Ethereum: A Short Term or Long Term Investment?

The cryptocurrency ecosystem is not a zero-sum game in which only one asset survives, contrary to the common opinion. Only a tiny percentage of cryptocurrencies was founded to serve as value storage and vehicles of trade.

More accurately described, the word cryptocurrency is a misnomer for the digital asset or blockchain protocol sector. Many people consider bitcoin to be the best and Ethereum to be the silver to bitcoin’s gold. In contrast, some consider Ethereum to be better due to the transaction speed.

Bitcoin has a single value proposition: it allows you to store and move money in a smooth, non-manipulable way. It’s a form of blockchain technology that’s been applied to money. On the other hand,  Ethereum is a protocol that allows developers to create decentralized applications. Decentralized exchanges, insurance,  finances, supply chain management, derivatives, non-fungible tokens, file storage, and organizational structures are all the sub-ecosystems built on the Ethereum protocol. 

The reality is that this blockchain’s application layer shares more in common with the Apple iOS operating system than with the money in your bank account. Usually, ethereum specific smart contracts are used to automate the execution of an agreement so that all parties can be certain of the conclusion right away, without the need for any intermediaries or time waste.

Three applications Of Ethereum Protocol

Financial, semi-financial, and non-financial applications are available on Ethereum. The sections below will provide you with a few examples of each, but they are not exhaustive.

Financial

• Financial use cases propel decentralized finance (DeFi). Stablecoins, financial derivatives, coin offers, lending protocols, and other Ethereum features like disintermediate banks and financial services.
• Collateralized stablecoins provide access to dollars and ownership of assets like real estate to everyone in the world. Individuals can use a lending protocol like Compound to get a loan or use initial coin offerings to raise money without a bank or venture funding.
• Users can also trade financial derivatives with lower fees on a 24-hour exchange. Brokerage costs, charges, fund management fees, and counterparty risk are common in centralized alternatives. Uniswap, a major Ethereum-based exchange, presently has a daily volume of $1 billion.

Semi-Financial

• When a data stream indicates that the conditions have been met, insurance protocols like Etherisc will instantly release funds to an insured individual. Flight insurance, for example, where a premium is paid in the event of a delayed or cancelled flight, can be automated.
• Musicians and artists can tokenize releases of their art and offer them directly to fans, increasing profit margins for the artist by disintermediating management corporations, as seen recently with the non-fungible token mania.

These application cases include both monetary and non-monetary elements, such as art or travel insurance.

Non-Financial

Decentralized Autonomous Organizations (DAOs) and decentralized file storage are two examples. The percentage of tokens owned native to that blockchain determines voting rights in a DAO. Legal teams, executives, and boards of directors are no longer required because company decisions are determined through a voting mechanism and enforced by a blockchain contract.

Individuals can also rent out their free disc space in file storage systems in exchange for blockchain tokens. Individuals who need additional disc space can discover people who have extra space and pay them at rates often lower than centralized cloud services.

Short-Term Bull Case

Due to structural outflows of supply imposed by the London fork (EIP1559) and the staggered Ethereum 2.0 rollout, a huge supply/demand mismatch is expected. On flows alone, there is a short-term (18-month) upside. So, there will be a short-term bull run in the ethereum crypto market due to demand mismatch. Before that, some questions need to be answered.

• Is it scalable enough to handle a large number of frequent, complex transactions?

Yes, ETH 2.0 plus rollups lower gas fees to the point that cost/Stx outperforms payment processors, and computation cost/byte will compete with software and infrastructure providers around 2022 when verification is prioritized. Existing payment companies are out-competed in terms of transaction size, latency, and frequency.

• Will it outperform existing alternatives (both blockchain and non-blockchain)?

Yes, blockchain P2P is a better paradigm because it has a lower cost base, greater security, stronger ecosystem incentives, similar or better transaction ability. Its interoperability allows for more innovation over a larger Total Addressable Market (TAM).

Risks Involved During The Short Term Bull Case

There are certain risks involved in this. Let’s see what those are.

• The London forks/ETH 2.0 are not passed.
• Short-term sell pressure causes volatility to fall, causing existing players to liquidate and inhibiting narrative adoption.
• Regulators cripple fiat onramp chokepoints.
• Competition from other Layer 1’s is fierce.

What is happening in the Ethereum Crypto market?

• Last year, Ethereum was pouring out of exchanges at a rapid pace. Cryptocurrencies flowing out of exchanges often signify a recent purchase and the transfer of the cryptocurrency to a personal wallet.
• Long positions in Ether substantially outnumber short positions, accounting for over 75.8% of all positions.
• Ethereum 2.0, often known as ETH  2.0, is an upgrade to Ethereum that promises faster and cheaper transactions, allowing the network to reach a wider audience.
• With more people using the network, the price may rise.
• Some think that Ethereum is following in the footsteps of Bitcoin and that if the bull market continues, it may hit $15,000 in this cycle.
• All cryptocurrencies are still inextricably linked to Bitcoin and heavily reliant on its performance.

Ethereum is a protocol worth investing in, albeit it comes with a higher risk due to its infancy. It features an asymmetric risk/reward profile, similar to Bitcoin. However, just as Bitcoin’s scaling concerns in 2017 led to the Bitcoin Cash hard fork, Segregated Witness, and finally the Lightning Network, Ethereum will face a defining moment in the next five years. 

Finally, most investors have grossly undervalued or misunderstood the industry. There’s no such thing as a “new Bitcoin” or “next Ethereum”. Bitcoin is the most widely used monetary network, whereas Ethereum is the most widely used application network. 

The next big blockchain protocol will be in a completely different business, whether a gaming network, a tokenized asset ownership network, an insurance network or something else entirely. Let’s wait and watch.