Forget the Tech – Ethereum Is Still a Huge Gamble

Ethereum (CCC:ETH-USD) has left Bitcoin (CCC:BTC-USD) in the dust so far in 2021. Cryptocurrency bulls believe the rally is just getting started. And Ethereum investors say the crypto’s technology is far superior to Bitcoin and other competitors.

A concept image of mining an Ethereum (ETH) token.
Source: Shutterstock

Unfortunately, in a world in which public opinion is the only thing defining value, Ethereum’s tech may not be as important as investors think. And cryptos like Ether aren’t as “decentralized” as people believe.

Ethereum vs. Bitcoin

I’m not a tech expert. Fortunately, people much smarter than I am have repeatedly broken down the key differences between Ethereum and Bitcoin.

Bitcoin was designed to be a means of transferring value from one person to another without relying on a bank. Ethereum is a platform for monetizing smart contracts and decentralized applications. One of Ethereum’s key technological advantages is its transaction speed, which is far superior to Bitcoin. Unfortunately, it is not the lowest among cryptos and is much worse than Visa (NYSE:V) or PayPal (NASDAQ:PYPL).

The average fee for a Bitcoin transaction recently was $13.44, according to BitInfoCharts. That fee has historically been higher than the average Ethereum transaction fee. However, Ethereum’s average fee has recently jumped to $24.88.

Ethereum’s utility as a platform appears to be much higher than the utility of the Bitcoin blockchain. However, Bitcoin is the clear market leader for the average Joe investor. In a market in which supply is fixed, demand is the only thing defining price. For now, at least, there is much more demand for Bitcoin.

Why I’m Not Buying Ethereum

A currency has only a handful of traits, and cryptocurrencies display none of them. A currency must be a stable store of value. In the past four years, Ethereum’s calendar year returns have been +9,159%, -82.7%, -8% and +464.1%. In the past seven days alone, Ethereum’s price is down 41%. So Ethereum clearly fails the stability test.

Second, it must be easy to use. Very few companies allow payment in Bitcoin at this point, and far fewer accept Ethereum. Sure, you can convert your Ethereum to dollars and then pay in dollars, but adding an extra step in the payment process is unnecessary. And of course, there are those pesky fees eating into every Ethereum transaction.

Finally, a currency must be secure. Ethereum and other cryptocurrency transactions are completely secure thanks to their blockchains. However, there is another layer of security that is missing. Billions of dollars of cryptocurrency are lost or stolen every year. If someone makes a fraudulent transaction with my credit card, I call my bank and the charges are canceled. If someone hacks your crypto wallet or you lose the password, your Ethereum is gone forever.

Crypto bulls love the decentralized nature of cryptocurrencies. However, that also removes an important layer of safety as well. If the value of the U.S. dollar starts to crash, the Federal Reserve, a handful of the smartest economists in the world, can step in to take measures to stabilize it. When the value of Ethereum starts to crash, it just crashes like it did this week.

Cryptocurrency’s Biggest Enemy

Finally, the idea that somehow cryptocurrencies don’t need the support of central banks is absurd. In my mind, the biggest threat to the long-term future of Bitcoin, Ethereum or any other cryptocurrency is that central banks around the world start to see them as valid threats to their respective fiat currencies.

If cryptos start to threaten the viability of the U.S. dollar, the U.S. president would be completely justified in banning crypto trading or ownership outright. After all, part of the mandate of the Federal Reserve is stable prices.

India is exploring a total ban of cryptocurrencies.  China is looking at a similar crackdown.

“This seriously harms the safety of people’s property and disturbs normal economic and financial orders,” the People’s Bank of China said in a statement.

Make no mistake, the fate of cryptocurrencies lies in central banks. Sure, Bitcoin and Ethereum will survive no matter what global governments do. However, if access to them is illegal and they are unable to be used for commerce, demand for them will plummet.

How to Play It

The best I can do when it comes to recommending Bitcoin and Ethereum is to tell people to consider investing a very, very small portion of your total portfolio as a potential FOMO speculation. I hold no crypto, and I wouldn’t put more than 1% of my total holdings into crypto.

If you buy it, assume that investment will go to $0 over time and forget about it. At least you will have exposure if there’s another crypto bubble, or if the global economy collapses in a very specific manner into a post-apocalyptic world in which there is somehow still an internet and power grid.

On the date of publication, Wayne Duggan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Wayne Duggan has been a U.S. News & World Report Investing contributor since 2016 and is a staff writer at Benzinga, where he has written more than 7,000 articles. Mr. Duggan is the author of the book “Beating Wall Street With Common Sense,” which focuses on investing psychology and practical strategies to outperform the stock market. 

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