Since 2016 I was always a bit skeptical of crypto. As a value investor for the longest time, it was very hard for me to wrap my head around made-up internet coins that had no inherent/tangible value. Up until one year ago, the overall cryptocurrency space to me was a speculative trade based on how much liquidity and greed there was in the market and would slowly die as the Federal Reserve moved from their decades long zero interest rate policy.

As inflation became rampant throughout 2021, the Federal Reserve had to raise rates as the economy was running way too hot.

After 2021 the overall market experienced a significant crash and cryptocurrencies had one of the worst bear markets ever since they were created. As the Federal Reserve raised rates to over 5%, it seemed as if it was over for crypto – at least until the economy cooled off and inflation went back down to normal levels.

Bitcoin fell to ~$15K after peaking at $69K and Ethereum fell to <$1K. My thesis that persistent inflation and higher rates would cause crypto to die was finally coming true.

I am not a financial advisor. I don’t give investment advice. The opinions discussed below are my opinions, could be wrong and could change at any time without disclosing. Use your own judgement when making investment decisions

Crypto – The Bubble that Never Dies

Everyone, including me, thought it was over for crypto in general at this point. Over a decade of zero percent interest rates and quantitative easing fueled a massive speculative bubble that quickly popped when the Federal reserve reversed course. It was the worst bear market in crypto since Bitcoin was created back in 2009 with no end in sight.

To invest when prices were at the lows required a large amount of conviction and speculation. Despite how much money has flowed into crypto over the years, it was not yet clear whether this asset class was here to stay or just another Tulip Bubble fad. It didn’t seem clear yet whether Bitcoin would be worth $1 million+ in 10 years or zero.

Enter the Bitcoin ETF in late 2023/early 2024

This is the defining moment that legitimized the crypto asset class and made me realize that it is here to stay. Simply put, if traditional finance firms (also known as “tradifi” amongst crypto-nerds) like Blackrock and Fidelity and government agencies like the SEC are willing to put their reputations on the line and create traditional financial products to invest in crypto, then those assets are legitimate and investments will continue to drive prices and innovation for the space.

Now this post isn’t focused on Bitcoin. We’ve covered Bitcoin and the overall thesis when bitcoin was < $20K (Will Bitcoin Reach $1 million in 10 Years). So what other cryptocurrencies could potentially be extremely valuable in the future?

Ethereum – The Second Most Valuable Cryptocurrency and Potential Future of the Financial System

If you are a “Bitcoin Maxi,” you will hate the rest of this post. I never understood those who solely believe in Bitcoin and think every other cryptocurrency is a fraud and going to zero. Do you really think that a new blockchain technology that came out of nowhere back in 2009 can only have one use case and one token of value?

Ethereum, launched in 2015, is the second most valuable cryptocurrency in the world. It is the only other cryptocurrency that has the scale/network at this point in time where we can almost confidently say that it will not go away or be replaced with another cryptocurrency. It is the only other crypto that has been legitimized by these “trad-fi” firms at this point in time. Just like Bitcoin, Ethereum will have an ETF trading shortly in the next few weeks. It is the only cryptocurrency that is guaranteed to have an ETF for the foreseeable future.

Unlike Bitcoin, whose sole purpose is primarily to replace gold and be a better store of value (a very simple narrative), Ethereum’s purpose is a bit more complicated given all the different use cases.

Ethereum is essentially a global settlement layer that supports all kinds of applications. Think of it as Apple’s App store, without an entity like Apple that controls it and anyone around the world with internet can access it. And the ETH token is the network’s currency/money that fuels all the transactions that happen on these applications.

Is Ethereum Just Another Bitcoin?

In some sense, yes. Today with how much money is being printed by governments around the world, everyone is looking for a place to park their cash and keep value.

Bitcoin has become known for being “Digital Gold.” Everything thinks of BTC as a better version than gold. With gold you can’t move large quantities around the world easily, it can easily be confiscated from you, and lastly, there is not a finite supply of it. Every year they can mine 2-3% more gold, and if the price goes up, more resources will be used to mine more gold.

With Bitcoin, there are only ever going to be 21 million coins and nobody can change that. You can slice 1 BTC into a million pieces, you can move it around the world instantaneously, and if you self-custody it (meaning you hold the private keys to your own digital wallet), then nobody can ever take them away from you – not even any government entity.

Ethereum is very similar. Right now, there are ~120MM Ethereum coins. Without getting too much into the technical specifics, this number will not change much going forward and at certain times would go down depending on network usage. So, we can also think of one of Ethereum’s main use cases as Digital Gold, a store of value in a world where governments can print trillions of paper currencies a year out of thin air.

How is Ethereum Different Than Bitcoin?

What makes ETH so special and different from BTC is that while BTC’s sole purpose is a store of value, Ethereum is programmable money.

What does programmable money even mean? Ethereum allows developers to build and deploy smart contracts. Think of smart contracts as self-executing contracts, with no third parties involved, with the terms of the agreement directly written into code. In its simplest form, if X event occurs, then Y happens.

These programmable contracts can be written directly on the Ethereum blockchain. They automatically execute when predetermined conditions are met, without the need for intermediaries or third parties.

Top 7 Real World Use Cases of Ethereum

There are thousands of developers and start-ups working on building applications on Ethereum today around the world. The capabilities of Ethereum are just beginning. The easiest way to describe what Ethereum is and its potential value is to walk through a few use cases. Just like Apple’s App store, there are an infinite number of use cases for Ethereum, so the below is a select list that everyone reading this can understand.

1) Store of Value / Digital Gold

We just talked about this. In a world where it is guaranteed that governments will spend more than they receive each year in tax revenue, we need a better/alternative form of money that will retain its value overtime and can’t be inflated away. Unlike prior eras, when currencies were based on physical metals, the only way you could inflate the currency is to either mine more metal or slowly melt down the existing currencies and add lesser value metals to the mix. This limited the pace of inflation to a degree as it was a process and took time to produce more coins.

In this digital age, governments can print money in a blink of an eye with a click of a button. Paper money used to at least be backed by gold a few decades ago, but now there is absolutely nothing backing the value of currencies around the world.

The Federal Reserve in 2020 printed trillions of dollars out of thin air. Just watch Powell, the Chairman of the Federal Reserve speak to his ability to create money instantly:

We are lucky to live in a country where for the most part (aside from the few years after COVID), inflation has not been that much of an issue and the US Dollar has been one of the strongest currencies in the world. But, if you have ever visited a third world country, then you will quickly understand that inflation has destroyed the value of everyone’s savings. Parts of the Middle East and South America have been destroyed by inflation.

Bitcoin and Ethereum, both assets where the supply is essentially capped, both solve this issue.

2) Sending / Receiving Money Instantaneously for Free

If you ever had family who lived abroad and you wanted to send them money there were previously only a few options. You could either 1) take thousands of dollars of cash with you and travel yourself to deliver the money or 2) pay very high fees to send the money with a third-party platform (and only if the country you are sending money to isn’t sanctioned by the US).

Now all of this can be done instantaneously for free. All both parties need is a digital wallet which is very easy to set up and you can send money in just a few seconds.

3) Tokenization of Financial Assets

If you have a lot of assets today, think about all the different accounts with third parties that are needed just to hold those assets. All the different retirement accounts, bank accounts, brokerage platforms, physical titles, US treasury accounts, trusts/custodians, etc., all these third parties clipping fees just to custody your assets. Imagine if you could have all your assets in one place or on one system that makes it very easy to transact.  

Overtime, it is very likely that almost assets will be tokenized on a blockchain and Ethereum is currently in the best position to be that blockchain that tokenizes all assets. For example, Blackrock has started to tokenize US treasury bill (can read more here about it).

Tokenization provides many benefits, including ability to transact 24/7, lower fees due to fewer third-party intermediaries, quicker settlements, better compliance (can just program the rules in a smart-contract that everyone can see), and better liquidity and transparency (can easily audit and see who owns what assets).

4) Eliminating Credit Card Interchange Fees

Every time you use your credit card, whether its Visa, Mastercard, Discover, or American Express, the seller has to pay a fee to these companies. That fee is somewhere around 1-3% of the transaction value. Now 1-3% may not seem that much to you, but to an owner of a restaurant whose net margins are in the 8-10% range, that is about ~10-40% of their profits.

With the advent of blockchains, there is no reason why we need a third-party intermediary like Visa to process the transaction. The transaction can be done using a stable-coin like USDC using Ethereum to process the transaction for basically free.

Now some may argue that Ethereum charges a high fee (what they call “gas” in cryptoland) depending on network traffic, but given Ethereum is a blockchain that is constantly being improved on with code, all those issues are solved now with Layer 2s.

Layer 2s makes it basically almost free to use the Ethereum Network. Don’t want to get too technical, but think of layer 2s as a system that sits on top of the base Ethereum layer and bundles thousands of transactions to be processed all at once on the base layer, instead of processing each transaction individually. This allows the network to scale and millions of transactions to be processed without bottling up the network.

5) Self-Banking Capabilities (“Decentralized Finance” or “De-Fi”)

You can be your own bank, and lend and borrow money with no third parties involved. Right now, you can use your Ethereum as collateral by lending it to a protocol on the Ethereum blockchain and borrow against it.

Say you didn’t want to sell your Ethereum but needed some money in the meantime for whatever reason. You could borrow USDC (a US dollar pegged stablecoin) against your Ethereum and pay that loan back to unlock your collateral at a future date. All of this done without the need for a bank.

Today, only the wealthy have the ability to get access to these lines of credit and use their financial assets to borrow against them. Once other assets are tokenized on Ethereum, you can use those assets as collateral and borrow against them without having to sell them just like how the rich do today. All of this done without a bank involved. Everyone who uses Ethereum has the ability to do this. Doesn’t matter how wealthy you are or whether some third-party accepts you as their client.

Another example is programmable savings. You could use smart-contracts on the platform to find the best place to park your cash to get the higher rates possible, and if the rates change, the system will find the next best option to invest your cash. No need to find the best CD or best treasury note to get the highest yield. All of this will soon be automated with code.

6) Betting / Prediction Markets

Like I mentioned before, the ability to write smart-contracts allows Ethereum to program certain outcomes to occur if XYZ happens. A prime use case for this is the ability to bet on certain outcomes without a casino or human being involved to make sure the bets are placed fairly and the money is sent once someone wins.

You can check out Polymarket and see for yourself. Given this year is the Presidential election year, you can see all the different types of bets going on with regard to the election. All of this done with the Ethereum blockchain and no third-parties involved.  

7) Voting

Think about how inefficient voting is today across the world. For elections, you need to physically drive to a location, wait in line and vote for your candidate. Some states require you to show proof of citizenship to vote as well. With tens of millions of people voting during each election, you can imagine how inefficient the whole process is to vote and then count the votes thereafter.

It’s such an outdated system that needs to be fixed. Everyone should be able to vote from their phones with the security where nobody can question the legitimacy of an election.

Overtime blockchains like Ethereum can streamline this whole process. Your phone camera can be used to verify your digital identity to prove you are a US citizen and then all votes can be recorded on the blockchain where they can be tracked and easily verified.

Another example is when it comes to ownership of digital assets. Think of a public company whose shares are owned by hundreds of thousands or millions of individuals/institutions. Every year there are votes to determine who’s on the Board of these companies, approving executive pay or various mergers and acquisitions, etc. Without going into the details, the process to vote or identifying who owns what securities is very inefficient. Once assets are tokenized on Ethereum, everyone can see all the different addresses that is an owner of an asset and you can reach out to each of them very easily when it comes to these voting/governance matters.

Will Ethereum Be More Valuable than Bitcoin?

This is what everyone in the industry calls the “flippening.” Today, BTC is a $1.1 trillion asset class while ETH is $350Bn. ETH is currently ~30% of the value of BTC despite having so much more functionality.

With new technologies, there is always a risk that something better is developed that supplants the existing leader. But what we have learned from all the large tech companies today like Facebook/Amazon/Ebay/etc. is that the network is what truly matters. It doesn’t matter how much better a new technology is if it doesn’t have the network or the user base. That is why Bitcoin is what it is today despite the dozens of other “better” Bitcoins like Litecoin or Dogecoin that exist today.

Ethereum is currently the #1 blockchain that has smart contract functionality and has the network of developers that continue to build upon the system. It’s the most liquid and dominates the field when it comes to the amount of value that is locked ($ value of assets used on smart contracts) in the blockchain.

Who knows what happens a decade out, but Ethereum is in the best position to flip Bitcoin in value over the long run.

Total Value Locked Across The Top Blockchain Networks

Source: defilama.com

Most TradFi People Continue to Ignore Crypto

Today, Bitcoin is ~$57K and Ethereum ~$3K. Despite how crypto prices have risen from the grave, most traditional finance people continue to be very skeptical and do not want to even talk about crypto anymore. These are the same people that were believers back in 2021, but then experienced the hardship that followed when they saw their bags drop in value substantially.

I’ll admit, the volatility in this space is not for everyone and can cause you to absolutely hate investing in crypto. When you are up $500K in less than a year and then over the course of a week you lose 50% of your gains on paper, that is not a great feeling. The cycles in this industry attracted TradFi and retail the way up, but the 2022 bear market have caused these groups for the most part to completely ignore this space going forward.

Others have been scammed out of their crypto by phishing attacks and forever think the industry is a scam. The one issue with crypto (which is also one of its most important qualities) is that there are no third-party intermediaries if you custody your assets in your own digital wallet. The downside of this though is that any transaction is irreversible; you fall for a phishing attacked and give someone else access to your accounts, they can then send all your crypto and there is no institution that will refund your money.

If you plan on investing capital into this space, make sure to properly secure your digital assets.