Ethereum
Bitcoin is not the only cryptocurrency game in town. There are plenty of them – Bitcoin is simply the most popular and largest in terms of market capitalization (as of April 30, 2019). But Ethereum ranks second – and according to its supporters, it is better than Bitcoin as it exploits the full potential of the blockchain (which is a digital, public ledger that records online transactions made in Bitcoin or other cryptocurrencies).
So what is Ethereum? It is the cryptocurrency that fuels a decentralized platform that runs smart contracts and decentralized applications. It was created by Vitalik Buterin in 2015. Ethereum can be used either as a token for operation of that platform or traded as a digital currency exchange like other cryptocurrencies.
That’s what distinguishes Ethereum: it goes beyond just supporting its cryptocurrency. It is also a platform and a programming language used to create smart contracts and applications. That’s blockchain on steroids. (the terminology can be misleading – actually, we should write about the Ether, the cryptocurrency, and the Ethereum, the platform, but the latter term was accepted to designate both things).
Thus, although both Bitcoin and Ethereum are based on distributed ledgers and cryptography, they differ in several key aspects. Beyond the scope of applications, the differences include the type of algorithm, the speed of transaction confirmation (in seconds for Ethereum compared to minutes for Bitcoin), transactions fees (lower for Ethereum), or the total supply (no cap for Ethereum vs. cap of 21 million for Bitcoin). Bitcoin has a first move advantage, while Ethereum is less known and younger – on the other hand, it learned from Bitcoin and fixed a couple of issues in the design that have led to Bitcoin forks.
Ethereum and Gold
What is the link between Ethereum and gold? Many people believe that they are substitutes. After all, both Ethereum and gold are alternatives to the current monetary system, being alternatives to fiat currencies issued by the government. Although not as popular as Bitcoin, Ethereum is also considered to be “gold for Millenials”, a free-market currency for people who don’t trust governments and central banks, but in a digital form.
However, the chart below suggests the lack any significant negative relationship between these two assets. As one can see, since late 2016, the price of Ethereum went on a crazy roller coaster ride from just several US dollars to almost $1,400 at its peak in early 2018 and then to below $90 in late 2018. Meanwhile, the yellow metal has remained in a sideways trend and has generally traded in a relatively narrow range of $1,200-1,400.
Chart 1: The price of gold (yellow line, London P.M. Fix, in $, weekly average) and the price of Ethereum (red line, right axis, in $, weekly average, at Bitfinex) from March 2016 to April 2019.
The bottom line is that although the shiny metal and Ethereum have some similarities, they are not substitutes, at least not perfect ones. It should not be actually surprising. After all, gold has a long history of being a monetary asset and the gold market is well established, liquid and relatively stable. Meanwhile, Ethereum is a young cryptocurrency, with high volatility, small liquidity and limited acceptability in payment (while Bitcoin is used for purchasing goods and services, Ethereum is mainly used to develop smart contracts). Although it also challenges the US dollar, it is not a safe haven asset such as gold. It can’ t serve as a safe haven given its instability. It is rather a speculative vehicle or just a token used for making decentralized applications. Moreover, Ethereum is not an inflation hedge, as it does not have an upper limit on its total supply, which has been seeing a constant rise at about 10 percent annually. Hence, we would say that Ethereum can complement bullion within the investors’ portfolio but it cannot replace it.