Bitcoin Vs Ethereum

The Future of Cryptocurrencies

Bitcoin and Ethereum are two highly disruptive cryptocurrencies looking to leverage blockchain technologies to drive innovation across numerous industries. The objective was to analyze each cryptocurrency to develop the ideal investment strategy for a $1,000,000 investment which must be held for five years without any additional trading. To develop an ideal investment strategy, we analyzed both currencies. After looking at the qualitative similarities and differences between each currency, we analyzed the historical performances of each and extrapolated these values to form a five-year projection. Conversations with industry professionals helped to identify the most probable and impactful factors for the future demand of both currencies. After incorporating our results and accounting for variance, we ran simulations to predict the expected values given a range of inputs and factors. After weighing these findings, the appropriate investment ratio proved to be 69:31 for Bitcoin and Ethereum respectively. Bitcoin offered a higher expected value, but the volatility and speculative nature of cryptocurrencies indicated a need for diversification across platforms.

What is Money Anyway? Since societies transitioned from a barter economy to using a money as a medium of exchange, individuals have tried to devise systems that allow for rational ways to exchange value. In order to help make goods and services commensurable the Greek philosopher Aristotle came up with four criteria that help to dictate what is considered to be ‘good money’ (Lee, 2009): 1. It must be durable 2. It must be portable 3. It must be divisible 4. It must have intrinsic value Originally the preferred medium of exchange was gold as it was able to fulfill all four of these criteria. As economies grew and the demand for a medium of exchange increased, governments were forced to create a more accessible medium of exchange that they could control and regulate. This was the birth of fiat currency. This particular medium of exchange has been adopted worldwide, however it has come with its own set of issues. In order to help fix some of these issues, cryptocurrencies began to emerge in 2009, leveraging a disruptive technology called blockchain. A cryptocurrency is a digital currency that uses cryptography for security (Investopedia, 2016). Blockchain specifically deals with the way in which data is structured and allows for the existence of decentralized digital ledgers where single organizations are not able to effect transactions (Hackett, 2016). Currently the two most widely adopted cryptocurrencies are Bitcoin and Ether, the currency that is used to power the Ethereum blockchain.
The Investment With the recent rise in popularity of cryptocurrencies many investors are now trying to determine how to invest into this new asset class. As with any investment into a new technology there are many factors to consider when assessing their future. In order to make an informed decision one must look at the origins of the technology as well as the potential applications and limitations in the foreseeable future. This paper aims to evaluate what the price (in USD) of Bitcoin (BTC) and Ether (ETH) will be in the next 5 years using thorough quantitative and qualitative analysis. From this evaluation a decision will be made on an appropriate investment allocation between the two currencies for this crypto-portfolio. The Contenders Bitcoin is the most widely known and used cryptocurrency in the world. The current market capitalization of just over $10 billion (USD) (Crypto-Currency Market Capitalizations, 2016). Bitcoin was originally developed by Satoshi Nakamoto as a strictly peer-to-peer electronic payment system and a solution to the problem of double-spending (Nakamoto, 2008). It is primarily designed to eliminate the need of financial institutions or ‘trusted third-party’ entities. Bitcoin does this by eliminating the possibility of fraud, increasing efficiencies, and providing objective proof-of-work to guarantee validity and security in any transaction (Nakamoto, 2008). The use of a public ledger as well as digital signatures allow for a secure and anonymous transaction without the need for trust, as the public network of nodes validates transactions through finding a consensus among a majority of nodes. Thus far, the primary use cases for Bitcoin revolve around increasing efficiencies and eliminating unnecessary time and costs that arrive from using multiple trusted third parties to facilitate transactions (Tapscott, 2016). Bitcoin is highly adoptable in markets that are lacking in traditional financial infrastructure but have access to mobile data, as well as markets with highly inflated currencies that require tools to allow for the mobilization and exchange of currencies (Magee, 2015). Bitcoin’s multiversion concurrency control is unique and allows for safe concurrent transactions without significant delay (Greenspan, 2015). Ethereum’s main point of differentiation is the ability to leverage the application of ‘smart contracts’ within its code. While growing at a much more significant rate over the past year, Ethereum has a total market capitalization of only approximately 10% of Bitcoin (CryptoCurrency Market Capitalizations, 2016). While the underlying currency, Ether, appreciates and depreciates in value, Ethereum’s value is largely driven by its increased utility and ability to eventually eliminate third parties’ involvement in determining contractual obligations. The main benefit of Ethereum can be found in the belief that, as long as it can be coded properly, Ethereum’s smart contracts carry potentially unlimited utility (although, highly complex contracts could prove to be illogical at this point in time) (Greenspan, 2016). The Ethereum Network serves to facilitate the exchange of data, information, votes, etc. indicating that there is the possibility for use cases well beyond simply serving as a disruptor to the current financial institutions. The Ether currency serves as the ‘gas’ that powers the transactions within the Ethereum Network. Ethereum leverages a Turing-Complete language which could, in theory, solve any computational problem (DeRose, 2016), allowing for an even greater possibility for utility across many areas.

Both Ether and Bitcoin are mined by solving highly complex computational problems. Additionally, as more blocks are mined, the difficulty of finding new blocks increases in both cases. Comparison: Where Bitcoin currently has a clearly defined use case in which disruption is possible, the possibilities for Ethereum to enter the market are far less distinct. Ethereum benefits from the possibility of much greater eventual impact. Bitcoin is currently better positioned to leverage and be incorporated into innovations that occur across many industries, whereas Ethereum is trying to drive the innovations. Ethereum is at a greater risk of experiencing disruption, as their network is the major driver of value (while the Ether ‘gas’ simply drives the network). This network which drives innovation opens up Ethereum to be disrupted by future entrants looking to build upon the existing framework. Bitcoin is largely safe from this threat of new entrants as Bitcoin’s explicit purpose of acting as a digital currency has been effectively accomplished, where future innovative networks can use Bitcoin as an underlying asset.