A Introduction to Bitcoin, Ethereum, and Dash From an Investment Perspective
03/28/17
Right out of the gate I want to declare that I’ve never been a “real” investor and that everything I say is simply what I’ve worked out for myself. This is not advice on how to invest, this is only an explanation of my reasoning for my investments. Take it for what it is.
That being said, what I want to do here is go over the most popular blockchain technologies from an investment point of view. I am presupposing that you have a basic understanding of what a blockchain is. If you don’t, please google it and do some reading on your own. After you’ve done that, feel free to ask me any questions. The blockchains I’m going to write about are the top three in total market cap. You can view the list here: http://coinmarketcap.com/
Bitcoin
Obviously bitcoin is number one with a market value of over $16 billion, which is about 75% of the total blockchain market. Bitcoin was the first blockchain and has a proven network that is incredibly stable and secure. However, as bitcoin has grown, the issue of scalability has come to a head. For most of its life, bitcoin was sold as being instant, inexpensive, and decentralized, and unfortunately that is no longer the case. Now that it has grown to such a substantial size, the network is having trouble keeping up with the rate of transactions, leading to a backlog of confirmations with delays up to hours, even days on occasion, which in turn has led to a sort of bidding war in transaction fees. Since a user can raise the fee they pay in order to have their transaction go through faster, more and more people are paying a higher fee. This is obviously not conducive to daily commerce. In order to deal with this issue, there are three options being presented. The first option is that they do nothing and leave the code as it is. This is the Bitcoin Core group. The second option is still considered Bitcoin Core but they also want to add new code called SegWit (segregated witness) to the blockchain. It’s purpose is to increase the amount of data a single block can contain by a factor of about 4 without increasing the blocksize. The addition of Segwit would require a softfork which is just a new feature set added to the existing code. SegWit is complicated code and has yet to be proven in the real world. The third group is called Bitcoin Unlimited (BU) and for it to be implemented, a hardfork would have to happen, which essentially means moving Bitcoin to a completely new blockchain. The purpose of Bitcoin Unlimited is to increase the blocksize which allows for more data within each block and improves transaction times, but because the blocks are bigger, it will take more substantial and costly hardware to mine the network (mining is the backbone of the blockchain) and will end up consolidating control of the network, which exactly what Bitcoin was developed to avoid.
This debate on how to handle the direction of bitcoin has been going on for a long time and brings to light another major problem of bitcoin: a lack of organized governance. Because bitcoin has no real organization, a sort of “tragedy of the commons” has arisen and there is no solution that I’m aware of. Bitcoin is destined to be torn between ideologues.
My support is for Bitcoin Core without SegWit. As you’ll see below, even if one of the other options is chosen and transaction times are improved, bitcoin is still outclassed by new technology, and will lose market share to the up and comers. It simply can’t compete. The reason that I want Bitcoin Core to succeed is that I think bitcoin has the market awareness, proven reliability, and significant investment to become the next global reserve currency. It would function wonderfully as the currency which all others are pegged against and will make a fantastic store of wealth - think digital gold. However, if Bitcoin Unlimited wins the debate, I think bitcoin will eventually fall by the wayside due to technological obsolescence. Bitcoin Unlimited, if it even works, is a short term fix at best.
Ethereum
Number two in market capitalization is ethereum, and even less people grasp what ethereum is than they do with bitcoin. While ethereum has a currency aspect, being a currency is not its purpose. Ethereum is a blockchain platform for other applications to be developed on. These can include DAO’s (decentralized autonomous organizations), smart contracts, prediction algorithms, and beyond whatever you can imagine. When you buy ether, it’s better to think of it like buying stock in Cisco or Intel than buying a currency. It’s still a very young company and they’ve had some serious technical difficulties that required a hard fork to fix, but unlike bitcoin, they have a system of governance and can react to issues in a timely manner. While I haven’t looked much into the projects currently being developed with ethereum, I recognize that its potential is mind boggling. I haven’t put much research into ethereum yet so I don’t have a lot to offer beyond a high level perspective.
Dash
What I’m most excited about is Dash (digital cash), which has jumped from number 7 to number 3 in market share this month. Unlike ethereum, Dash is a currency and nothing but a currency. It is technically sound and introduces a revolutionary approach to running a business.
Dash competes directly with bitcoin but it’s simply better top to bottom. In bitcoin, the miners do all the work of the blockchain which has led to backlogs, but Dash instead created a second tier on their blockchain called masternodes. Masternodes have 3 core functions - 1) pre-confirmation verifications, 2) coin mixing for privacy, and 3) voting on network proposals.
The purpose of the pre-confirmation verifications is to enable instant transaction rates while still preventing double spending. A double spend is where money that has been sent to someone is moved to another address before confirmation so that the original recipient doesn’t get paid. In bitcoin, since there’s such a backlog, confirmation times have been increasing which means that the time it takes to complete a transaction also increases which in turn increases the chance of not getting paid. Dash solves this with masternodes and having them lock the transaction and holding it until it can be confirmed, thus both providing instant (1.3 second) transaction times and the prevention of doublespending. It’s a brilliant solution to the scaling issue that bitcoin is facing.
One of the original selling features, promoted by those who didn’t understand the technology, was that bitcoin was anonymous. However, this is not the case as coins can be easily followed through the blockchain explorer and traced all the way back their release to the blockchain. There are ways to anonymize coins and one of the most effective is called coin mixing. Mixing is where multiple coins from multiple people are intermixed in a digital pool causing them to lose their identity and making them truly fungible. It’s like having a pot of gold coins and throwing 10 of your coins in, mixing them all up, and then pulling out 10 random coins. For bitcoin, this is provided by third party services, which include service fees, but in Dash, it’s built right in as an option and with no fees. You do lose the instant transaction speed when enabled but confirmation times are still measured in minutes, not hours. The masternode facilitates the mixing of coins for Dash’s Privatesend function.
The final functional aspect of the masternodes is governance. As evidenced in the current block size debate in bitcoin, a lack of organized governance can really hinder the growth of a project. In order to prevent this, Dash has a system of governance built into the network. When something needs to be addressed, whether it’s a code change or the release of treasury funds (more on that later), a proposal is submitted to the network and then the masternodes vote on the proposal. For example, there was a proposal to increase the block size, the exact same debate that bitcoin has been arguing over for 2+ years, and within 24 hours it was voted on and implemented. This is one of the reasons that you have to own 1000 Dash in order to own a masternode - you have to have a vested interest in the network in order to have voting rights (and no, this isn’t a scam. The 1000 Dash aren’t paid to anyone, they just have to kept locked in the masternode. They can be released at any time, though at the expense of losing masternode status).
Voting rights leads us to what I consider to be the truly revolutionary aspect of Dash. Dash is a DAO - a Decentralized Autonomous Organization. It is a company that doesn't have a president, a CEO, or anything of the sort, it runs itself. Dash is a for-profit business, it’s product being currency, and because it’s for profit, it has incentive to provide a product that the market demands. The way it earns is by a) having the value of its product, the Dash currency, go up, and by b) transaction fees. All cryptocurrencies have transaction fees but Dash not only has lower fees than bitcoin, but they also changed how they’re distributed. In bitcoin for example, 100% of the transaction fees go to the miners whereas Dash distributes only 45% to the miners with another 45% going to masternodes, and 10% going to the treasury. The treasury is used for paying developers, marketing, etc. For example, there is a YouTube personality named Amanda Johnson who has been putting out videos and media promoting and educating people about bitcoin and other crypto currencies for quite some time, and has developed a bit of notoriety. When she discovered Dash and decided that she wanted to be a part of it, she submitted a proposal to the network for funding to develop multimedia promotions for Dash. It went to the masternodes for vote and they agreed and released funds to her. She now runs a weekly video blog, offers educational videos, gives presentations etc, paid automatically by the network. And by all counts, she’s been very effective. This ability to invest in and promote itself is what makes Dash different than the others. It’s a company and it wants your business.
The last thing I want to talk about regarding Dash is Evolution. Up to this point, all cryptocurrencies take a fair amount of technological skill to be able to use, let alone understand. Coinbase has done a pretty good job of making bitcoin available to the layperson, but Coinbase is just a very simple exchange and wallet. Evolution, which will be released later this year, will be a game changer in how people see and use cryptocurrency. This will be the first truly consumer-centric interface for digital currency. Instead of having to use long cryptographic addresses, you’ll simply send to a contact, just like email. They’re also developing a way to recover your coins in the event you lose your private key - no other cryptocurrency offers this. And lastly, Evolution promises to offer an interface so simple that anyone can use it.
There are over 650 different cryptocurrencies currently being exchanged, and there are a couple of others I’m interested in, but as this is already several pages long, I’m going to write about some of those another time.
As far as investing goes, my current position is 50% bitcoin, 25% Dash and 25% ethereum. I’m not going to invest as heavily as I have been in bitcoin until the blockchain size debate is settled and instead concentrate on Dash and ethereum. I also plan on expanding into some other coins after more research. I think bitcoin still has lot of upside ahead of it but I think the real growth will be seen in Dash and ethereum.
If you found any value in my insight, I gladly accept tips :-)
BTC: 1E5ca8ZbmAo4S8DswcLxgUAhA4HDZ35z9q
Dash: XrKT3kX2ha2KbdimPPNCPM3wnefcbZEEjc
Ethereum: 0x7227f671cc472e477571cE4e2ceFEba20664e035