Cryptocurrencies have suffered one heck of a head fake, and Ethereum (ETH-USD) investors were not immune. Earlier this year, ETH became a hedge of sorts within the wild virtual-currency markets. By the beginning of February, the crypto-coin had “only” lost about 19% of value from its all-time high. This compared very favorably to bitcoin, which lost 52%.
Unfortunately, this unusual circumstance ultimately turned out to be a brief respite. Ethereum quickly collapsed due to widespread panic and selling pressure.
The blockchain-reward token, currently the second-most valuable by market capitalization, enjoyed an encouraging resurgence during the spring season. But that too eventually failed, leading many to question the crypto markets’ viability.
So when rumors started to emerge that the Securities and Exchange Commission were on the verge of approving a bitcoin-centric exchange-traded fund, the sentiment boost couldn’t have come soon enough. Bitcoin, Ethereum, and many other cryptocurrencies soared because the rumor wasn’t just about one coin; it was about extending mainstream credibility to a much-maligned asset class.
Events unfolded as if leading to a natural conclusion, the way that our ears respond affirmatively to a musical denouement, but the SEC being the SEC produced an anticlimactic ending. The suits rejected the bitcoin ETF, which eventually took down the cryptocurrencies.
Presently, ETH sits a few bucks above $400, having not moved much since April of this year. Does that mean the token is bound for further disappointment? I’m biased, but I genuinely don’t think so, and here are three reasons why:
A Bitcoin ETF Is Nearly a Foregone Conclusion
Admittedly, the recent lift in bitcoin and crypto prices is due mostly to the bitcoin-ETF rumors. In a space now littered with negativity, an SEC approval was exactly what the sector needed. A rejection was exactly what the digital markets didn’t need.
Since Ethereum as an investment acts like most other cryptocurrencies, bad news for bitcoin is bad news for all. The common assumption is that these blockchain tokens will die a protracted death; therefore, it’s best to dump these assets while they still have value.
However, if history is our guide, a bitcoin ETF will happen sooner or later.
Currently, almost all investors take for granted gold investments through convenient vehicles like the SPDR Gold Shares (NYSEARCA:GLD). But prior to the GLD, gold investing was a cumbersome affair. Interested parties had to buy physical bullion, and ensure their safekeeping. If stolen, the investment was gone for good.
The struggle for gold-ETF proponents in convincing the SEC was also an arduous affair. It took four years to craft a system that regulators found satisfactory. But within days, the GLD became a billion-dollar success story.
Later on, the SEC would greenlight the iShares Silver Trust (NYSEARCA:SLV). Since Ethereum acts like silver to bitcoin’s gold, an Ethereum-based ETF is surely the natural conclusion.
Even if you dismiss the historical argument, just look at reality. The New York Times (NYSE:NYT) recently declared that the stock market is shrinking. As a publicly-traded institution, they have every incentive to suppress or downplay this information.
Here’s the bottom line: traditional investments are losing relevancy with the younger generation. Cryptocurrencies have experienced the opposite effect, which is a net positive for a credible token like ETH.
Ethereum Is the Building Block of the New Economy
I’ve spoken at length about the blockchain economy and how it represents the next step for cryptocurrency integration. Naturally, people are excited about the potential for accruing ten-bagger, perhaps even hundred-bagger gains. That impetus for crypto-engagement will never go away.
But the bigger story about cryptocurrencies isn’t about going back in time and buying Apple (NASDAQ:AAPL) during its initial public offering. No, the real story is how the underlining blockchain technology can transform most business transactions, and not just payments.
As revolutionary as bitcoin is, its original founder(s) never imagined how popular the platform would become. This much is obvious whenever you attempt to send BTC to another account. The bitcoin network is always bogged down, and transaction confirmations take an alarmingly-long time.
Other payment-focused cryptocurrencies entered the fray, and offer faster, more convenient transactions. But with the Ethereum blockchain, the primary purpose isn’t payment facilitation, but rather, the introduction to smart contracts.
Long story short, this cryptocurrency takes advantage of the benefits of an open-source, decentralized, and immutable database to ensure contract integrity. If parties to a deal agreed to allow the ETH blockchain to “arbitrate” all the functions within the contract – such as withholding payment until terms are met – this process would eliminate legal middlemen.
Ethereum also provides a viable avenue for crowdfunding. For instance, an entrepreneur can setup an pledge, where she or he will not receive funds until specific terms are completed.
At least this part of this currency’s utilitarian value is not theoretical. A recent project called KickICO provides a “blockchain ecosystem” where participants vote on their favorite crowdfunded enterprise with their wallets. It’s an ambitious endeavor, and KickICO won’t be the last.
Developers have earnestly jumped on the Ethereum train, and again, ETH stands to benefit.
ETH Levers Enormous Credibility
A few months back in June, Coinbase jolted the ETC price when it announced plans for its inclusion. Since Coinbase is the place to go for convenient crypto-coin purchasing and storage, blockchain proponents embraced the news.
But to outsiders, the announcement might appear like a headwind for the currency. ETC is actually the original Ethereum. However, a security breach understandably shook investor confidence. The much-debated and still controversial solution was to “hard-fork,” or create an offshoot blockchain network. The result is the higher-priced token with which you’re most familiar.
Coinbase already lists ETH in its digital wallet. Adding ETC inherently creates competition. As previously mentioned, ETH is above $400. ETC is less than $20. Psychologically, you’d rather accumulate 23 ETC tokens than one ETH token. Plus, the allure that the lower-priced crypto can replicate its counterpart’s performance is extremely strong.
That said, ETH levers a credibility that money can’t buy. Its combination of utilitarian and market value makes it a powerful asset. Against a longer-term framework, I wouldn’t be surprised if ETH overtook BTC. It’s not a likely scenario, but it’s not outside the realm of possibility.
Most important, I believe competition is a net positive for ETH. Irrespective of the price swings, the past year has proven that multiple cryptocurrencies can co-exist. Granted, most of the offerings right now are junk, and a great purging might occur. However, despite all the bad and ugly news, we’re seeing more engagement and participation, not less.
Ultimately, this benefits ETH because as rookie crypto-investors dive into the digital markets, we’ll see a gradual flight to quality. With bitcoin selling for what a decent used-car might cost, ETH is the perfect alternative.
As of this writing, Josh Enomoto is long BTC, ETH and ETC.