How Vitalik and crew could change the game yet again.

My Birthday!

By the way, it’s my birthday today! HOORAY! This is a picture of me (riding on top) and my dad in his mid-thirties. I’m 49 years old today, so more than a decade older than my dad in this pic.

If you want to send me a birthday present, buy some ETH on https://evercoin.com =) Actually buy or sell anything on Evercoin.

Ok, that’s not what this post is about. This post is the case for ETH.

Caveat

Usual caveat, this blog post is not investment advice, and I am not an investment advisor. I’m just a blogger commenting on cool cryptocurrency topics.

Ether Prices

Here’s the last 60 day BTC/ETH graph on Coingecko

Now one thing to consider is the same time period chart BTC / USD

What does this mean? My way of reading this chart is that ETH right now is very cheap compared to BTC. Watch the BTC /ETH pair, not the ETH / USD pair. Watching the BTC / ETH pair was advice I got from Josh Goldbard from the CryptoLotos Hedge Fund.

Why so Cheap?

Why is Ether so cheap? I attribute it to several factors:

Impact of ICOs: ICO funding just passed VC funding with the huge $252M Filecoin crowdsale via coinlist. A large number of ICOs are based on Ether whether they are ERC20 tokens or they are just using Ether as a medium of transaction to acquire other tokens or SAFT notes. Regardless, the proceeds of ICOs are often liquidated in order to provide operating capital as well as money that can be used by the crowdfunding organization to implement monetary policies (like buybacks). The short version of this is that Billions of dollars are flowing out from ETH in the short to mid term. Bitcoin update: The smooth lock-in of the Segwit “update” and the failed “fork” of Bitcoin Cash have dominated the news cycle recently. All of this has been “good news” for Bitcoin, and all of the buzz has been for Bitcoin which has experienced a “relief rally”. Lack of an Ethereum update: Not only has ETH lacked much of a software update, but there is a lot of buzz and speculation about “Casper” the upcoming update. Vitalik Buterin, the Ethereum founder has yet to commit to a ship date for Casper, and this is causing some consternation. Many people are complaining about the transaction rate in ETH which is currently as of this writing at about 330,000 per day. 330,000 transactions per day is 13,750 per hour or 229 per minute or less than 4 transactions per second. Plasma.io may help, more on this later. Complexity of upcoming update: The other thing weighing on ETH other than performance is the speculative nature of Casper. Casper proposes to move the entire governance model for Ethereum from Proof-of-Work (Nakamoto Consensus) to Proof-of-Stake, which is less proven. Bitcoin brand dominance: many new players are entering the space including larger retail investors and funds. Goldman Sachs recently said Bitcoin could no longer be ignored. Ethereum Competition Coming: Stratis, Lisk, Waves, EOS, Tezos, Next, Ark, Aragon, ASCH, XEM, Stellar, Rootstock/Bitcoin are on the short list of what could be called competitors to Ethereum blockchain for the dominant dApp platform. Each of these has a unique approach to dApp platform support, although Gavin Wood is building a multi-chain called polka dot (which has a beautifully pink polka dotted “white” paper) which may also create interoperability between many chains.

Distribution of value

At the moment Bitcoin is at $70,726,440,113 or about 70 Billion USD in total market cap and the total market cap of all cryptocurrencies is $139,377,101,141 which is approximately 50.7% of the total. So interestingly , Bitcoin is worth almost exactly half of the value of all cryptocurrencies. There are a lot of equations that follow this kind of distribution

Top 19 Cryptos by current Market Cap (CoinMarketCap.com)

“Natural Value” of Ethereum

The unknown value is the “natural value” of Ethereum relative to Bitcoin. At the moment the value of Bitcoin vs all other coins seems to be 50%. The question should first be generalized to the “second spot” in theory the Silver to Bitcoin’s gold. Although Charlie Lee’s Litecoin is often called “Silver” to Bitcoin’s “Gold”, by pure market cap analysis, the number two slot belongs to Ethereum.

So it’s currently unknowable what the “correct” ratio between the #1 cryptocurrency is and the #2, and the current ratio is floating at Ether being 39.7% of the value of Bitcoin.

For a while during the ETH run up in price, there was a lot of talk about “Flippening” or the flip of #1 coin to ETH. While this talk has largely died down, this is still a remote possibility depending on how Segwith 2x goes in November and how the next few updates go in Ethereum.

Suppressed value

One way of looking at it is that Ether has a “natural value” as the #2 coin behind Bitcoin, and that this value is being suppressed by the emergence of viable competitors and by fears and uncertainties about Ethereum’s future roadmap.

Ethereum Scaling

As far as scaling, one exciting proposal for Ethereum is the emergence of the Plasma proposal. I cover it in more detail in my piece “How big a deal is Plasma.io” Joseph Poon and Vitalik Buterin have proposed using Merkleization sidechains as a way to create a vast network of efficiently intercommunicating sidechains that could bring Ethereum contract execution scale up to potentially billions of transactions per second. This is an insane rate of transaction rate considering that the VISA network credit card processing system completes an estimated 2000 transactions per second.

Maturity of competition

As far as other “competitive blockchains” including Stratis, Lisk, Waves, EOS, Tezos, Next, Ark, Aragon, ASCH, XEM, Stellar, Rootstock/Bitcoin there are few that have an appreciable market cap (NEM/XEM at about 2 Billion, Stratis at 610M, Waves at 468M), and few actually shipped networks with live transactions.

So what is the case for Ether?

Interestingly enough, if a “competitive blockchain” is successful in creating a wave of ICOs (for example, Stellar is launching Mobius and Vinny Lingham has talked about moving Civic onto Rootstock, Bitcoin’s smart contract platform) — those platforms themselves should follow the fate of Ether and actually decrease in value as tokens flow away from the platform and into the applications.

Ether as a platform is being vastly undervalued due to ICO mechanics

The thesis is that the flow of value *AWAY* from platforms like Ethereum and into its apps is artificial. This is due to the current mechanics of ICOs, many of which use Ethereum smart contracts to exchange Ether for ERC20 tokens. This actually causes huge applications to *decrease* the economic value of the platform that they run on. This is just an artifact of how ICOs are conducted today. In reality, the reverse should be happening — that every single huge application that launches on Ethereum should increase the value of Ether. Any competitor of Ethereum should face similar dynamics (unless they come up with a way for ICO participants to pay using other currencies).

Segwit isn’t over

Bitcoin’s governance problems aren’t over. The existence of a fundamental flaw in Nakamoto Consensus is the tendency of miners to gain extraordinary hash power through custom ASIC (Application Specific Integrated Circuits) systems like ASICBoost. This fundamental schism has enabled China to acquire 60% of global hashing power for Bitcoin and thus create a potential rift in the governance of Bitcoin. Although Bitcoin Cash was not successful in creating a 51% attack on Bitcoin and creating a miner activated hard fork, the story is far from over. The schism continues to exist and the Segwit2x Hard Fork crew remain committed to push ahead in November.

The schism in Bitcoin is fundamental to the current state of Nakamoto consensus, and a fork of Ethereum or the creation of any dominant Proof-of-Stake blockchain could have huge positive implications for decentralized governance of blockchains if successful.

Bitcoin is King

Here’s something significant to consider. Right now people are continuing to think of Bitcoin as king, and yes, to some extent when people say “Bitcoin” they may be generalizing about all of cryptocurrency. People who say “Bitcoin is as significant as (or more significant than) the Internet” (I’m actually someone who says something like that) they don’t exactly mean “Bitcoin”. It’s not an exact equivalency, The Internet vs Bitcoin. What they are saying is a combination of things including “blockchain based currencies are beginning to decentralize financial services and are beginning a wave of decentralization that is likely to sweep across as many vertical industries as the internet, but the fact that this is money transacting will enable the net impact to be much greater.” So the “beginning of decentralized applications” is really Ethereum at the moment, with more to come.

Ether can deliver

The core of the thesis on investing in Ether comes down to a few core things

Price is good now: the last 60 days of BTC/ETH price decline has led to a very favorable time to move BTC into ETH. ICO mania: ICO mania shows Ethereum is more valuable not less. ETH prices due to ICO mechanics are artificially suppressed. The value of Ether should go UP after a major ICO when the price actually falls (due to how smart contracts exchange ETH (which is subsequently liquidated for fiat) for ERC20 tokens. This is reversed, and ironically as more competitive platforms mature, they will suffer from this effect as well. N00b money: New money is moving into Bitcoin… many new Coinbase accounts being made. The first pit stop after buying Bitcoins for new money is to buy ETH. Vitalik and crew could yet deliver: right now things have been quiet. The recent reveal on the Plasma white paper is a hint at massive performance scaling updates to come, and Casper, if successful could be a huge transformation not just of Ethereum but of blockchain models in general.

The biggest one of these is 4. If Ethereum core delivers Proof-of-Stake, they have changed the game in a fundamental way and we could potentially even see Flippening.

This post is solely the opinion of the author and does not reflect the views of Evercoin or anyone else.

Thanks for reading.

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