Thanks to widescale institutional investment into Bitcoin (CCC:BTC-USD), the original cryptocurrency eventually made its way above $52,000, truly a milestone moment for the blockchain economy. Though BTC did give up some of its gains at time of writing, enthusiasm remains sky high. But what about alternative crypto coins (altcoins) like Ethereum (CCC:ETH-USD)? Is there any benefit to wagering on ETH, or should investors ride the main show?
On principle, the narrative overwhelmingly favors Bitcoin. While many altcoins have made a splash, and the underlying blockchain technology of Ethereum is commendable, the reality is that most institutional players are just warming up to BTC.
Before you attempt to push the relationship to the next level, the institutions would prefer you to take them out to dinner first. In other words, one step at a time.
Second, you’re not really hearing too much about Ethereum – the only altcoin so far with a market capitalization of at least $200 billion. Instead, it’s all about Bitcoin. As the Wall Street Journal detailed, Bank of New York Mellon (NYSE:BK) stated that it will treat BTC as any other financial asset. Credit card giant Mastercard (NYSE:MA) declared that it will integrate Bitcoin into its payment network this year.
Of course, you have Elon Musk and Tesla (NASDAQ:TSLA). As a vocal proponent of cryptocurrencies, Musk has been responsible for some wild swings in the crypto space. Moreover, Tesla revealed that it purchased $1.5 billion of BTC. This is in line with other technologically savvy corporations like Square (NYSE:SQ) buying up the token, though Tesla’s purchase magnitude has shot up Bitcoin’s credibility to the moon.
While amazing for the continued mainstreaming of cryptocurrencies, it all seems BTC-centric. However, I wouldn’t necessarily give up on Ethereum as the narrative may be more exciting for it down the line.
Why Ethereum Matters
When it comes to technological innovations, it usually pays to be first. But with cryptocurrencies, that might not be the case.
Yes, Bitcoin clearly enjoys the benefits of being first to market. And let’s face it – from a marketing perspective, the name stands out positively because of its elemental elegance. On the flipside, Ethereum sounds like the currency of the Star Trek universe – cool but a bit esoteric.
More importantly, though, Ethereum builds upon Bitcoin’s proof of concept and addresses issues that have plagued the original token’s aim to become the internet’s currency of choice. Due to a comparatively clunky infrastructure and difficulty of scalability, Bitcoin has instead become the blockchain’s lab queen.
Put another way, it’s a store of value, something that you keep tucked away like a precious metal. Of course, this dynamic prevents BTC from being an effective, widely used virtual currency.
On the other hand, Ethereum doesn’t share this problem. Fostering innovations such as proof of stake mining protocols – which rewards engagement of the ETH platform over outright computing power in the supply building process known as crypto mining – and smart contracts which theoretically eliminate human intermediaries in business/legal transactions, Ethereum hands down offers superior utility.
If cryptocurrencies become as mainstream as say smart device payment transactions, ETH has a viable path to incredible profitability, probably more so than BTC.
As for institutions preferring Bitcoin, that may not necessarily be a slight against Ethereum. Yes, it’s a distraction for the time being. However, you have to understand the psychology of the marketplace. It’s much easier for newcomers to invest in ETH (or other attractively priced altcoins) and acquire whole “equity” units.
At more than 50 grand a pop, you can’t really say that about Bitcoin.
What Keeps Me Up at Night
Nevertheless, what I said above shouldn’t be considered an open invitation to buy Ethereum willy-nilly. Cryptocurrencies are incredibly volatile. Therefore, you must perform due diligence before even thinking about getting involved.
While I support the longer-term thesis of virtual currencies, as institutions put digital assets into their balance sheets, the pressure has ratcheted up enormously. Here’s the deal – the big boys are getting into this arena very late into the game.
How much more will Bitcoin rise? What’s different about this rally compared to prior run-ups is the law of large numbers. BTC truly captured mainstream attention when it jumped from a $1,000 peak price point to just under $20,000 in late 2017. Obviously, that’s a 20-bagger.
This time, we’re making a huge fuss about BTC again as the price went from $20,000 to $50,000. That’s a 2.5-bagger, which is great but not a 20-bagger.
Should a correction occur in the stock market, there will be additional pressure for institutional players to dump out of Bitcoin to salvage something from the red ink. Put another way, crypto volatility isn’t the only thing you must worry about in this space. The stock market is another variable, perhaps the variable to focus on.
I’m not here to scare you away from Ethereum or cryptocurrency in general. But you should at least know this reality before stepping forward.
On the date of publication, Josh Enomoto held a long position in BTC and ETH.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.