Cryptocurrencies remain one of the most volatile sectors of the market. As a result, deciding whether to jump in on a cryptocurrency like Ethereum (CCC:ETH-USD) is a tough call, especially with so many traders getting in and out of the cryptocurrency for no tangible reason.
Take the case of Dogecoin (CCC:DOGE-USD). The whimsical crypto has limited utility but continues to garner attention on the basis of a few high-profile endorsements. As I see it, the coin is moving higher simply because it can.
Ethereum certainly does not belong in the same conversation as Dogecoin. The Ether network is the standard for digital contracts. Ethereum, the coin, is benefiting for a simple reason. Demand for these digital contracts is increasing and will continue to do so in the coming years.
Trying to Make an Intangible Asset More Tangible
As I’ve learned more about cryptocurrency, it helps me to think about them in terms of what particular parts of the blockchain ecosystem a particular coin targets. This may bother crypto purists, but creating a word picture about the cryptocurrency universe helps me.
Bitcoin (CCC:BTC-USD) is the original cryptocurrency and is considered the “gold standard.” Like physical gold, it exists in a realm by itself. Ripple (CCC:XRP-USD) and Stellar Lumens (CCC:XLM-USD) are altcoins that exist in the payment processing space. Sandwiched between the two is Ethereum. Ethereum is widely known for its ability to facilitate digital contracts.
Of course, I’m oversimplifying the uses for cryptocurrency. Ethereum sits as the clear number two after Bitcoin. In fact, it’s Bitcoin, Ethereum and then everyone else.
Ethereum is a logical candidate for the emerging field of decentralized finance (DeFi). One example, launched last year, is Compound. This decentralized software program uses Ethereum’s digital contracts to create a market. In this market, a variety of cryptocurrencies can be borrowed and lent by way of Compound’s program.
In theory, Compound offers the kind of services you get from a bank. Customers can make deposits and earn interest. The platform even offers collateralized loans. These transactions can happen without the need for a trusted third party. The digital contract is made up entirely by the borrower and the user via the decentralized software program.
Ethereum May Branch Out on the Blockchain
In a former life, I worked in several marketing communication agencies. Our clients looked to us to handle the marketing and advertising material that didn’t generate enough income to be handled by its traditional ad agency. In the trade, this was called “below the line” work, and it allowed every agency to work with one another.
However, when economic conditions got rough, the traditional agencies found it advantageous to go below the line which became a threat to us.
What does any of this have to do with Ethereum? As I started this article, I pointed out that cryptocurrencies tend to operate in specific areas of the blockchain ecosystem.
In this case, Ripple and Stellar Lumens operate in the payment processing space. They currently enjoy an advantage over Ethereum because of the speed, or latency, at which those platforms can confirm transactions.
Ethereum 2.0 will be Ethereum’s way to move into other areas of the blockchain ecosystem. In this case, Ethereum 2.0 should increase the latency at which it processes transactions. That may remove one of the primary benefits that altcoins like Ripple and Stellar Lumens have in the payment processing space.
Is there room for everybody? At this point, nobody knows. But if you’re looking for a tangible reason to buy Ethereum this is something to consider.
On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for Investor Place since 2019.