I’ve heard that Bitcoin can be thought of as gold and Ether as equity. Bitcoin has become (is still becoming, really) the most widely accepted and well established cryptocurrency. It was developed primarily to act as digital currency that benefits from the ground-breaking tech that underlies it (blockchain). Blockchain enables a profound shift in the conduct of modern transactions, removing both centralization (i.e. the middle man) and manipulability (i.e. traditional record keeping and contract management).
Going back to the analogy, Bitcoin’s becoming, just as some 200 years ago gold became, inherently valuable through wide acceptance and the profound shift in transactional philosophy it represents. A good example of the power of such acceptability is how we still use the colloquial term “gold standard” to describe any well regarded and highly accepted product, service, person, etc.
When it came to buying Bitcoin, the big “green-lights” for me were Jamie Dimon and Vladimir Putin’s negative commentary along with the overall supply/demand case. Dimon’s railed against Bitcoin on numerous occasions recently, calling it a “novelty,” accusing it of being “fraud,” and labeling those who invest in it “stupid.” Putin took his signature hardline stance, threatening that he and the Russian Central Bank would “come down hard” on those who attempted to adopt it. To me, both those guys have a lot to lose as Bitcoin gains popularity and acceptance.
Putin sees it as a technology that will be difficult to control and could seriously hinder, or at least shine a light on so to speak, all the shady ops he & his government get away with. Dimon knows Bitcoin will essentially replace the transactional middle man (the banks, in this case). Brian Kelly of CNBC first offered this argument in late October, saying, in his words, Bitcoin will “Amazon” the banks. Further, Bitcoin has much room to expand in terms of market cap when you compare how much capital the large banks, like Dimon’s JPMorgan Chase, transact daily.
Ether, in contrast to Bitcoin’s existential function as an asset, exists as a means to grant its holders access to and use of the Ethereum network. Through the power of its smart contracts, the Ethereum platform has tremendous potential to impact many existing industries as well as to create new ones. Smart contracts automate contract execution through computerized algorithms, eliminating the time, cost and general conflict associated with traditional contract management and the records that accompany it. Ether the “coin” will become valuable insofar as it lets developers leverage the platform on which it’s based to create new technologies, generate new business ideas and generally disrupt the status quo.
So, investing in Ether is really an investment in the Ethereum network. Again, going back to the analogy at the very beginning, buying Ether parallels buying equity in a particular company or group of companies. The value of both (Ether and company stock) grow with the utility and ingenuity of the underlying, in contrast to the inherent value model represented by gold and Bitcoin.
My next point is a bit more philosophical. I’ve heard smart people say that you should only invest in what you understand. And I understand very little about blockchain. I also understand very little (zero) about how crude oil is refined into gasoline or how gene therapies work. So I shouldn't invest in any Energy or Biotech companies, right? Wrong, in my opinion. How many mutual funds that form the retirement plans of Energy & Biotech laymen like me (smartly) include holdings of companies in those two sectors?
Instead I look at Bitcoin & Ether (& Energy & Biotech) through the lens of supply and demand. Arguing the supply/demand cases for a reliable fuel like gasoline and longer life through medical breakthroughs makes investing sense to me, though the former’s case is weakening while the latter’s grows. Analogously, demand for Bitcoin will expand to match the transactional “size” of banks, complemented by strong account growth (in terms of “addresses”). Supply will grow to meet that demand, and the underlying value of Bitcoin will grow in kind.
One last comment about a third cryptocurrency yet unmentioned. I’ve heard that Litecoin isn’t nearly as powerful as Ether, but execution of its algorithms is much faster than those of Bitcoin. So, having very little background, it sounds like Litecoin might come to be thought of as a currency, like the US dollar, British pound, Japanese Yen, etc., in contrast to Bitcoin’s gold. Litecoin, then, would have inherent value but would be much more liquid and flexible in its potential uses.