Considering many factors such as real use, user base, technological iteration speed, etc., Ethereum is likely to replace Bitcoin as the mainstream cryptocurrency.
In terms of market trends, the key difference between the current cryptocurrency market and the 2017-2018 bull market is the participation of institutional investors. However, with the recent slowdown in the participation of institutional investors, the inflow of cryptocurrency ETFs has decreased, alternative currencies have emerged one after another, and the market has once again been dominated by retail investors.
This shift from institutions to retail investors is increasing the possibility of a market crash. The current high volatility in the market will continue until cryptocurrencies have potential real economic uses independent of prices.
Etherfang has huge potential
The Ethereum system supports smart contracts and provides developers with a way to create new applications. At present, most decentralized financial applications are built on the Ethereum network, and most NFTs are also purchased using Ethereum.
Compared with Bitcoin, Ethereum has a larger transaction volume. With the increasing use of Ethereum in Defi and NFT, Ethereum will establish its own first-mover advantage in the application of encryption technology.
Ethereum can also store almost any information securely and privately on a decentralized ledger. This information can be tokenized and traded. This means that the Ethereum platform has the potential to become a large-scale trading market for trusted information.
At present, investors can already sell digital art and collectibles online through NFT, but this is only a small part of its practical use.
In the future, individuals can store and sell their medical data to pharmaceutical research companies through Ethereum. Digital archives on Ethereum may contain personal data, including asset ownership, medical history, and even intellectual property.
Ethereum also has the benefit of being a decentralized global base server. Unlike centralized servers like Amazon or Microsoft, this may provide a solution for sharing personal data.
Bitcoin's scarcity is not enough to support its value store function
The main reason is the market to support Bitcoin's value storage function is its limited supply. But Goldman Sachs believes that the success of the store of value lies in demand, not scarcity.
At present, the main price storage assets on the market have a stable supply: the supply of gold has been growing at a rate of close to 2% for centuries, but gold is still a recognized means of maintaining value. Rare elements like osmium are not a store of value.
A fixed and limited supply may stimulate hoarding, forcing new buyers to bid higher than existing buyers, thereby pushing up price volatility and creating a financial bubble. Compared with limited supply to maintain value, it is more important to reduce the rapid and unpredictable growth of new supply. At present, there is no upper limit on the total supply of Ethereum, but there are limits to the annual supply growth, which meets this standard.
Fast-developing technology breaks first-mover advantage
Supporting the view that Bitcoin will dominate the cryptocurrency market is that it has a first-mover advantage and a huge user base.
History has proven that it is difficult to maintain the first-mover advantage in an industry with the ever-changing technology and increasing demand. If established companies fail to adapt to changing consumer preferences or competitors’ technological advancements, they may lose their dominant position.
At present, the overall number of active users in the cryptocurrency market is very unstable. In this environment, encryption technology is changing rapidly at the same time, and systems that cannot be quickly upgraded may become obsolete.
In terms of the user base, Ethereum gained a large number of active user groups in 2017, and the current user base has reached 80% of the scale of Bitcoin.
In terms of technology, Ethereum is currently rapidly upgrading its protocol.
At present, the energy consumption of Bitcoin has reached the energy consumption of the whole of the Netherlands. If the price of Bitcoin rises to 100,000 US dollars, its energy consumption may double. From an ESG perspective, this makes Bitcoin investment challenges.
In terms of security and stability, all cryptocurrencies are still at an early stage, with rapid technological changes and an unstable user base.
Although there are security issues in the verification process of the Ethereum PoS protocol, Bitcoin is not 100% secure. At present, the top four Bitcoin mining pools control nearly 60% of the supply of Bitcoin, and the excessive concentration leads to the possibility of false transactions.
Ethereum also faces many risks, and its dominance cannot be guaranteed. For example, if the Ethereum 2.0 upgrade is delayed, developers may choose to move to a competing platform.
The market will continue to fluctuate until the real use-value appears
The key difference between the current cryptocurrency market and the 2017-2018 bull market is the presence of institutional investors: this is a sign that the financial market is beginning to embrace cryptocurrency assets.
Bitcoin's volatility has been high, and the single-day price in the past week has fallen by 30%.
At the same time, the recent participation of institutional investors has slowed down, the inflow of cryptocurrency ETFs has decreased, and alternative currencies have emerged one after another, suggesting that the market is once again dominated by retail investors.
This shift from institutions to retail investors is increasing the possibility of a sharp drop in the market. The current high volatility in the market will continue until cryptocurrencies have potential real economic uses independent of prices. This will usher in a new era of cryptocurrency.
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