The rise of Bitcoin and Ethereum…two very different assets

The rise of Bitcoin and Ethereum…two very different assets

Brendan Greenwood CIM, QAFP, B.Comm | March 16, 2021

One evening in the spring of 2014 I was walking in downtown Toronto and passed a building that read Bitcoin Decentral on it. The building housed one of the first ATMs in Canada where you could easily purchase bitcoin. At that time, I had heard about bitcoin in-passing amongst friends. My friend with me at the time, an accountant briefly started explaining how a blockchain ledger accounted for transactions across a decentralized computer network and that bitcoin could play a significant role in how individuals exchange value in the future. He advised me to put a little money aside and buy some bitcoin as we were passing by the building. Did I do it? It was early in my career and I was living in one of the most expensive cities in the country. I didn’t have a lot of money to speculate on something I didn’t know much about, so his advice passed over me like a sound bite in time, forgotten the next day.

My friend followed his own advice and bought a home with his future gains. Lesson here, never assume you know more than an expert. My friend wasn’t a Bitcoin expert, but he was an accountant and if someone was going to understand the blockchain ledger system and it’s potential it was him.

What is Bitcoin?

Bitcoin is a crypto currency blockchain software that allows people to exchange value directly with each other. After every transaction the blockchain ledger is updated on every computer that is part of the blockchain network. Every time someone makes a transaction, a unique encrypted signature is added to the ledger for verification. Once the transaction is confirmed the unique encrypted signature cannot be changed or altered. This prevents counterfeiting of bitcoins. The decentralized and leaderless nature of the blockchain technology means that no individual has the ability to make universal changes to the network adding to its security.

The digital currency is not tied to any physical asset. Unlike fiat currency, no central party can control or destabilize the digital currency. People can exchange value with each other securely anywhere in the world avoiding banks and currency exchanges.

Is there really a limited supply of Bitcoin and what is Bitcoin mining?

The creator of Bitcoin has embedded in his coding a condition that will only allow a maximum of 21 million bitcoins to eventually become available within the bitcoin blockchain network. To date 18.5 million of these 21 million bitcoins have been mined and make up the total number of bitcoins being exchanged for value today. Miners use powerful computers to solve complex problems to process bitcoin transactions. This process unlocks new digital coins. This may have you thinking that bitcoin has almost hit its finite supply limit, but every four years the reward per a batch of transactions confirmed per a mining puzzle solved gets cut in half. This means that the 21 millionth bitcoin will not be created until likely sometime around the year 2140 based on mathematical projections.

Is bitcoin digital gold? How does it compare to other assets? How volatile is it?

Bitcoin’s market cap is about 1 trillion, while the market cap for gold is about 11 trillion. Like gold, bitcoin will continue to be a store of value as long as there is demand from investors. It is not a capital asset in the sense that its productive, produces an ongoing source of value or generates cash-flow. Gold for the most part is not considered a capital asset either and many hold gold in the form of a paper instead of directly. For this reason there are some parallels to gold. The market capitalization for Bitcoin is less than a tenth the size of the gold market which makes it a much more volatile asset than gold. With demand for bitcoin growing faster than the number of bitcoins available and larger institutions continuing to get into bitcoin, the value of the digital coins could move a lot higher. Because bitcoin is completely decentralized it has no insurance backing it. And with no circuit breakers or closing bells it makes it possible for bitcoin to fall to zero in a day.

What is Ethereum and why could it’s cryptocurrency Ether become more sought after than Bitcoin?

Ethereum, like bitcoin is a crypto blockchain network, but it has a much broader focus. Ethereum’s more flexible platform is facilitating a secure market for digital assets. Ownership of digital assets is being exchanged through the use of non-fungible tokens (NFT) which can be thought of like a property deed. The Ethereum blockchain certifies the sale of the digital asset by codifying the non-fungible token establishing a verifiable record of price, ownership, and transference, and prevents the file from being digitally forged or replicated.

Creators of content along with resellers have been able to sell their work for significant value on various marketplaces that use Ethereum’s blockchain. Terry Nguyen of Vox media reported, Top Shot an online market place launched by the NBA has generated over 230 million in sales, selling NBA highlight reels and other content. She also reported that electronic music producer 3LAU sold a limited edition NFT-based album in February this year generating $11.6 million in less than 24 hours.

What’s Ether?

Ether are the digital tokens that power the Ethereum blockchain network and can be used as a form of payment when transacting on the blockchain network. Because Ethereum is an open-source platform it is more flexible and has greater utility than Bitcoin’s blockchain network. Ethereum can facilitate the exchange of items beyond cryptocurrencies. The decentralized software platform enables smart contracts and distributed applications. This makes Ether, the tokens that are traded as a digital currency exchange and also function like a digital oil to run applications and monetize work inside Ethereum much more than simply an asset that stores value.

Ethereum is working on an upgrade to the efficiency of the blockchain network and part of the upgrade involves a reform to Ethereum’s gas fee mechanism that will burn Ether creating a diminishing supply of tokens. Gas fees are payments made by users to compensate for the computing energy required to process and validate transactions on the Ethereum blockchain. The price of Ether could rise considerably once this change takes effect.

How can Bitcoin or Ether be bought?

Bitcoin and Ether used to only be able to be bought through cryptocurrency exchanges like Coinbase. Today the cryptocurrencies are more accessible and investors can gain exposure through trusts and now ETFs too. Many of these trusts and ETFs hold Bitcoin or Ether directly. Investors should ensure the ETF or trust is storing the digital coins or tokens offline in what’s known as cold storage to help avoid fraud or misappropriation of funds.

If you are considering an investment in cryptocurrency seek advice. They are a very volatile asset class that is not well understood by most investors.

Brendan Greenwood is an Investment Advisor with Worldsource Securities focused on personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionals, incorporated individuals, business owners, retirees and their families.

For other articles authored by Brendan Greenwood on issues impacting business owners and individual investors see https://www.greenwoodwealth.co/blog.

Investments in cryptocurrency should be considered a very risky investments that are speculative in nature and appropriate only for investors who are prepared to have their money invested for a long period of time and have the capacity to absorb a loss of some or all of their investment. Each type of cryptocurrency investment is unique and involves unique risks and investments in cryptocurrency can lead to loss of money over short or even long periods. Past performance is not an indication of future results. Cryptocurrency investors should expect prices to have large range fluctuations.

This material has been prepared for informational purposes only and should not be considered personal investment advice or solicitation to buy or sell any securities. As well, it is not intended to provide, and should not be relied on for, tax, legal or accounting advice. It may include information concerning financial markets as at particular point in time and is subject to change without notice. Every effort has been made to compile it from reliable sources, however, no warranty can be made as to its accuracy or completeness. Investors should seek appropriate professional advice before acting on any of the information here. The views expressed here are those of the authors and writers only and not necessarily those of Worldsource Securities Inc., its employees or affiliates. There may also be projections or other "forward-looking statements." There is significant risk that forward looking statements will not prove to be accurate and actual results, performance or achievements could differ materially from any future results, performance or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Before acting on any of the information provided, please contact your advisor for individual financial advice based on your personal circumstances. Worldsource Securities Inc., is the sponsoring investment dealer and the member of Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund.