Ethereum: High Risk, Better Reward


  • I believe Ethereum is set to outperform Bitcoin in the coming rally.
  • Ethereum has a much larger utility than Bitcoin and could one day surpass it in market capitalization.
  • However, Ethereum is facing competition from newer and "better" cryptocurrencies, which makes it a riskier investment.
  • Thesis Summary

    I believe Ethereum (ETH-USD) may be set to outperform other major cryptocurrencies in the coming bull rally. Despite its shortcomings, Ethereum continues to be the most valuable Blockchain, and the upcoming updates will cement its position in the world of decentralized finance and technology. Ethereum plays a very different role to Bitcoin (BTC-USD), and while I think both are worth owning, Ethereum offers a higher reward, though perhaps also, higher risk.

    It’s a Bull Market, Especially for Ethereum

    As I’ve explained in previous articles, I believe that we are still in the final stages of a bull market. Since I last wrote on Bitcoin, we have seen the cryptocurrency make a new all-time high, but since retrace to near $60,000. Ether, on the other hand, hasn’t quite broken through the ATH it made back in May when it reached $4,178. With that said, I believe there are a few factors that lead me to believe that Ether will outperform Bitcoin in the next few months, and even more so long-term, to the point that one day Ether’s market cap could surpass that of Bitcoin.

    For starters, we are already seeing more strength in Ethereum than Bitcoin, with the former holding a lot better during the pull-back of the last week. On top of that, in the past Ethereum has amplified returns versus Bitcoin during bull markets. But the true reason why I believe Ethereum will outperform Bitcoin, and most other cryptocurrencies, lies in its fundamentals.

    Don’t get me wrong, I am not saying that you shouldn’t own Bitcoin too. Both Bitcoin and Ether play different but necessary, even complementary roles, in the cryptocurrency ecosystem. While Bitcoin provides a stable source of value, Ether is the breeding ground for DeFi and other decentralized applications. The fact that Ether is moving to Proof-of-Stake (arguably more practical), while Bitcoin is remaining a Proof-of-Work blockchain (arguably more secure and with a more grounded value, since large amounts of computational power are required to run it) just accentuates this complementary relationship.

    Having said this, the possibilities for growth and utility for Ether seem to be much larger than for Bitcoin. Many have already compared Bitcoin to gold, which I find to be an apt comparison. This means that ultimately, Bitcoin’s utility is limited to acting as a store of value. Gold has a market cap of over $11 Trillion, which we could use as a preliminary target for Bitcoin, which currently sits at over $1 Trillion.

    Ethereum, on the other hand, has many more potential applications. Just taking DeFi, for instance, we are looking at something that could potentially replace banking and finance as we know it. According to Statista, the global banking market is worth over $7 trillion. But this is just the beginning, we have many other industries that Ethereum could host, including gaming, art (NFTs), and most significantly what we encompass as “Information Technology”, an industry worth over $16 Trillion.

    Long-term Targets

    We have to consider that market cap doesn’t necessarily imply better price-performance because supply will increase in the next few years. Bitcoin’s supply is capped at 21 million, with around 18 million already in circulation. Meanwhile, there are 118 million Ethereum in circulation, with this number increasing by a maximum of 18 million every year.

    What could Bitcoin and Ethereum price and market cap look like in 2025? If we take the assumptions above and say that Bitcoin could “take the place” of gold by then, we’d be looking at a market cap of $11 Trillion, with around 19.5 million Bitcoin in circulation. This would mean each Bitcoin could be worth close to $560,000, representing a 9-fold increase from today’s price.

    And what about Ether? This is a hard question to answer, but we can also get a sense of where Ethereum is going by the numbers laid out above. Right now, Ethereum’s market cap stands at half a Trillion, but there is plenty of room to grow if we consider all the business that could move into Ethereum’s blockchain. If by 2025 Ether captures half the market cap of the banking sector and the Information Technology Industry, we’d also be looking at a capitalization of $11 Trillion. Let’s round that to $10 Trillion to be cautious. By 2025 there would be close to 200 million Ethereum in circulation, with each worth around $50,000. This represents roughly a 12.5x increase from today’s price.

    Of course, the scenario laid out above is optimistic, both for Bitcoin and Ethereum, but it serves to prove the point that Ethereum has the potential to deliver superior returns to Bitcoin. The utility for Ethereum is much bigger, and we are still in the early stages of adoption.

    High Risk, High Reward

    Having said that, Ethereum could be considered a more risky investment than Bitcoin. Bitcoin’s place in the cryptocurrency space seems to be tightly secured, and I don’t see another cryptocurrency taking the place of Bitcoin. But this is not the case with Ethereum, which is under threat from various other cryptocurrencies that promise to do what Ethereum does, only better.

    Transactions in Ethereum are slow and costly, and other cryptocurrencies like Solana (SOL-USD) and Cardano (ADA-USD) could be considered “superior” alternatives to Ethereum. Solana, for example, can carry out 50,000 transactions per second, and ADA can now support smart contracts following the Alonzo update.

    Ethereum 2.0 promises to solve most of the cryptocurrencies' shortcomings. Once Ethereum 2.0 launches, the blockchain should be able to process up to 100,000 transactions per second. This should also significantly lower gas fees and gas price volatility since the network will suffer less congestion. On top of that, the transition to Ethereum 2.0 should make the cryptocurrency even more secure, due to a large number of validators.

    Another concern with Ethereum is its coding language, Solidity, which can be challenging to code. Having looked into the topic, it seems like the language in itself is simple enough to understand, and those familiar with JavaScript should be able to pick it up easily. The real problem comes when implementing smart contracts because there is little room for error, running apps is costly, and in the case of DeFi, you are dealing with people's money directly.

    With that said, I don't think that we can say with certainty that other cryptocurrencies offer a better way of doing this. Smart contracts are relatively new so we have little to go on. Most of the real-world applications are on Ethereum, and despite limitations, DApps have taken off like never before. Ethereum still offers the best place to build smart contracts, and until this changes, it has the upper hand.

    In the past, I have expressed concerns that Ethereum could one day become the MySpace of cryptocurrencies. Indeed, I have diversified my portfolio into many other cryptocurrencies like Solana, ADA and Polkadot (DOT-USD). But I do believe Ethereum still offers the best risk/reward ratio out there, especially for those just getting started in the crypto space.

    Ethereum has a first-mover advantage and network effects in its favour. The Ethereum ecosystem continues to grow, even with “better” alternatives out there, and this won’t change any time soon. We can't underestimate how important this kind of momentum is. Let's consider just how relatively "slow" blockchain adoption has been since Bitcoin came out. Only in the last few years have we seen major companies like Mastercard (MA) and JPMorgan Chase (JPMinvest money into the space.

    When it comes to cryptocurrencies, speed and cost are important, but not as important as network and security. The simple fact that Ethereum has a proven track record puts it leaps ahead of the smaller competitors. In short, I don't see Solana or Cardano receiving the kind of business and institutional support that Ethereum has behind it any time soon.

    What I do believe though is that we will see other blockchains emerge into the mainstream to complement Ethereum. While Ethereum won’t be dethroned, it will have to share a space with other cryptocurrencies, which does mean that, perhaps, its future growth could be limited as these other cryptocurrencies chip away at Ether’s market cap.

    Final Thoughts

    Ethereum holds a privileged place in the cryptocurrency space. In the future, it could power most of the world’s applications, which is why I think the potential for growth and appreciation is much larger than for other cryptocurrencies, especially Bitcoin. Though there are other alternatives out there, Ethereum has momentum and institutional support on its side, and with the coming updates, Ethereum will become faster and cheaper, making the investment case even more compelling. There is always a risk that Ethereum could be dethroned, but I believe the potential return far outweighs the risk at this point.

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