the specifics, he decided to go his own way.
In 2014, Ethereum launched. With Ethereum, Buterin had created a cryptocurrency with built-in utility value.
Bitcoin works through a decentralized ledger known as the blockchain. Transactions are recorded to the blockchain, a database housed in a vast number of locations, all of them synced with one another so that no transaction anywhere is approved until recorded to the entirety of the blockchain.
Ethereum goes one step further with the introduction of smart contracts. The terms of an agreement are recorded on the blockchain and then executed once you meet the conditions. For example, you could agree to pay for a delivery of some products. Once they’re on record as being delivered to their destination, the sender automatically receives payment.
In practice, the potential for smart contracts is almost limitless. From self-executing electricity grids to completely anonymous and incorruptible voting in elections, smart contracts take blockchain tech to a level that could completely revolutionize society.
Ethereum vs. Bitcoin: Is the World Big Enough for the Both of Them?
The future for the two most prominent cryptocurrencies doesn’t need to be a zero-sum game. It is entirely reasonable for Ethereum’s smart contracts to reach their full revolutionary potential while Bitcoin’s value matches gold as a long-term store of value.
But the evolution from Bitcoin to Ethereum is an interesting counterpoint to the many arguments that have been made claiming cryptocurrency is a bubble waiting to burst. Those who see cryptocurrency as a giant bubble often point to a few well-worn examples.
The first is the original bubble, 17th Century Dutch tulip mania. During this time, the value of tulips surged in the Netherlands, causing people to buy as many tulip bulbs as possible. Tulip investors figured that the prices would continue increasing forever. At the height of the craze, a single tulip was worth more than a house. Of course, the tulips had no utility value and were only worth something while people believed their value would increase. As soon as the price started to dip, it crashed completely. Tulip mania made a few millionaires and then scores of destitute late investors.
The second often-used example is the late-1990s’ dot-com bubble. Just like cryptocurrency, people saw the internet as a revolutionary new technology that would change almost every aspect of daily life. While this prediction has proved true, the early movers weren’t necessarily those with the most long-term success. Most of the companies involved in the dot-com bubble went bust, taking an incredible amount of investors’ money with them.
So are Bitcoin and Ethereum part of a cryptocurrency bubble?
With regards to tulip mania, they are part of a bubble if they’re proven to have no utility value – if, as Warren Buffet would say, their backers are swimming without clothes on. This argument can only be sustained long-term in the case of Bitcoin’s new role as a store of value, but Ethereum’s smart contracts seem to make it unlikely that this is the case.
As for the dot-com bubble, it could be true that both these cryptocurrencies have come along before the world is indeed ready for them. An excellent example of the original dot-com bubble is Webvan. Webvan offered grocery deliveries through its website. While this idea was apparently a good one, it came too soon to be successful. Today, every major supermarket provides online deliveries. When Webvan went bust in 2001, there just weren’t enough internet users to make the idea successful.
Another similar example comes from social media. In 2005, Rupert Murdoch’s News Corporation paid $580 million for the world’s most popular social network, Myspace. That seemed like a forward-thinking piece of business at the time, but history has proved it to be a catastrophically wrong decision.
Facebook, launched in 2004, quickly overtook Myspace and became the world’s number-one social network. Myspace promptly became a graveyard of abandoned profile pages as users fled to a new and improved social media platform. In 2011, News International sold Myspace for $11 million. In six years, their investment had lost $569 million.
So could Ethereum be the Facebook to Bitcoin’s Myspace? Or are they both about to be usurped be an entirely new form of cryptocurrency?
Nobody knows the answer to these questions, just as nobody could’ve known for sure that both Ethereum and Bitcoin would explode in value during 2017. But if you want to make an educated guess on what the future holds for these cryptocurrencies, its essential you understand where they come from.