What can be wrong with Ethereum?

Ethereum ,Psychology
June 19, 2017

In the past fortnight there has been intense action towards the upsurge of Ethereum. Just this week itself, Bitcoin Wiser received a considerable amount of queries to buy Ether instead of Bitcoin [first of all buying a full BTC is becoming cost prohibitive and secondly Ether is causing a lot of news in mainstream media].

Before we delve down into the economics and monetary aspects of comparison, from a technology and Blockchain perspective Ethereum differs from Bitcoin in 7 main ways:

. In Ethereum the block time is set to 14 to 15 seconds compared to Bitcoins 10 minutes. This allows for faster transaction times. Ethereum does this by using the Ghost protocol.

2. Ethereum has a slightly different economic model than Bitcoin – Bitcoin block rewards halve every 4 years whilst Ethereum releases the same amount of Ether each year ad infinitum.

3. Ethereum has a different method for costing transactions depending on their computational complexity, bandwidth use and storage needs. Bitcoin transactions compete equally with each other. This is called Gas in Ethereum and is limited per block whilst in Bitcoin, it is limited by the block size.

4. Ethereum has its own Turing complete internal code… a Turing-complete code means that given enough computing power and enough time… anything can be calculated. With Bitcoin, there is not this form of flexibility.

5. Ethereum was crowd funded whilst Bitcoin was released and early miners own most of the coins that will ever be mined. With Ethereum 50% of the coins will be owned by miners in year five.

6. Ethereum discourages centralised pool mining through its Ghost protocol rewarding stale blocks. There is no advantage to being in a pool in terms of block propagation.

7. Ethereum uses a memory hard hashing algorithm called Ethash that mitigates against the use of ASICS and encourages decentralised mining by individuals using their GPU’s.

While Bitcoin mirrors the functions of real money, the same is not true for Ethereum. To understand the same, let’s review what real money is:

Before we arrive at the conclusion that why Ether is not real money, let’s understand it by a few facts:

  1. Nobody, even the old crypto players, saw the Ethereum bubble coming in the last two months.
  2. Ethereum’s sole use case at the moment is ICOs and token creation.

So what’s driving the Ethereum price?

Greed.

Greed from speculators, investors and developers.

Can you blame them?
Speculators and investors: No.
Developers: Absolutely.

So let’s think for a minute and think what determines the price? Supply + demand. Pretty straightforward.

Supply: the tokens that are available on the market, right? But with every ICO there are more tokens that are being “locked up”. Obviously the projects will liquidate some, to get fiat to pay for development of their project, but they also see the rising price of Ethereum. So at that point greed takes over and they think, totally understandable, “We should probably just cash out what we really need and keep the rest in ETH, that’s only going up anyway it seems.”
And obviously there are new coins being mined, but if you look at the amount of ETH these ICOs raise, at this point, it’s just a drop in a bucket.

Demand: You have the normal investors (who are already very late to the game at this point… as usual), but the buy pressure that these ICOs are creating is crazy and scary. Take TenX for example, it’s an upcoming ICO at the end of the month. The cap is 200,000 ETH (at current ETH price of $370) that’s $74,000,000 for a startup. Here’s the best part: it’s only 51% of the tokens. Effectively giving it an instant $150 million valuation (if it sells out, which it probably will).

Bitcoin Wiser itself has invested in projects such as Wageer, Golem, Iconomy, Basic Attention Token and tAAs but we are in for the short, cause Gordon Gekko said “Greed is Good”.

What will the price do next?

It can go quite a bit higher, there are so many coins being taken off the market by these ICOs, that it can still continue for a while and everyone is seeing this and thinking: “Why aren’t I doing an ICO”. There are lots more coming.

At one point it will crash, hard. What the trigger will be? Bug(s) in smart contracts, major hack, big ICO startup that fails, network split, even something as silly as not having a decent ICO for a couple of weeks which creates sell pressure from miners and ICO projects can cause a big crash. It’s not a question of “if”, it’s a question of “when”. That being said: Markets can remain irrational for quite a long time.

Usually when a bubble like this pops we could easily see 70–80% loss of value (for reference: Bitcoin went from $1,200 to $170 after 2013–2014 bubble). Check this situation from the epic film The Wolf Of Wall Street and most probably you might see some similarities:

https://www.youtube.com/watch?v=UTHlXb0PXh4

Furthermore, ICO’s are “High on Radar” by US SEC

For people who think Ethereum can replace Bitcoin as the top coin

Ethereum is not a store of value. It isn’t capped. Yes, we know they’re planning to switch to PoS (which it already kind of is). Do you think they managed to create the first software implementation ever without any bugs? Doing such a major change on a (currently) $30 billion market is completely irresponsible, borderline insanity. Even if we assume that there are no bugs, what about the miners? The miners who bought their equipment to mine Ethereum, the miners that supported the network for years. “But they knew we were switching to PoS.” Of course they knew, and do you think they’ll just give up on such a profitable coin? Some might switch immediately to Zcash and Ethereum Classic but there will be another fork and we’ll have ETHPoS and ETHPoW, with of course all the Ethereum tokens being on both chains. Even Ethereum developers think that his is a very likely scenario.

Ethereum is not immutable. search and read on DAO and split that lead to Ethereum and Ethereum Classic.

Ethereum is not decentralized.

Ethereum has the Enterprise Ethereum Alliance. But but but.. all those big banks use Ethereum. No, they don’t. They use “an” Ethereum, which is a (private) fork of Ethereum. By that definition 99% of all altcoins are using Bitcoin. Still a separate chain. The fact that we’re talking about a private blockchain here actually makes altcoins more like Bitcoin than “an Ethereum” that EEA uses like Ethereum. You can compare it to 2013–2014 when some companies started to get interested in blockchain vs Bitcoin, only difference here is that for Ethereum it’s part of their marketing campaign to lure in potential investors.

Tip: If you’re a trader or investor, be realistic about the bubble. We know you hear this a 100 times when you’re trading but: don’t invest what you can’t afford to lose.

[Source: big shout to WhalePanda for his writing on Medium and on Twitter]

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