Ethereum Analysis: Silicon Valley Meets Wall St.

In late February, a collaborative effort to harness the potential of blockchain technology was announced by a coalition of 30-plus firms including Microsoft & JPMorgan [1]. The goal of this so-called “Enterprise Ethereum Alliance” is to build a standardized platform for smart contracts among a wide array of other financial transactions. Unlike Bitcoin ($BTC), Ethereum ($ETH) is not just a standalone cryptocurrency (Ether is the literal currency) … but is rather a distributed computing platform that can be used to execute scripts, thus providing enormous flexibility with regards to its potential applications [2].

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Introducing Quorum

Quorum [3], a software tool recently developed by JPMorgan using the Ethereum Virtual Machine, features a two-tiered distributed ledger where each tier represents a public and private level of access, respectively.  This two-tiered system ensures that market participants can both satisfy regulatory authorities and maintain public anonymity when making large payments or trades. As with Bitcoin, each transaction is cryptographically verified by the network so as to maintain data integrity and dissuade hackers. If Quorum fails to gain traction, similar technologies could gain popularity among institutional investors and hedge/PE  funds seeking to obfuscate their larger positions from predatory market makers & high-frequency traders without the need for dark pools.

Smart Contracts

To provide a specific example of smart contracts in action, consider the usage of 3D printers. Several years ago they were the next big thing, but it seems like 3D printers at the consumer level are still mostly used for toys and trinkets instead of fancier and more complicated gadgets.  Why is this? Well, in order to print a 3D object the printer must have a CAD file or other technical specification that tells it what to print and how to do so. For complex proprietary designs, these files are highly valuable assets and therefore must be kept secret at all costs.

This intellectual property nightmare means that 3D printer ownership at the present time is probably a waste of money unless you are a well-funded engineering lab at some educational institution. Enter smart contracts [4]: where both parties can agree to remotely print X items at a certain price, but at which no point does the purchasing party actually possess the secret designs. This is just one of many applications of smart contracts, and a huge reason why I’m a believer in Ethereum.

Impact on Ether’s Price

These recent developments have skyrocketed the price of Ether, the cryptocurrency component (also referred to as “value token”) of the Ethereum platform. On January 1st of this year, ETH/USD was hovering around $10. In mid-March, the value of Ether exploded from $18 to $48 within one week before seeing a correction to $35. As of the time of writing (4/21/2017) ETH/USD is trading at just under $49, with an all-time high of $54.

My Trade

Thankfully, I had the foresight to buy into Ether shortly after the Ethereum Enterprise Alliance was announced, but what should investors new to cryptocurrencies do given that ETH/USD has been floating in the $43-50 range for several weeks?

Cryptocurrency Rating

At present, I rate Ether a strong buy. While no technology is immune from hackers, governments, and the whims of its users as it scales… I ask those skeptical of Ethereum one simple question:

Do you regret not buying Bitcoins in 2010?

To this question, any sane individual should answer yes… (myself included)

Of course, Ether is subject to considerable volatility as with every other notable cryptocurrency.  But as both a programmer and trader, I recognize the critical ways in which Ethereum developers have differentiated themselves from the competition posed by Bitcoin and other altcoins e.g. Monero ($XMR) & Litecoin ($LTC).

  1. Ethereum has fallen into favor with the powers that be. (government + industry, SV & Wall St.)
  2. Ethereum is not just a currency, it is a platform. Whereas Bitcoin introduced the blockchain, Ethereum puts it to practical use with scaling potential.                                                                                                   
  3. Ethereum has a stronger development ecosystem than Bitcoin.  From a purely technical perspective, this means that Ethereum is superior to Bitcoin in terms of both design & maintenance.

Summary of Ethereum Analysis

Given the diverse applications of Ethereum software and its emergence as a prime contender to Bitcoin, ETH/USD is on track for continued long-term growth. Although its value is not necessarily dependent on widespread commercial adoption (see: $BTC @ 1200+), cryptocurrencies have innate value as an alternative wealth storage mechanism in times of macroeconomic uncertainty or recession/depression. To those wary of inflated balance sheets and overhyped IPOs, Ether is a solid choice for investors seeking diversification and innovation. Therefore, we are adding ETH to our Bullish List.

References:

  1. https://www.nytimes.com/2017/02/27/business/dealbook/ethereum-alliance-business-banking-security.html (soft paywall)
  2. https://github.com/ethereum/wiki/wiki/White-Paper (technical introduction to Ethereum)
  3. https://www.jpmorgan.com/country/US/EN/Quorum
  4. https://www.ethnews.com/ethereum-blockchain-3d-printing-smart-manufacturing

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