Since the explosion in the price that lasted through most of last year, Bitcoin’s dominance has slowly been dropping. This is largely due to network congestion caused by its own popularity. With more people trying to use BTC, the blocks comprising the blockchain get full of transaction data. This causes users to increase the fees they pay to get their transaction noticed by the network. The higher the fee paid, the faster the transaction should be confirmed. Such a situation caused some people to declare that Bitcoin was broken, prompting them to explore alternatives for quick, cheap, and reliable digital transactions. Some, like Roger Ver et al. took matters into their own hands by creating an alternate version of Bitcoin with larger blocks. The developers of Bitcoin Cash increased the block size to 8mb in August of 2017, creating two chains and two different crypto coins (a fork). However, a recent yearlong study by Microsoft into on-chain scaling (a fancy term used for increasing the block size) concluded that the optimum way to allow for more transactions per second was to look for second layer protocols, such as Lightning Network and Segwit.
Seeking an alternative, Bitcoin’s market cap bled into the exploding altcoin sector. Many of the second-generation coins promised things that those in the Bitcoin community were still busy squabbling over. One which promised a lot, and which has already made early advocates incredibly wealthy, is the number two cryptocurrency in terms of market cap, Ethereum. With it already seeing massive gains throughout 2017, it’s understandable that many ask “Is Ethereum’s native currency, Ether, still a good investment? Should I buy Ethereum   or not?”
What Makes Ethereum Different to Bitcoin?
Faster network and lower fees
If it was slow confirmation times and large fees that prompted the initial migration away from Bitcoin, surely the currencies that benefited most from the redistribution of funds away from the oldest and most well-established cryptocurrency would have to offer quicker and cheaper transactions themselves. Ether, the Ethereum platform’s native currency, provides just that. With a 12 second block time, compared to 10 minutes it takes new blocks to be formed on the Bitcoin network, the Ethereum network can deliver many more transactions per second than its rival. By its very design, it’s better equipped to deal with global traffic than Bitcoin. This makes it appear a better cryptocurrency, and therefore a solid investment.
However, it isn’t perfect yet. Scaling affects all blockchains when they reach sufficient transactions a second to fill up blocks. This amount of data a block can fit might be higher on Ethereum. But the potentially more complex nature of transactions using Ether and the fact that a single game involving collectible cats on the network caused it to grind to a halt, imply that the network is under just as much pressure as Bitcoin to scale.
Dapps and Smart Contracts
What really differentiates Ethereum from many of the other cryptocurrencies and blockchain projects out there is its inbuilt programming language. This allows developers to create decentralized applications directly on the blockchain. These applications are then powered by Ether tokens. This is the ace up Ethereum’s sleeve. Ether will be required by developers in creating the applications and users when interacting with them. Whilst there are few examples of these dApps working at present, there is no shortage of companies experimenting with the smart contract technology. If just one killer application is launched on Ethereum, the value of every Ether in existence could soar overnight.
Enterprise Ethereum Alliance
Finally, there’s the Enterprise Ethereum Alliance. This is a group of the planet’s largest companies who are experimenting with Ethereum in either a public or private capacity. With every announcement from them, the price of ETH seems to leap up and stay up. Just a glance at the names associated with the EEA is enough to tell you why. Credit Suisse, BP, Intel, MasterCard, Microsoft, and Pfizer are amongst those most recognizable from the “who’s who” of the planet’s largest companies that forms the list of alliance members. With many of the world’s largest companies running tests on the Ethereum network, the chances of a killer dApp emerging on the platform is substantially higher. These powerhouses of global industry know exactly how to present billions of people with an idea and make it stick. With the help of the EEA, a product or service built on top of Ethereum that provides utility for enough people would send the price “to the moon” to steal a well-worn phrase.
An Uphill Struggle
That isn’t to say that an investment in Ethereum is a pathway to a guaranteed fortune. There are several issues that the platform faces that could cause it to implode before reaching the heights its developers are hoping it can. Firstly, it faces competition. The likes of NEO are also seeking to become the planet’s premier smart contract platform. They offer more accessible programming languages for their developers, as well as a proof-of-stake system for confirming transactions rather than the energy intensive proof-of-work algorithm Ethereum currently uses. Bitcoin itself has developers working on its own smart contract functionality too. This would provide a truly decentralized platform for the revolutionary new settlement method, rather than subsequent cryptocurrency’s reliance on centralized companies to steer the direction of a project.
Then there are regulatory pressures. These are common throughout the cryptocurrency space. A surprise blanket ban across the globe tomorrow on all digital tokens and assets would certainly hurt an investment made today. However, Ethereum faces its own unique challenges when it comes to the law. This is thanks to one of the use cases that emerged from smart contract technology.
ICOs or initial coin offerings (the process by which many developers seek funding for the dApps) could spell disaster for Ethereum on multiple fronts. Firstly, nations could decide that holding ICOs is illegal. This would cause buying pressure to dry up for Ethereum (at least for the short term), and the price would drop suddenly. Secondly, and also from a financial point of view, if ICOs continue to draw huge sums of money, the price of ETH will be driven up in the short term. People need to use ETH to swap for the tokens associated with the company they’re backing through ICO. However, with hundreds of millions of dollars of ETH sitting in one place, the selling pressure created by just one of these huge fundraisers deciding to cash out could easily crash the price. This could cause a mass selloff and destroy an investment.
These are just a few of the shortcomings that could hinder the success of investments in Ethereum. There are many more. The point is, there is no such thing as a risk-free investment, and within no sector is that truer than the cryptocurrency space. Whilst there is certainly a lot of upside potential with ETH, one of many setbacks could render the project naught but a pipedream in the eye of its developers. Always invest wisely and be responsible for your own finances.
Mary Ann Callahan, Blockchain and Bitcoin Expert/Consultant, Freelance Journalist, Cex.io
Mary Ann Callahan was born in Madrid, Spain. She is an expert in Bitcoin and Blockchain-related topics. Her experience has spanned across the high technology and data worlds for more than a decade, as well as many other industries, from her current work as a Journalist and Blockchain authority/consultant at Cex.io, a cryptocurrency exchange, to work at Social Media Marketing Manager at Boston Globe Media, and within the Morrison & Foerster LLP. She holds a B.S in Economics from Yale University, and a M.S. in Journalism from Columbia University. She has written on many technical topics, especially related to Blockchain security, Bitcoin regulations for many different countries, and related purchase and help guides.