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FINANCE8-MINUTE EXPERT
Ethereum: The lowdown on what it is and why it’s surging
BY LEE CLIFFORD AND ROBERT HACKETT
May 8, 2021 11:00 AM PDT
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The crypto world has been transfixed as Ethereum, long stuck in the shadows of Bitcoin, had a breakout stretch, rising more than 50% in the past week. Year to date, the world’s second largest cryptocurrency has risen more than 360%. And since the stock market bottomed late last March, Ethereum is up an astonishing 2,200%. For those new to crypto or just curious, here's what you need to know about ETH.
What is Ethereum?
Can you actually use Ethereum for anything?
As Ben Carlson wrote for Fortune, yes you can. And that's a big reason the price is soaring:
The crypto run this time has two features the 2017 version didn’t—institutional adoption and actual applications. According to the Financial TimesCoinbase now has more than $122 billion in institutional capital on its platform, up from just $45 billion at the end of 2020. For most of its existence, crypto has been driven by individual and retail adoption. That is changing.
But it’s the uses that are likely driving Ethereum higher. Ethereum is a blockchain just like Bitcoin but it differs in that it is highly programmable. This means developers can write code, create rules, and make applications on the platform. The “smart contracts” behind them can be used to validate agreements securely.
You can think of the applications that can be built on Ethereum much like the apps that can be developed on Apple’s App Store or Google’s Android system. The biggest difference is there are no giant tech behemoths behind the scenes controlling Ethereum’s network—instead everything is done by computer code. This is what attracted so many people to crypto in the first place: It’s decentralized in terms of who controls it. The general idea is you can create rules for proof of ownership and automatically executing software programs because of the security of the blockchain.
And you need Ether, the cryptocurrency that powers Ethereum, to buy things on the network. According to the Wall Street Journal, more than 7 million new accounts that hold Ethereum balances were created in the first four months of 2021, bringing the total up to more than 55 million. Transactions totaled $1.5 trillion in the first quarter, more than the previous seven quarters combined.
What's a "dapp"?
These are decentralized apps that run on Ethereum. Imagine a cryptocurrency exchange without the need for a centralized intermediary, like a Coinbase. (That's Uniswap.) Picture a social media network that has no Facebook or Mark Zuckerberg calling all the shots. (That seems to be Jack Dorsey's ultimate, blockchain-based "blue sky" plan for Twitter.) The options are endless: Gaming, crowd-sourced investing, an Uber-less Uber alternative, and on.
How high can ETH go?
Nigel Green, CEO and founder of deVere Group, says Ethereum’s time has come—and the digital currency is well positioned to increase its market share.
“Ether is one of the main beneficiaries in the wider explosion in the cryptocurrency market,” he says. “The boom over recent months has been fueled by soaring interest from major institutional investors and growing recognition that borderless digital currencies are the future of money. This momentum is likely to build further in the near-term and I believe Ether will hit $5,000,” he said in early May.
Explain how "DeFi" plays into all of this
DeFi—pronounced "DEE-fie"—is short for "decentralized finance." Former Fortune writer Jeff Roberts recently dove into this topic. "The simplest way to describe DeFi is as an open financial network. If you want to send, lend or borrow money you don't need to join a private network like PayPal or Fedwire or a bank," says Peter Johnson, a former Morgan Stanley banker who is now an executive at Chicago's Jump Capital, a firm that specializes in fintech and cryptocurrency.
Like Bitcoin, the broader world of DeFi is fueled by a libertarian worldview, and a thirst for money. But unlike the crypto mania of 2017, savvy traders don't have to rely on swings in asset prices to earn a return. Instead, they can turn to a variety of websites that let people loan out their cryptocurrency, often for high rates of interest.
Are big companies embracing Ethereum?
Some have. According to Fortune, "The supply of Ethereum has also been dropping amid increased demand and businesses have been investing in startups that revolve around Ethereum, including such big names as Mastercard, UBS, and JPMorgan."
What's a fair price for Ethereum?
Carlson wrote in Fortune that there's no easy way to answer that question. "From a purely financial asset perspective, none of this helps us determine what the fair price is for Ethereum itself. The soaring price is likely taking into account the future potential of this technology. There is also an element of momentum, speculation, and the fear of missing out at play here. It’s impossible to know what the “fair” value of Ethereum is or could be. Crypto is like a commodity in that there are no cash flows, profits, dividends, or income streams to use for valuation purposes. It’s all supply and demand. Right now, the demand for Ethereum remains strong. Assuming the use cases continue to grow, that demand could remain for a while."
If you own ETH, when should you sell?
Do you take profits off the table? Let your winnings rise in hopes of even greater gains in the future? Try to pick the next big winner?
Carlson advises asking yourself these four questions. The fifth and final one is especially germane. Ask yourself: What would bring me the most regret?
Investing itself is a form of regret minimization. You’re forgoing consumption now to give yourself the opportunity to consume something else, hopefully with more money, in the future.
Some investors are better than others at holding on for dear life during a crash. Others are better suited for a risk management strategy that reduces volatility, even if that reduction in risk comes in the form of lower expected returns over the long haul.
Whatever your disposition, it can pay to figure out what you would regret more after sitting on big gains in your portfolio: (1) Missing out on further gains if you sell too early, or (2) Seeing those gains evaporate if you hold on too long.
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