Cryptocurrency is a relatively new invention meant to create a more equitable financial system for all. The two leading cryptocurrencies are currently Bitcoin (BTC) and Ethereum (ETH).
History of Bitcoin and Ethereum
In the world of cryptocurrency there are no bigger names than Bitcoin and Ethereum. Bitcoin was the first cryptocurrency created by a mystery figure, Satoshi Nakamoto. To this day, nobody knows the true identity of Satoshi Nakamoto, since whoever created Bitcoin wished to remain anonymous.
Bitcoin’s white paper, which is an essay-like document explaining what Bitcoin is meant to be, was first released in 2008. It wasn’t until January 12, 2009, when computer programmer Hal Finney became the first person ever to receive BTC as payment for mining block-70 of Bitcoin’s blockchain.
Bitcoin has come a long way since having just 70 blocks on its blockchain. Bitcoin’s current block-height, which is the number of blocks that have been mined to date, is 747,652. With Bitcoin gaining mainstream popularity over the past decade its counterpart cryptocurrency, Ethereum, has followed as it has seen massive mainstream acceptance.
Ethereum’s history is quite different than that of Bitcoin’s. Ethereum was invented by then 19-year-old Vitalik Buterin, in 2013. The network didn’t go live until 2 years later, on July 30, 2015.
Ethereum’s history is far shorter than that of Bitcoin’s. However, being only 7-years old versus Bitcoin’s 13-year existence has not put Ethereum far behind Bitcoin in terms of market capitalization. Currently, the market capitalization for Bitcoin sits around $400B US, while Ethereum’s sits at $200B US.
At the end of the 7th year of Bitcoin’s existence, its market capitalization was about $15B. When comparing Bitcoin’s first 7-years of existence to that of Ethereum’s first 7-years, one realizes that Ethereum has created 13 times the amount of value within the same amount of time as Bitcoin had. Some may say that it is because of Bitcoin’s popularity that Ethereum has been able to generate such value, others say the reason has more to do with the way Ethereum works versus the way Bitcoin works.
How Bitcoin and Ethereum Derive Value
The functionality of Bitcoin resembles much of the same functionality that gold does. Gold is a limited precious metal that is predominantly used as a store-of-value due to its limited quantity, which is where its value is derived from. In economics, the more something is limited while retaining a demand from people, the higher its value will go in the long run.
Bitcoin functions in the same way, as it is too a limited asset. There will ever only be 21 million Bitcoins, since the code that created Bitcoin limits the actual quantity that can be made. Gold has a current market capitalization of about $11.8T. Both Bitcoin and Ethereum pale in comparison to the market capitalization of gold, but this is due to the fact that gold has been utilized by humanity for thousands of years, whereas Bitcoin is only a little over a decade old, and Ethereum is even less than that.
For Bitcoin maximalists, who are people that believe Bitcoin will be the global currency used by the majority of humanity in the future, a constant case of usability is made to further their position, and they kind of have a point. The argument is that unlike gold, Bitcoin can be sent all over the world within a matter of seconds. This is a real advantage that Bitcoin has over gold and is a testament to how Bitcoin could potentially overtake gold in market capitalization in the future.
Ethereum’s functionality is far more complex than that of gold or Bitcoin. Ethereum functions much like a cross between fiat currency (a government-issued currency that is not backed by a commodity such as gold), and the means of production itself. Imagine if the system we currently use to produce and purchases a home, a car, or even smaller purchases like eating out, or renting a hotel room was done so under a globally decentralized network instead of the many centralized government issued systems we currently have.
Further, imagine the creation of apps, websites, and software, otherwise referenced as businesses, that are available around the world today utilized a single currency to function instead of the many different government issued currencies that are available today. This is what Ethereum is. It is a system that has the potential to perpetuate global production in a decentralized way. On a much smaller scale than what has been described, we can look at the relationship between the dollar and the S&P 500 as a point of reference to what Ethereum’s system will eventually resemble.
The Potential of Ethereum
The S&P 500 is an index of the top 500 companies in the United States stock market. These companies all function with the use of the dollar, a fiat currency. As time goes on, and the government produces more dollars some of those dollars will be spent on assets like stocks included in the S&P 500. Over-time, barring cataclysmic events such as natural disasters or war, this system of fiat currency feeding an asset class will continue, thereby creating more and more value off the production the dollar incentivizes businesses to create.
The same can be said about the system behind Ethereum. The reason Ethereum is so much more complex than gold or Bitcoin is because on Ethereum’s blockchain it is possible to create more asset classes like businesses, applications, art, identity registrations, etc. The number of things that can be created on Ethereum is akin to the potential humanity has defined from creating everything we have so far. Theoretically, one day an individual will be able to purchase their home, car, and other worldly goods through Ethereum, and that is but one facet of Ethereum’s functionality.
This is why Ethereum will eventually overtake Bitcoin in market capitalization. If Ethereum continues its path in not only developing its technology to become more usable in everyday life, but also educating the masses on how to use Ethereum’s tech, then the eventual result will be like what the dollar has accomplished over its existence. Ethereum does everything the dollar and Bitcoin can do, yet it can do more.
The System of ETH Compared to Others
The dollar is the incentivizing factor that generates production from businesses and people. Without the dollar Apple would not be as incentivized to create iPhones, Chevy would not be incentivized to create cars, people would not be incentivized to work. Production and advancements in technology increase the quality of life for people. Knowledge becomes more accessible, transportation becomes more efficient, and medicine saves more lives. Ethereum aims to do the same thing the dollar has, but in a more decentralized fashion and on a more global scale.
At this point, many would claim that since we already have the dollar and can send it all over the world, what does Ethereum do to give it more value than the system we already have? The answer to this is that unlike the dollar, Ethereum is decentralized which means anybody in the world can have a vote on how to develop this technology and how to distribute it. For the dollar, the government and the Federal Reserve decide on how dollars will be created, distributed, and regulated. With Ethereum, those who stake enough Ethereum will have the right to vote on how Ethereum will function, which gives it a decentralized quality that most current currencies do not have.
This is where Ethereum’s complexity is realized. There are so many moving parts and people related to this blockchain, and this is how it will overtake Bitcoin. Going back to gold and the S&P 500 as real-life examples of how Bitcoin and Ethereum function, we can evaluate growth-trajectory for these currencies.
Over the past 100 years the S&P 500 has eclipsed gold in the creation of value, and it makes sense as to why. Whereas gold does not produce anything, and is regarded mostly as a store of value, the system of generating incentivization for production by utilizing a fiat currency has generated about 6 times the amount of value that gold has. This metric is only regarding the limited scope of the S&P 500, since the S&P 500 has increased about 60,000% versus gold’s increase of 10,000% over the past 100 years. If we were to realize how the dollar has incentivized all the production that it has beyond the S&P 500, then we can rationally say the value of what has been created is much higher.
For reference, the S&P 500 market capitalization alone is about $40T versus gold’s $11T. That is a 4-fold evaluation, and it is only considering the top 500 companies in the stock market. If Ethereum can truly capture global incentivization and production, then theoretically it can amass value unlike anything we have ever seen before.
What is Hindering ETH from its Potential
This all sounds good in theory, but competition and obstacles remain for Ethereum. The first true obstacle for ETH is the difficulty of mass populations’ truly understanding what ETH is and how it works. But say everyone figures out how to use ETH, the problem of competition persists. Governments around the world, like China and Russia have scrambled to ban crypto like BTC and ETH in aspiration of creating their own digital currencies. However, this is where the quality of decentralization brings power to ETH in the face of big government.
Even though China banned cryptos like ETH, the variable of decentralization pokes holes in China’s effort. By use of VPNs, which are virtual private networks that is defined by Google as an arrangement whereby a secure, apparently private network is achieved using encryption over a public network, typically the internet, one can bypass China’s regulations if they really wanted to. VPNs have been made illegal in China, but it is still possible to use them. Since ETH is decentralized, if enough people knew how to use both VPNs and ETH, then theoretically China cannot truly stop the use of Ethereum.
Now, let’s continue down this rabbit hole and imagine people in countries that do not have a ban on ETH eventually do develop a sound knowledge of how ETH works. This knowledge has the potential to create a global community of commerce that will overtake all other modes of commerce from Bitcoin, to the dollar, and especially gold. Ethereum can be sent all over the world in seconds, businesses, apps, and a slew of other products can be developed on Ethereum’s blockchain, and the currency is not bound to any one government or institution.
The potential for what can be created with Ethereum versus all other currencies is astounding. The only real obstacles standing in the way are global acceptance and education, and the competition other currencies present. Again, it cannot be stressed enough how valuable the characteristic of decentralization is. The glaring advantage that Ethereum has over its competition is its ability to develop value through a decentralized system. Unlike Chinese or American currency, literally anyone with an internet connection and the know-how anywhere in the world can create on Ethereum’s blockchain; whether it is ETH itself, an online business, or even a social media platform.
Ethereum’s Boundlessness
In economic systems a store of value is very different than creating value. In the case for Ethereum, it can do both in terms of creating and storing value, which gives it a leg up on its biggest competitor, Bitcoin. Although an unlimited amount of ETH can be created, which would render the quality of storing value void, the burn function of Ethereum’s blockchain limits supply giving it the quality of regulating value similar to the store of value Bitcoin provides.
In a way, this is a much better system for production. If we can agree that production is where real value is, since production is synonymous with an increase in quality of life, then an unlimited resource of incentivization is the dominant system of currency. If the dollar never came off the gold standard in 1971, then the value that has been created since then would have been far more limited. The boundlessness of currency production is what makes more people wealthy.
If a currency is limited, it is more likely that only a handful of people can truly attain wealth. When a currency has the potential to continue being created, the velocity of that currency will continue to rise. If that velocity, which is a fancy way of describing the movement of a currency continues to rise, then theoretically an infinite amount of people can attain value from it. In a sense, the dollar has already done this.
Prior to 2010 there were roughly 3 million millionaires in the U.S. In 2015 that number rose to 15 million, and currently there are over 20 million millionaires in the U.S. The quantity of both millionaires and functioning businesses would be much more limited if the government could not continue to print the dollar off a whim. If the dollar was still tied to gold, production by U.S. businesses would be much slower since gold is limited, and its velocity would be stifled.
It is as though Ethereum embodies the best qualities of what a currency should be. It provides a store-of-value, it functions as an incentivizing system for production, it has the potential to continuously increase its velocity, and it is a decentralized currency giving anyone that desires sovereignty over their own money the ability to have it. If BTC and ETH follow the already established track records of gold and the dollar system, then it is only a matter of time before Ethereum overtakes Bitcoin as the leading cryptocurrency. The only true obstacles in the way of ETH becoming globally accepted are mass understanding and education. Once these two parameters are met, ETH will really begin to realize its true potential.
