Reading about Ethereum has been a really interesting adventure into the incredibly powerful information bubbles we live in and the market bubbles they create.

At the start of the year, Ethereum was worth about USD$30. At that time I was trying to figure out how to start mining it. I was having some trouble and decided to pause for a few months. Fast forward to May and it is worth USD$150 per unit. At this time, I learned my computer couldn’t handle mining Ethereum. Within a month, Ethereum topped out at around USD$420. As I write this, it has started to crash (a.k.a. perform a market correction,) back to the USD$200 range.

Leading up to and during this market spike, there was an incredible amount of press being generated. Companies were doing ICOs (initial coin offerings,) where their digital coin would be built on top of the technology of Ethereum itself. Other companies performing services related to cryptocurrencies were gaining millions of dollars from startup investors. And, the optimal video cards that were used to mine Ethereum were selling out worldwide. All of this was being publicized.

On top of that, professional finance traders were creating or attempting to create and trade cryptocurrency portfolios. To follow suit, local and national governments were quickly rolling out regulation or legislation regarding tax codes, legality of trading or running portfolios, and legality of accepting or using cryptocurrency as a form of payment.

It’s really been a fascinating ride in such an incredibly short period of time. The creator of the currency Vitalik Butern has even been elevated to a celebrity-like status, all for the value of the currency.

It seems as though many people enjoy making money, and are therefore willing to invest a lot of time or money into doing so, especially if it seems easy, the gains seem large, or it seems like they are getting in ahead of everyone else. A lot of the details of the product or service itself seem to be secondary to this intuition.

Vitalik’s ideas are really transformative, and his software has the great potential to follow through with those ideas. However, his celebrity comes from the value that he can provide to investors, which is then linked to the ideas he has, which is then linked to the actual software his team is creating.

Interestingly enough, that hierarchy of value should be almost the opposite. The idea should be transformative, which should be backed up by software that is possible to build, which should then be backed up by a team that is capable of building it, which should then link to a potential to make money.

The issue with information imbalance and the market is this: if you are going to make more than a %100 return on any single investment, it’s probably going to be over a long period of time, on something that you fundamentally understand more than a majority of the people who are paying attention, because you got lucky, and/or there was some reason for why the market overhyped or quickly valued the thing you were investing in.

When you look at a bubble, it’s easy to amass every investor into one solid lump, however there are different cohorts of investors (groups of people that invest at different times,) and within each of those cohorts, there are investors with different investment strategies and philosophies.

With Ethereum, there are people who fundamentally understand the computer science behind Ethereum at the deepest level. There are people who fundamentally understand the market logic behind it. There are people who have a somewhat solid grasp of both. There are people who are wowed by the ideas behind why the technology was created. There are people who understand Bitcoin and view Ethereum as a Bitcoin analogy. There are people who like the idea of free money, and are willing to use their computers to mine digital currency. There are people who want to make immediate short term gains. There are people who want to make the same long term gains as others did in Bitcoin.

But no matter who you were, if you were investing in Ethereum right now, you were probably excited.

A friend explained an investment mentality to me that was very telling.

“People want to buy ETH because they feel like they missed out on Bitcoin. They don’t want to miss out this time around.”

Investing in a currency that is bubbling can be a very dramatic experience. The price is increasing fast, but at the same time, every day it drops, by some unpredictable amount and may never go back up. Everyone knows they’re in a bubble, no one knows when it will stop, and everyone hopes they get out before the next sucker.

In the case of Ethereum, it’s a little different, because many Ethereum investors expect Ethereum trends to historically mirror Bitcoin trends, and over long term periods of time, they expect it to reach the same value (which is currently around $2000.)

However, there are a few very important caveats to that mentality that are often overlooked. Trading is a game. It is a zero-sum game to be exact, however it may not always appear to be. In every game, there are players, and many players operate off of a set of rules and assumptions. If you are operating off of the assumption that Ethereum will mirror Bitcoin prices, and you expect the rest of the market to be operating off of that assumption, everyone is going to sabotage each other for a number of reasons.

To give a little clarity here. Bitcoin has had two historic price spikes. The first, within a year or so of the currency coming into existence, it spiked to over $1000. Then it crashed below that amount for around 5 years, before steadily rising to the approximately $2000/per coin it is at now.

Back to the reasons…

Reason 1) the market is overly full of people who are prospecting, rather than people who understand and value the currency for what it is. This means that there aren’t really any other people to sell Ethereum to, other than the other people who think the currency will be worth even more than what you think it will be.

Reason 2) If the apex of Bitcoin’s first price spike was $1000, if you are smart, you will sell Ethereum at $999 and buy back more when it bottoms out. If you are smarter, you’ll realize that someone else will try to sell at $999, so you may sell at $900, $800, $500, and so on.

Reason 3) If you are even smarter than the people using Reason 2 to invest, you’ll make a long term financial decision to invest, assuming that Ethereum will match or exceed current Bitcoin prices at $2000. However, there is absolutely no guarantee that Bitcoin itself is stable, or has any kind of long term future, nor is there a guarantee that Ethereum does either. They are just the most promising currencies currently on the market. That said, if this is your mentality, you will be buying Ethereum from other people. Most likely, people who invested a lot of money at the outset when Ethereum was closer to $40. Those people are incentivized to make or spread wild predictions that Ethereum will reach heights of $10,000 or $100,000 (yes I have actually read reports that state this.) And due to a combination of a game of hot potato and The Emperor’s New Clothes, you are now incentivized to do the same.

There are many, many other factors to a bubble, but these three are primarily why the bubble’s beginning, end, length and timing are so unpredictable.

On top of all of this, the financial market behind cryptocurrency, at least in the US, is unregulated. This means that there are a lot of classic schemes that you can fall prey to without the common legal protections that people of the US have in place to protect from predatory trading practices. This means that financial institutions, such as Coinbase can make all kinds of statements about the trading of currencies they reap financial rewards from, without having to worry much about the legal ramifications of doing so. To be clear, there are still legal ramifications for standard shady business practices, but there are no extra protections in place for consumers that normally would be if they were regulated like a standard financial institution.

Here is a video of a project manager from Coinbase talking about the cryptocurrency that they sell.

Here is an example of the character Jordan Belfort performing a pump and dump scheme, where he outright lies to a potential investor to make a sale.

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There’s a huge difference between these two videos. Adam White is giving legitimate information, while Jordan Belfort is outright lying. The one thing they do share in common is that neither person says anything negative about the thing they are selling, and both people promote their services in relation to the thing they are selling.

When buying a piece of Ethereum, you will not have a roster of all other people that own it, and what their intentions are.

What you do have access to is a bunch of information on the internet about how the currency works, how people are currently using it, and what kind of press it’s getting.

If you have a high level understanding of computer science, you can read into the details of the underlying code behind Ethereum and make value judgements based on that.

If you have a high level understanding of project organization or business implementation, you can make value judgements based on the team that is creating Ethereum.

If you have a high level understanding of how markets work, you can also make value judgments based on the market data right in front of you.

You’d think that understanding the market data would prime you to make short term gains by trading Ethereum during it’s bubble, however there are a fair amount of studies that show that most financial managers struggle to outperform the NASDAQ index and that it is fairly rare for someone who has had success timing the market once, to consistently time the market. This means, even with experience, it’s unlikely that even a professional would be able to time the Ethereum market with enough consistency to make more money than they lost.

For the uninitiated, timing the market is buying low and selling high. The issue with that simple statement, and why I’m mildly offended when people offer it as investment advice, is that you will never know where the price is going to go next. You could buy low, and the price could drop lower. You could sell high, and the price goes even higher, never to come back down again. In order to consistently time the market, you’d have to buy low, sell high, buy lower than you sold, ad infinitum. You’d have to know how much the price would drop or raise and when. If you could do this, it would defeat the purpose of a stock market.

What we all get instead is the value of retrospective insight. We get to look back at the moments where we interacted with Ethereum previously, consider our state of mind back then, and then compare it to what we are thinking now and either kick ourselves in the butt, or pat ourselves on the back. This type of thinking seems logical, but is almost the antithesis of it.

Proper investment isn’t related to how you feel, or how much you like making money, or how much money you could have made if you had made all of the right decisions at the right time.

Proper investment is often tied to understanding something much more deeply than the rest of the market does, getting in early while it’s still cheap and no one else gets it, and getting out at the point where most of the available market has picked up on the idea. Alternatively, you could be investing in an idea that has really great stability and longevity and you can just kind of leave your money in there while it takes care of itself.

The current opinion of the timing of the Ethereum market is that it is expensive now, however it will be even more expensive in the future when the rest of the world catches on to how valuable it is. I like that idea, and it could be true, but I really don’t have enough foresight to know.

Realistically, proper investment is not limited to one thing. It should be money that you’ve invested in a group of funds. Each fund would be invested in a group of companies or ideas. That is, in essence, a retirement fund, which is not exciting, and though that kind of stability is what will make Ethereum viable as a functional currency, that kind of stability is not at all what is interesting the current cohort of Ethereum miners and investors.

I mean, who would want to buy stuff with a dollar if today it’s going to get you a Playstation, and tomorrow it’s going to get you a box of Pixie Stix.

And who wouldn’t be excited in investing in a box of Pixie Stix that could magically transform into a Playstation?

The real, long term, profit from Ethereum comes from it’s ability to be used by the general public, or by some large and or stable entity.

For example, Wal-Mart used blockchain technology to improve the tracking of food safety from farm to soul-crushing-town-destroying-store. This news popped up in a few Ethereum blogs, which just served to bolster the hype. However, if you read the article, you can see that Wal-Mart used blockchain technology developed by IBM, not Ethereum. That said, this article or a rewritten version of it popped up in many Ethereum news feeds and were worded in ways which made it sound like Ethereum itself was used.

It is also worth considering that Ethereum itself has multiple versions that can be implemented by an organization, and not all of them are tied to the ETH currency that everyone is mining and trading.

If you don’t already know, a blockchain is a distributed ledger, which means that a peer-to-peer network verifies all transactions that have ever occured (at the risk of oversimplifying it.) This means that everyone knows what everyone else has done, so there is no need for a central authority, like a bank, to keep track of everything. The primary and most public form of Ethereum is the public blockchain under which the currency is created. Each peer (computer that is mining Ethereum) is a node, the blockchain itself is public, and when you have enough nodes working together, you can verify that a transaction is legitimate.

Alternative forms of this blockchain can be private or have trusted nodes. Private blockchains mean that the public cannot access them (which is most likely the kind of blockchain Wal-Mart used.) Trusted nodes mean that those nodes’ verification of transactions take precedent over other nodes that aren’t considered to be trusted.

If you know anything about corporate culture, it should be blindingly obvious that most traditional corporate entities with large amounts of capital are going to invest in technology that is easy to control before investing in experimental technology that is unpredictably affected by the outside world. What this potentially looks like is the first large wave of adoption coming from companies like Wal-Mart will be in the form of them dipping their toes in the water by using private blockchains, and/or blockchains with trusted nodes.

These kinds of blockchains can be fundamentally useful, but violate the underpinning philosophy behind Ethereum (of a market that is free of all financial middlemen,) upon which many people are investing. On top of that, these kinds of blockchains do not interact with the public Ethereum blockchain that everyone is investing in. In short this means that they may use Ethereum technology but not actually directly contribute to the use of the public blockchain (labelled ETH, that everyone is buying and selling.)

Furthermore, any kind of created value through use could come from literally anyone. So while traditional Fortune 500 companies may not instill immediate value in the currency, some other entity may figure out a highly useful and profitable way to take advantage of the public Ethereum blockchain. They also might not, or the technology implementation could be underwhelming, or it could be really great, but not live up to the financial hype that Ethereum market was expecting.

When you see a lot of confidence in a very new technology like this you have to ask why. Not the blinded “Tell me why I should invest my money in this,” version of the question. You should ask the reality questions like “Why do people think this is valuable,” “How long to they expect to invest,” “What industry leaders already have plans to create viable technology or businesses off of this technology,” “What exactly is it about the technology that is fundamentally game changing,” “Are there any holes,” “How could it fail?”

When I asked these questions, I really couldn’t come up with anything other than: people think Ethereum will be better than Bitcoin, potentially. They they often know about 40–80% of why. And, they have no idea how the currency will replace current financial markets other than that they just don’t like current financial markets in general.

When it’s hard to make decisions on your own, it’s easy to default to experts. As I wrote earlier, prominent financial institutions and investors were creating investment funds around cryptocurrency. If you paid any attention to the financial crash earlier this century, you’d know that men in suits do not always recommend the best stocks.

In addition, many startups were being created around products that were based off of Ethereum alone and were getting fully funded quickly, in some cases, before the creators of the businesses were even able to explain exactly how their business would effectively use the blockchain. Everyone wanted money and they wanted to get it from the blockchain.

Some articles I read referenced court proceedings, or official corporate announcements, however others were just word of mouth accounts of what the culture was like. The point is, whether or not the information was 100% accurate, everyone was reading it and trading on it.

Before I dive into startup insanity, here is what is completely absurd about an subset of an industry built on top of a software that is still in a beta testing phase. Literally anything that goes wrong with the software or the market surrounding it will tank your entire company… unless you’re really savvy and have built the internal functionality of your company so that it can switch over to operating on top of a different cryptocurrency when the time is needed, but that’s probably about as difficult as creating your own cryptocurrency in the first place.

Here’s the problem with startup investors. They’re stupid. Technically, they are highly intelligent and competitive people making decisions within a smart business model that exists within a somewhat fictional reality, and they often know that. And that kind of stupidity, well, who can blame them. I mean isn’t that really how we all struggle to make meaning of our lives? Plus, at least some of them are probably making good money.

Startups often throw words around like unicorns and 10x. They’re looking for companies that will return the entire fund or more. If you’re investing in cryptocurrency, you’re investing in 10 companies that, after all your research, you truly believe each will return 10x or more each of the money you put back into them. That’s a really crazy ROI, and everyone knows it. So in reality, they all expect 9/10 of those businesses to not return the entire fund, or in many cases, fail outright. Hopefully, the other 1/10 company is supposed to be a unicorn like Google that owns an entire market, thus returning way more than 10x from that investment.

Like other investors, studies have been done on Angel and V.C. investors to see how consistently they outperform each other or the market in general. There are a few notable firms, like Y-combinator that do, however most investors end up not doing much better than had they just put their money in a 401k and let it be.

Let’s take a step back and look at the market and the bubble.

The information I’ve extrapolated from all of this is that Ethereum isn’t guaranteed to be valuable and the current bubble is coming from a lot of people who think it has potential to be. I would have to agree that it has the potential too, but potential is not the same as a guarantee. And many people are treating it as a guarantee.

I thought about how to end this article, as there are so many ways to end it. I had to take into account my own level of credibility and understanding.

There are really so many things that can happen and so many things that are missing from any real evaluation of what ETH is worth.

Before I go into any of that, you really should be familiar with the idea of a black swan. It’s the same idea that keeps people playing the lottery, except the difference between the lottery and a black swan is that everyone sees the lottery winner coming, they just don’t know who it is. With a black swan, it’s a freak event that was completely unpredictable and changed the game entirely. For Verizon, Facebook was a black swan. For Apple and Microsoft, Google was a black swan. 9/11 was a black swan depending on how much attention you were paying to it. The meteor that wiped out the dinosaurs was a black swan (because they didn’t have satellites and astrophysicists.) So just keep in mind, that the reason why most people suggest that you diversify is in part due to the black swans abound in the market. If you’re heavily invested in a very small amount of assets, one giant change can ruin your portfolio.

A crafty way of saying this is:

Unknown, unknowns.

From everything that I’ve read and seen, ETH’s current value is derived from public interest. Almost no one is actually using it for the purpose it’s been designed for, at least no entity that can compare to the amount of people who are mining or investing in the currency.

However, that doesn’t mean that may not happen in the future. In the near term, I am suspicious of any Fortune 500 firm adopting the public Ethereum blockchain in the short term, though they may adopt it sometime in the future, if the currency is in fact as transformative as it claims to be. That said, new firms, organizations, or use cases may pop up for Ethereum that may be as transformative as the currency itself. These ideas haven’t been invented yet, so it’s really hard to know what they will be.

In order to gain any kind of stable functionality as a currency, the value of ETH would have to stablize. For that to happen, ETH (the public blockchain, not the technology itself,) would most likely have to be used in some sustainable and consistent way. ETH is currently hard to understand, use, and get a hold of, so there is a way to go before your grandma can use ETH to buy ice cream at the corner store. However, I would never underestimate greed. If that ever becomes possible, I guarantee that a fair amount of companies or banking divisions would pop up to manage the ETH itself. There are already a few, however they are not as stable or reliable as they claim. More importantly, banks manage things that have value, and outside of speculation, ETH will have to have real use cases in order to retain any kind of value.

Alternatively, Ethereum could end up having some debilitating problems similar to what Bitcoin is experiencing. Ethereum’s proof of stake system should avoid the problems Bitcoin is currently experiencing, but who knows what other problems are abound. That isn’t to say they can’t be fixed but… this question has been raised before. If a decentralized currency requires a central group of programmers to maintain it, is it really decentralized? What happens to the currency if their lives become politicized? On top of that, are there fundamental exploits that can’t be fixed? Are there exploits that can be fixed, but can’t be fixed in time to gain public trust?

Another doomsday scenario is that by the time ETH becomes stabilized, or even before, or after, whenever really… another cryptocurrency comes along that is even better. And that begs the question, if technology advances at such a rapid pace, how quickly can we expect cryptocurrencies to advance in complexity and utility? The thing about a dollar is that it’s always a dollar. It isn’t a more advanced dollar next year. The financial system around it may be, but the dollar’s utility is a fundamental constant. What would a dollar be like if, every year, you had to exchange it for new dollars. Those new dollars, you could never be sure they were as good as the old dollars, but if they were, the value of the old dollars would drop pretty quickly, within months or within a year. It would take a lot of financial analysis to really know what you should be buying and when… just to have the right kind of money to buy things with. That is one potential outcome for cryptocurrencies in general.

Governments could regulate Cryptocurrency in some way as well. They do not have direct control over the currency, but they do have control over regulation of trade, taxation, and punishment for violating their rules in relation to cryptocurrencies. These rules could effect cryptocurrencies in many ways. Positive consumer protections often negatively impact the middlemen that are performing the trade. Regulations like that may immediately hurt the short term value, but bolster the long term value. Regulations like that could also bolster the short term value as it would be a legitimate start to an acceptance of cryptocurrency as a potential norm. The rules could also be draconian or expensive to consumers, unduly punishing or taxing them beyond a point where they would want to use the currency. This response is more than likely to be fragmented across many borders and have a much more nuanced effect on Ethereum’s price.

Another interesting scenario is that Ethereum never really gains a huge market share. The application of the currency could be specific enough that it’s really useful, but it never achieves the same utility as government issued money. Which means that in order to know what the value of a cryptocurrency would be, you’d have to identify the industries it would be relevant to, and any other cryptocurrencies in that market it may be competing with.

Another scenario is that Ethereum has a really slow climb and does eventually become as stable, or more stable than Bitcoin. There are a lot of reasons for why this could happen. The underlying technology behind the currency is supposedly really sound, being developed by a team of highly intelligent people with groundbreaking vision, and is improving every day. The theories around which the currency is based on could be completely true and ETH could be as transformative as it claims to be. This could lead to real world adoption of the currency and it’s utilities over a short or long term period, giving it a real value and stability that can be translated into government issued currency. I really want this to be true, because Ethereum is interesting and I like the vision behind it, but the one place where I differ with the consensus on Ethereum is that this real world value will be explored and created over a longer period of time rather than a short one. That said, the market can be crazy, and there is a potential for a high Ethereum cost where no real value exists yet.

Many people are investing on 1, 5, or 10 year returns. What this means is if you think ETH will be worth $1000 in a year, $2000 in 5, and $10,000 in 10, you would be willing to pay completely different prices for ETH depending on when you wanted to cash out. Let’s say you wanted to double your money. You may be willing to pay $500, $1000, or even $5000 per ETH. As it’s currently valued at $254 (of the time of this post,) it’s a complete steal. (As I was writing this post, the price rebounded to ~$350.)

Calculating a return on gains like that is both intelligent and unintelligent. I would say, if you really understand the market you’re investing in, and all of it’s pitfalls, it’s a completely sensible way to invest. In this case, I can guarantee you most investors (by investors, I mean you and me,) are going off of two graphs. The graph of Bitcoin’s all time price, and the graph of Ethereum’s all time price. This is in no way enough data to understand or project any future price on Ethereum. In fact, it’s just enough to think that you know what is going on before you feel confident about your purchase.

#1 Rule of Wall Street is?

I hate to say it, but the people that made a killing on Ethereum already made a killing. You could probably make some money on it, but who knows how much, or when it will pay out. The next killing to be made on it is by investing millions of dollars into Ethereum (provided you know what you’re doing,) or investing millions of dollars into a legitimate business based around Ethereum (provided you know what you’re doing.) What a lot of people are doing right now are looking into mining or investing other cryptocurrencies that they hope will skyrocket to Ethereum levels. It’s really important to note that these new currencies will also have to contend with Ethereum. In order to be able to understand what will be able to contend with Ethereum, you would have to be able to understand how Bitcoin and Ethereum fundamentally work, and how they fundamentally differ.

But the craziest thing, to me at least, is that bubbles never pop when it makes sense for them to pop. They always pop at times that are hard to predict unless you have the right information. People know they’re in a bubble and trade up and up and up. That keeps going and maybe they forget they’re in a bubble.

Ethereum is expected to switch from mining (where your computer can solve complex cryptography problems in exchange for Ethereum,) to a proof of stake model (where you can no longer mine, but holding and dedicating 32 ETH to the blockchain will allow you to reap transaction fees,) within the next 2–6 months. This switch is intended to fundamentally alter the scarcity of the currency, which is another thing that is driving prices up. No one knows what ETH will be worth when proof of stake comes into play but they do know that they can’t get any more of it. If ETH prices rise over time, it will be harder and harder to acquire enough to set up a proof of stake server, and the only way you will be able to acquire it in the first place would be by purchasing it. So, it could become incredibly scarce. Or, it could really not affect the price very much because most people won’t be interested in running proof of stake servers and will instead be interested in using a stable currency to make transactions, which could drive the price of ETH towards a stable point.

The bubble could pop before proof of stake. It could pop afterwards. It could pop before and another one could happen after proof of stake. It could bubble all the way past proof of stake and pop anywhere from 1–3 years down the line, or potentially even further. So, just because I’ve detailed everything above, and lets say it’s all 100% true and everyone on planet Earth knows it… that just doesn’t prevent a bubble from happening and isn’t predictive of when it will burst.

I can’t honestly make any predictions to you without telling you that I have no idea what will happen. All serious advice I’ve heard on Ethereum investment has been “Invest what you are willing to lose.” And as far as learning about it, I’ve heard that the requisite amount of knowledge to truly understand Ethereum is so incredibly high, that rooms full of intelligent people from many different disciplines meet up at conferences or in groups to share and learn as much as possible. Within those circles, the time and energy you have devoted to learning about Ethereum and all of it’s effects are the largest class separator.