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The enormous rush of cryptocurrency assessments has been one of the most exciting financial developments of the last decade. The crypto-mania seems to be slowing down at the moment, but those who bought important currencies early have seen huge returns.
Ethereum (ETH-USD) has been a big winner for investors who have entered the ground floor, increasing in value 3,800% in the last two years, even after big sales in 2018. This is an absolutely incredible return, and the potential for being part of the current momentum on that scale certainly has its charm. That said, I still have no intention of buying Ethereum.
Image source: Getty Images.
What is Ethereum?
Ethereum is a network of distributed blockchain. This basically means that it is a platform for recording and running data transmissions that is safer than most other current solutions. While bitcoin (BTC-USD) is strictly an asset stored on the blockchain, Ethereum is a network capable of running applications. The computational power to run these decentralized applications has a cost, which is measured in units – or tokens called Ether.
Blockchain is still very young
With cryptocurrencies in general still in a relatively nascent state, I think there is a high probability that new coins will emerge that have better value propositions than any of today's best coins, even if the blockchain proves to be a step in revolutionary breakthrough in information technology. The amount of new cryptos that can come into circulation is essentially unlimited, and I expect future blockchain initiatives will outweigh most of the current set of comparable projects.
There is also the possibility that emerging technology, such as quantum computing, will make blockchain networks obsolete. Much of the current case for currencies supported by the blockchain revolves around the premise that the blockchain allows secure contracts that can not be changed because cryptography is too complicated to violate, but innovations in quantum computing could change everything.
Ethereum also has security issues, and it is not clear how technology will work while scaling. Increasing the size of the network and the number of coins in circulation is likely to increase transaction fees and transaction times. As the currency becomes more popular, its usability as a currency will probably decrease – something that has already happened with bitcoins. The founder of Ethereum Vitalik Buterin estimates that the problems of scalability of the network will be solved in the next two to five years, but with little visibility on how these corrections are going, it is a risky bet.
Separate the hype from the value
I am convinced that many investors in the cryptography market do not have a solid understanding of what they are investing, and this has led to a dangerous increase in valuations. If one examines the cryptocurrency discussion forums, one might note that a significant portion of cryptography enthusiasts frame their investments in terms of philosophical or moral rejection of legal money systems. I think that kind of ideological investment lays the groundwork for overvaluation, and the significance of this risk factor has increased when cryptocurrencies have become a hot topic in mainstream news.
Many cryptographic investors seem to have bought coins with the expectation that their holdings will increase in value – without a well-founded reason why it should happen. This does not mean that all those who buy shares necessarily have a deep understanding of the underlying assets or financials of the companies in which they invest. However, in general, there is a fundamental value behind the publicly traded companies – so there is a greater degree of risk in not understanding a crypto investment than there is in an investment in, say, Alphabet or Johnson & Johnson.
There is also the question of the value of Ethereum which is closely linked to the value of bitcoin in recent months. At the moment, some coin exchanges require users to buy bitcoins first and then use this cryptocurrency to buy other cryptos. This, among other factors, caused that a large part of the movement in the encrypted market was closely related to the currencies.
The meaning of Bitcoin for the broader cryptic market is also evident in popular terminology, with all other crypts sometimes grouped under the banner of "altcoin". This does not mean that Ethereum or other cryptocurrencies will always exchange in relation to bitcoins, but for the moment it seems to be the case. If the bitcoin stops, there is a good chance it will drag the value of other important coins – including Ethereum.
So I stay out of the crypt … for now.
Blockchain is a promising technology, but I see too much publicity and not long enough of the product in Ethereum and in most other cryptocurrencies. It is certainly possible that the currency continues on its incredible run and offers great returns for investors, but it is undoubtedly a high risk game that could just as easily (or even more easily) go up in smoke.
At the moment, I do not understand the value for Ethereum. Maybe I miss it, but for now, this is reason enough not to buy it.
Suzanne Frey, manager of Alphabet, is a board member of The Motley Fool. Keith Noonan has no position in any of the stocks mentioned. Motley Fool owns shares and recommends Alphabet (A shares) and Johnson & Johnson. Motley Fool has a disclosure policy.
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