Easy Read on Ethereum
In a prior post, I went through the history of the biggest cryptocurrency — Bitcoin. Bitcoin is a simple cryptocurrency, basically digital gold or store of value. Bitcoin has a market cap of $922Bn, and it makes up 41% of all outstanding cryptocurrency value. It’s huge, it’s a beast. But the second biggest crypto is called Ethereum (ETH), and it is really important too.
Ethereum was created by Vitalik Buterin in 2014, at the ripe age of 19. Vitalik was born in Russia and moved to Canada with his family when he was six years old. While still in high school, he started a popular Bitcoin newsletter and then a magazine. He dropped out of the University of Waterloo to participate in the prestigious Thiel Fellowship. Unlike Satoshi, Vitalik is a well-known participant in the crypto industry. He speaks at conferences, is a frequent podcast guest, and is fully in the public eye. He is currently worth over $1Bn with a massive holding of ETH and other cryptocurrencies.
Vitalik credits the idea for Ethereum from his play of the PC video game World of Warcraft. He has written about it as such, “I happily played World of Warcraft during 2007–2010, but one day Blizzard [the maker of the game] removed the damage component from my beloved warlock’s Siphon Life spell. I cried myself to sleep, and on that day I realized what horrors centralized services can bring.” Vitalik wanted to create a new way to have assets carried on the blockchain where no single company would be in charge, where no one could take away the value on a whim like Activision Blizzard did to him.
Vitalik launched Ethereum to be a general-purpose “global computer” operating on a decentralized network. Where Bitcoin is simply a coin or token like money, Ethereum is much more sophisticated. Contracts can be written to the Ethereum blockchain that can do basically anything. They are programmable with unlimited use cases. They can reference ownership in a picture or a video file. They can be used in borrowing/lending transactions. They can be tied to video game assets. They could represent ownership of physical assets like your home or car. There is no end to this.
To date, most assets that have traded on the blockchain have been recorded on the Ethereum blockchain. When a new buyer comes in to purchase one of these assets, they are typically converting USD or another fiat currency to buy Ethereum to make the purchase. Yes, I understand that if the seller of the asset turns around and converts the ETH back to USD, then there is no net new demand. However, that is not happening as often as you might think. This buying interest has sent Ethereum flying, from $150 in 2019 to nearly $4,000 now. The market cap of Ethereum has ballooned to nearly $500Bn, nearly 21% of the total value of all coins outstanding currently. The next biggest coins are only $40–90Bn market cap, so ETH and BTC are really in a class by themselves today.
Just like Bitcoin, the details of every contract on the Ethereum network is published to the blockchain and carried across a network of miners. The miners are paid a fee to record transactions to the network, which are referred to as gas fees. These gas fees fluctuate in price based on activity levels on the Ethereum network. These can be $10–20 per transaction or can rise at times to over $100 per transaction. High gas fees have opened the door for other programmable cryptocurrencies to emerge and attract new projects. A number of efforts are underway to reduce the high gas fees, which we will discuss in future posts.
Another concern for the long-term value of ETH is that, unlike Bitcoin, there is no hard cap on the amount of Ethereum. There are however mechanisms in place to slow the growth of outstanding ETH so that it doesn’t grow forever to a massive number.
Ethereum is traded on all of the major brokerage exchanges like Coinbase and Robinhood. It is fairly liquid and easy to buy/sell in most market conditions. As always, I am not your investment advisor, make your own decisions about whether Ethereum belongs in your portfolio.
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