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 project and that's open source, it's really buggy early days but after a while it gets much more robust – you get all these eyes looking at it, so it gets much better over the course of five to 10 years to really become bulletproof." Still, today "it's just still so early, you can lose your money because of the bugs, and software," he added. "Every step along the way is another chance for a deadly bug or some major mix up or mistake to happen that really damages the brand and strength of its platform," said Blum, referring to a set of upgrades to the existing Ethereum blockchain designed to scale it and improve user experience over two years. Ethereum has benefited from first mover advantage; it currently hosts more than 3,000 decentralized apps, there's $53.93 billion locked in DeFi on Ethereum. However, its has a number of competitors like Cardano, Solana, Polkadot and Binance Smart Chain looking to chip away at it. Many of them can process transactions faster. They're also able to divide and share data more efficiently with other blockchains. That means when developers look to build something new, they could be more inclined to do so on a blockchain that's interoperable with several blockchains, rather than be limited to the Ethereum network. "It's been very slow to innovate and others without the kind of legacy and history aren't as far behind," Blum said. "Each time there's a new product out or a new company, they're getting kind of seduced by these different platforms potentially to try and build it on theirs instead. There's really not much of a downside to that and sometimes there's a lot of upside." Biggest risks Other than the technical risks of Ethereum, investing in ether also comes with the risk of regulation, volatility and narrative. Volatility – Like any cryptocurrency, ether is subject to large volatility swings because of how new the technology and the asset class are. "Ether was double the price two months ago which, if you're in it for the next 10 years, is fine but if you're looking to make a quick buck you're also likely to lose a lot," Blum said. Regulation – Ethereum itself has a lot of clarity; three years ago the Securities and Exchange deemed ether not a security (although it also said if a crypto asset were to be sold in a securities offering the SEC would maintain purview over it). That could leave some assets operating on Ethereum in regulatory limbo. "Everything that's built on top of Ethereum – DeFi tokens, for example, that are reinventing all of these financial primitives like lending and margin and derivatives – and ultimately giving Ethereum value," Garg said, "If it turns out that ether is not a security but everything built on top of Ethereum is a security, well that doesn't really have any value." Narrative – Ethereum might be going through a bit of an identity crisis. By comparison, bitcoin was created to be digital cash, but the market (at least in the U.S.) eventually came to a consensus about its status and value as digital gold. However, the market is unclear on what the narrative is, for Ethereum, Garg said. "Is it actually an even better digital gold because it's more productive?" he said. "Is it actually like a global settlement system? Is it actually its own digital country, but you have your own identity and make money in ether and everything has been automated there and has ether as the reserve currency? Is it more like a commodity of some sort, and it's going to be a fixed supply? Is it just a payment network?" "That's an open question and depending on where that goes the terminal value of Ethereum could change very dramatically," he added.
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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.