Why Bitcoin Is Digital Gold And
Ether Is The Currency of The Future
* Bitcoin is becoming established as a pristine monetary asset.
* Ethereum’s protocol is much more complex and flexible than Bitcoin. However, ether is Ethereum's native monetary asset and it has arguably superior monetary properties when compared to bitcoin, gold and fiat money.
* Ether is much more similar to money than it is to oil. However, it is a multifaceted asset that can be valued as:
* Monetized Commodity
* Growth Tech Stock
* Consumable Resource
* ETH will become more scarce than BTC. ETH's net issuance rate is projected to become near 0% as soon as the fourth quarter of 2021, but not later than the end of 2022. This will be primarily possible due to the switch to PoS and transaction fee burning from EIP-1559.
* Ethereum's network "utility" is hosting its own digital economy, and it is using ether as its primary monetary asset. This means that ether's value is not restricted by supply side scarcity. It is also driven by its demand as collateral and a medium of exchange (DeFi, ICOs and NFTs). Transaction fees are also becoming an important contributor to ETH's demand (Ethereum's daily fee revenue is ranging from 30 to 70 times higher than BTC's).
* An argument can be made that demand side impact for money as a facilitator of economic activity is even more important than its properties related to wealth preservation. This theory would explain why the global money supply (the total amount of fiat money in the world) is worth about ten times more than gold's market capitalization (the market price of all the gold in the world). This will contribute to ether’s valuation when compared to bitcoin.
* Ethereum's combination of persistence, permanence, utility and scalability will cement it as the #1 monetary network. Ethereum Killers will likely become Layer 2+ (sidechains) scaling solutions to Ethereum. They will be much more scalable than Ethereum, but permanence is more important than utility when it comes to monetary networks and value retention. These networks can prosper, but they must be valued primarily on a cash flow basis as cloud service providers as opposed to monetary assets.
* Multiple unprecedented macro factors are lined up and creating a massive appeal for cryptocurrencies. This will continue to drive institutional and retail demand for Bitcoin and Ethereum. At the bare minimum, Bitcoin and Ethereum should be considered an important hedge against other asset classes and the prospect of inflation.
In 2020, Bitcoin and cryptocurrencies reentered the media spotlight as a new crypto bull cycle began. In the same year, Bitcoin surpassed its previous all time high of $20,000 and reached almost $30,000. Public interest in Bitcoin as a better alternative to gold also increased due to central banks' engagement in unprecedented expansionary monetary policies. Bitcoin is establishing itself as a pristine monetary asset due to its artificial scarcity that limits the maximum number of bitcoins to 21 million.
In the wake of its success, countless new cryptocurrencies emerged as possible contenders. Amongst them, Ethereum: a transformative cryptocurrency that continues to evolve into what many investors in the space believe will become the dominant monetary asset in the world. This belief is founded on technical enhancements that will potentially turn ether into a deflationary asset while at the same time being uniquely positioned to facilitate economic activity as the most frictionless form of money in existence.
Ethereum investors tend to understand that network upgrades currently being implemented will result in a sustainable monetary policy with near 0% issuance and the potential for ether to become a deflationary asset. What is even more interesting is that the net return of ether as a SoV (store of value) becomes superior to bitcoin the moment that issuance is lower than the staking yield (a form of passive income that will be provided to ether long term holders). In other words, even if Bitcoin had already ceased issuance, it offers no mechanism to provide yield to long term holders with a negligible risk exposure as Ethereum does.
There is an execution risk that Ethereum will not deliver on what is currently planned, but if it does, then it will become more scarce than Bitcoin could ever become under its cryptoeconomic model. However, the focus on scarcity as the primary contributor of value to a monetary asset is arguably misplaced. A dissection of the intrinsic value of money and how it is used can reveal a different story where value is primarily derived from the facilitation of economic activity rather than scarcity. In this regard, Ethereum has a tremendous advantage over Bitcoin because what is often described as “Ethereum’s utility” is actually the economic activity occurring in its digital domain.
Bitcoin seems fast and frictionless, but that is only because it is being compared to something in the physical world. In digital terms Bitcoin emulates the friction of operation that is found with gold: it is difficult and expensive to move it, securing it yourself is not trivial, and it does not make for a great medium of exchange. This is not an ideal dynamic for a system which will ultimately rely solely on transaction fees, and it raises concerns about the long term sustainability of the system. This may be a subjective interpretation of it, but regarding this particular situation it is nearly impossible to make objective assertions at this point. It is possible to assert that, in the digital world, the expectation of frictionless money would entail near instant transactions without the risk of irreversibly losing funds due to simple mistakes.
Cryptocurrencies do not offer any mechanism to recover lost funds in case an account gets compromised by a hacker or a mistake is made during a transaction (like keying in the wrong recipient address); this is a serious problem. It is the reason why dealing with cryptocurrencies directly involves a level of risk/paranoia similar to dealing with nuclear waste and having a hacker watching your every move waiting for you to make a mistake to snatch it away. Digital money would also need to be fully programmable and interact with other digital assets, preferably defined and operated within the same ecosystem. Ethereum is steaming ahead on all fronts.
Unlike Bitcoin, Ethereum is a fully programmable protocol that is capable of fostering a digital economy (this is a very important part of understanding the value of ether) in addition to hosting its own native monetary asset called ether. A set of financial applications running on Ethereum are creating a form of decentralized financial system (DeFi) that is dramatically more efficient, reliable, and inclusive when compared to our traditional financial system. DeFi is one of the reasons Ethereum is currently (as of 8-13-2021) generating about thirty-four times more transaction fee revenue than Bitcoin, but it is just one of the almost infinite applications that can be provided by the Ethereum network.
In addition, multiple scaling technologies called “Layer 2 solutions” will greatly increase Ethereum’s transaction capacity. These are going live as we speak, and it appears they will be much more practical and provide better user experience when compared to Bitcoin’s scaling solution called the “Lightning Network”. This will help to amplify Layer 1 block space value and push transaction fee revenue even higher. That will be followed by EIP-1559, which is an enhancement designed to stabilize fees, improve security related to edge cases, and create a deflationary mechanism through the partial destruction of transaction fees.
Eventually the transition to Proof of Stake (PoS) will dramatically cut the operational cost of the network. That means that Ethereum as a business will become more profitable and less reliant on the issuance subsidy. Finally, we will see the introduction of sharding which will scale Layer 1 by 100 times, compounding the effect of Layer 2 solutions and making it feasible for the network to operate as a platform for new use cases.
A solution to the hacker/nuclear waste security situation is being explored via social recovery wallets. Social recovery wallets leverage Ethereum’s programmable capabilities to create a dynamic that is a mixture of self-secured “be your own bank” cryptocurrencies with the protection advantages offered by the traditional banking system. It is still in the early stages of research and design, but it is important to realize that the Ethereum community recognizes it as a problem and is working on a solution.
The combination of Ethereum’s monetary policy, its programmable capabilities, and its scaling roadmap will pave the way for ether to become a more valuable asset than bitcoin and gold because it will be more scarce, significantly more useful, and provides passive income to long term holders.
Ethereum is a once in a lifetime investment opportunity, but it is also much more than that. It is an awe inspiring technology and a tool that promotes democracy and the betterment of mankind. At its core, Ethereum is about leveling the playing field. It is about breaking chains and removing gatekeepers. It is an unstoppable force because it is not just driven by individual financial gains. It is driven by the passionate desire to be part of something much bigger than ourselves; something that can truly make the world a better place. It is real, and once you see how Ethereum can achieve this, you too will become passionate about it. In the end, Ethereum will not lead us to utopia, but it will save us from dystopia, and it will make the pursuit of happiness much more attainable.
A Personal Perspective About Bitcoin and Ethereum’s Potential as Currencies
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