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Is Ethereum a Legitimate Threat to Bitcoin?

Posted: 1st February 2018 by Finance Monthly
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With the rise of several follow ups to Bitcoin, cryptocurrencies are proliferating at a very serious rate. With ICOs left, right and centre, Bitcoin could soon be facing serious competition; or is the competition already here? Below Richard Tall from DWF explains why Ethereum could be the new kid on the block.

I was helping a client the other day, to identify some of the legal issues surrounding his cryptocurrency trading business. One of my questions to him was which cryptocurrencies he trades in - and he very kindly shared a list of them with me.

It was pretty long.

I have previously made the point that, in the last four years, humankind has invented seven times more "currencies" than the governmental currencies that already existed. The two most famous of these, to those of us not immersed in the market, are Ether - the token associated with Ethereum - and Bitcoin.

Seemingly to most, Bitcoin is a bigger beast than Ethereum. But does the latter present a threat to the former's dominance?

The present state of the cryptocurrency market

As I write this article, the market capitalisation of all cryptocurrencies has taken a hammering as they suffer further setbacks. These range from UK mortgage companies refusing to accept funds generated from cryptocurrencies as deposits for properties, to concerns about further governmental bans in jurisdictions such as South Korea.

All of the major cryptocurrencies have trended in much the same way, albeit they do different things. Ether's market cap today is about $102 billion (slightly larger than Kraft Heinz) and Bitcoin's is about $190 billion (about the same as Citigroup).

In 2017 alone, the value of Ether rose by 13,000 per cent against a somewhat modest showing of 2,000 per cent from Bitcoin. There is little point in trying to ascribe reasons to the differing levels of value increase though, as a market driven by those seeking to get rich quick is no real market at all.

Ethereum's perceived threat to Bitcoin is not a simple comparison of relative worth, then. There are essential differences to what each does and while Bitcoin is currently synonymous with cryptocurrencies in the minds of the public, as the market matures the value of both Bitcoin and Ether will be driven by factors other than the frenzied speculation which currently persists.

Crucial differences between Ethereum and Bitcoin

In reality, Bitcoin and Ethereum are quite different.

Ethereum is a computing platform which provides scripting language for smart contracts. This means that there is a blockchain upon which a number of contracts can be written and which automatically execute on the happening of a set series of events.

As with most blockchains, it is open source, which means that anyone minded to do so can use the Ethereum blockchain to write and implement smart contracts, which are simply a series of promises in digital form. A bit like a contract really, just with the word "smart" added at the front.

Ether is the unit of value deployed on the Ethereum blockchain, and consequently shares certain characteristics with Bitcoin. It is a potential store of value and is fungible between persons who perceive it to have a value.

Bitcoin is ubiquitous. It has become mainstream, can be used as a means of payment in a number of different arenas and is part of common parlance.

Technically, there are no limits to the use of Bitcoin. While it settles in a way different to dollars or pounds, it essentially does the same thing - which is not a lot, really. Money exists and it sits in our bank accounts. It may enable us to do things but in itself it does not undertake any activity.

Ethereum - more than just a cryptocurrency

As we are currently seeing, governments are starting to put restrictions on cryptocurrencies, driven not by a desire to see their citizens exchanging any particular kind of asset for another asset, but because their citizens are speculating on something which their governments perceive they do not understand.

Ether is simply a child of Ethereum. Ethereum is actually a huge computing network which enables anybody to build a decentralized application. A business, if it determined that it needed a blockchain developed solution, could employ a programmer to build that on the Ethereum platform.

Ether, while associated with the Ethereum platform, is capable of performing the same function as Bitcoin. Whether or not it does so is simply a factor of the parties to any transaction determining whether or not Ether has any value to them.

So back to the central question, is Ethereum a threat to Bitcoin? Probably not.

While Ether is clearly a competitor to Bitcoin, bearing in mind that the combined market capitalisation of both is way south of the market capitalisation of some of the world's biggest companies, there is room for both. Ether has the advantage of being associated with Ethereum, and Ethereum does what Bitcoin cannot do, and came to be because of the limitations and single function of Bitcoin.

Mainstream businesses are beginning to embrace Ethereum technology with banks and other entities using Ethereum-led solutions for things such as payment services. The biggest threat to Bitcoin remains Bitcoin itself, with the continuing creep of government regulation and the ongoing tag of financial crime driving market behaviours.

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