This is not investing advice. Seek a financial professional before making important financial decisions. Nothing we say or write is a recommendation to buy/sell/or trade any security.
By Bernard Baruch
Ethereum rose to an all-time high today. Ethereum is the second largest crypto asset by market capitalization. It is the first and largest decentralized smart contract network in existence. Ethereum is also a network ... and like all networks its value grows with adoption. Adoption is growing and we believe that growth rate is accelerating.
If you are thinking about investing in Ethereum you would be wise to read the creators White Paper by Vitalik Buterin. It is several years old but useful as a reference and an accurate representation of the Ethereum vision. You may also want to read our new post on "Why Bitcoin and Ethereum are rising".
Decentralized Applications (DApps)
Ethereum is was inspired by Bitcoin but goes beyond by allowing the creation of Decentralized Applications (DApps). Here is an excerpt from the White Paper.
"The intent of Ethereum is to create an alternative protocol for building decentralized applications, providing a different set of tradeoffs that we believe will be very useful for a large class of decentralized applications, with particular emphasis on situations where rapid development time, security for small and rarely used applications, and the ability of different applications to very efficiently interact, are important. Ethereum does this by building what is essentially the ultimate abstract foundational layer: a blockchain with a built-in Turing-complete programming language, allowing anyone to write smart contracts and decentralized applications where they can create their own arbitrary rules for ownership, transaction formats and state transition functions." - End Excerpt
Decentralized Applications (DApps) are essentially "smart" contracts that do not require a third party to enforce. During the crypto bubble of 2017 the most popular smart contract was called “Crypto Kitties” which allowed individuals to trade digital pictures of cats. Some of these cats sold for hundreds of dollars at the height of the bubble…another signal that crypto was in a euphoric bubble. DApps are essential digitized contracts that don't require third parties like governments to enforce.
There are hundreds of different DApps on now…many providing useful services. Nearly all of the largest most popular DApps are runniing on Ethereum. You can find them on many website but we like DapRadar.com https://dappradar.com/rankings ... screenshot below.
One of the most interesting DApps is a crop insurance policy called Etherisc that pays farmers if it doesn't rain on their farms geolocation for a week. The farmers that use this DApps are primarily in emerging markets that don't have strong governments to enforce contract laws. Most of the farmers are very small with payouts of only $3,000 ... too small for most insurance companies to bother with.
Ethereum is very different from Bitcoin in that it's more of a commodity. Ethereum smartcontracts run on “Ether” which is a coin that you pay to execute a smartcontract. In that respect, Ether is more of a commodity than a currency.
One topic getting a lot of attention after the Robinhood debacle is decentralization. Some are angry at Twitter for removing Trump. Many are angry at Robin Hood for unilaterally stopping traders from buying Gamestop. Reddit's WallStreetBets page briefly became closed last week. All of the frustration stems from a single problem...and that is the ability of intermediaries and platforms to control behavior.
DApps solve this problem because no one controls the network. Not even Vitalik Buterin who created the network. That's also why talk about a government backed cryptocurrency is nonsensical. a Government back cryptocurrency would be centrally controlled which defeats the whole purpose of decentralization.
Decentralized Finance (DeFi) DApps are gaining a lot of attention right now because of their direct relevance to the Robinhood debale. DeFi DApps allow investors to trade and make loans without going through banks or other financial intermediaries. DeFi DApps are also extremely hard if not next to impossible to censor.
Ethereum is a leader in DeFi in large part because it is far easier to build other types of decentralized applications beyond simple transactions. These more complex financial use cases were even highlighted by Ethereum creator Vitalik Buterin back in 2013 in the original Ethereum white paper.
DeFi Applications include but are not limited to the following...
Stablecoins: A cryptocurrency that's tied to an asset outside of cryptocurrency (the dollar or euro, for example) to stabilize the price.
Speculation: Betting markets allow users to bet on future events like elections. Gambling on events and gambling in general are considered illegal in come countries and so this provides a way to avoid censorship.
Exchanges: Decentralized exchanges allow users to exchange assets like currencies or security tokens which are like stock but decentralised. Decentralizing the exchange makes it nearly impossible for governments or platforms like Robinhood to stop transactions.
Lending: Credit markets are another avenue in which decentralization is taking place in finance. Lending contracts essentially seek to replace financial intermediaries.
Obviously many Robinhood investors are upset about losing money because Robinhood shutdown trading on some securities and Reddit WSB briefly became private. Decentralized money and DApps are pretty obvious solutions.
We also bought Ethereum because growth in the price doesn't seem to be driven by a retail investor fad. This first graph shows Google searches for three popular crypto assets including Dogecoin which was bid up over 500% in a day with help from Elon Musk last week. You can also see searches for Gamestop exploding recently (before the price imploded this week). But searched for Ethereum have been pretty muted by comparison.
Google Trends that go back further than a week cut off the past couple days. For that reason we like to look at the past week as well just to see if there is anything important happening in the past two days. Note that "Buy Silver" actually peaked at 8Am on February 1st which also coincided with the peak in the price. If we had been paying closer attention we might have thought twice about keeping a lot of the Silver exposure we bought last Thursday as the price cratered today.
But again we see searched for "Buy Ethereum" are muted. No speculative bubble here. We were actually quite puzzled as to why the price was hitting all time highs without any retail excitement...then we remembered Ray Dalio's White Paper on Bitcoin. Retail investors are not interested in reading white papers by the biggest hedge fund in the world. That's what institutions do.
So that's why we decided to add Ethereum to our portfolio in a big way last Thursday...and added more today when it broke out above it's early 2018 all time high.
Be careful with your hard earned money.
Full Disclosure: We own securities with direct exposure to crypto assets including $GBTC $ETHE $HVBTF $MSTR $SQ $PYPL