Investing in Ethereum? What you need to know about it and why it's not just another bitcoin

Published Sun, Jul 4 20216:45 AM EDT

As institutional investors become more comfortable with bitcoin, many have also taken an interest in ether, the native currency of the most widely used blockchain-based development platform, as they seek further diversification beyond bitcoin. Ether is the second largest cryptocurrency by market cap, about $271 billion, and is mostly used to pay for "gas fees," the fees for transacting and processing on the Ethereum blockchain. It powers a whole world of new applications, from decentralized finance (DeFi) projects to nonfungible tokens (NFTs). "If bitcoin is like digital gold, ether is like digital oil," said Alexander Blum, managing partner at Two Prime Digital Assets. "It goes into many products and the value of it goes up as more use cases are found for it, whereas, right now at least, [the Bitcoin blockchain] is pretty much just keeping track of bitcoin." Ether is trading at about 2,328.55 as of Sunday. Here's what you need to know about investing in ether beyond its price and market cap, and why it's not another bitcoin or a bitcoin replacement. Bull case That ether is a more productive digital asset is the bull case for it because it makes digitally native money, like what bitcoin gave the world, and makes it programmable, according to Avichal Garg, co-founder of Electric Capital, which invests in early stage crypto and fintech companies. "That's really powerful because a lot of the world is basically: here's a pile of money, here's who can access the money, and here are a bunch of rules about what to do with that money for the next 10 years," Garg said. Wills, trusts, escrows, REITs, derivatives and securities are all examples of this, he explained. "It does to the financial sector like what the Internet did to media," Garg added. "It redefines what it is, you get this entire new generation of companies and protocols that make it faster and cheaper and more transparent, and make it so that anybody can participate in the same way that now anybody can go into Twitter and Facebook and Instagram." Garg also said that while a segment of the population will respond to Ethereum's potential to power things like DeFi, a different segment will be drawn in by use cases like NFTs, which many may write off as being in the peak of a hype cycle but have serious business utility. The artists, musicians and creators that benefit from NFTs are "the modern Internet small business" – a small but growing percentage of the economy that could make up 25% of it in 20 years, he added. On top of that, Ethereum has a technology update scheduled for July that will change the economics of how ether is destroyed after it's used for gas fees, Blum explained. It would make ether more of a deflationary asset, he said, where more of it is destroyed and created on an annual basis. Bear case Ethereum's technology is still young, and while it's slow to modernize, other up and comers are moving quickly as they look to take market share. "Because it's so early in the evolution, the systems are really foggy, there's still a lot of tail risk with these smart contracts," said Garg. He likened Ethereum and the apps building on it to the Internet and the early days of Wikipedia, which has grown its database from a network of volunteer contributors. "This is open finance in a lot of ways," he said. "Whenever you have a new proj