The Risk of Bitcoin and Ethereum

At this point in the cryptocurrency world, future success and predictability is unknowable.

It is impossible to know how competition and regime change will change the market. It is unlikely that cryptocurrency will be a winner-take-all game. But are there going to be 1000 useful cryptocurrencies in five years? Or will there only be 10? Future cryptocurrency regime changes have the potential to shift drastically in the next five years. Ultimately, what could kill Bitcoin or Ethereum?

It is highly unlikely Bitcoin could be killed at this stage in its development. However, if Bitcoin were to die, the probable cause would be the creation of a new technology, which humanity cannot yet envision. This technology would have to include a superior consensus mechanism which provides greater security and a better overall governance mechanism. Proof of Work is arguably the best consensus mechanism currently, but the world does not know if a new technology has the potential to emerge.

Some cryptocurrency hedge funds are looking to capitalize on this potential development. This investment strategy is strongly based on Silicon Valley venture capital investments. For example, if a VC invested in 20 different social media companies and only one of them were to beat Facebook, that would still be considered a very successful investment. The same is true for possible technologies which have better consensus mechanisms than Proof of Work. However, in this scenario most of the investments will fail. Cryptocurrencies should be treated in the same manner.

Overall, it is unlikely that Bitcoin will die, mainly because it’s competing based on its security, longevity, stability, and brand identity. In this sense, Bitcoin is comparable to a company such as Coca Cola. A competitor is not going to out-preform Coca Cola just because their prices are ten or twenty cents cheaper. This was the reality for Richard Branson when Virgin tried to launch Virgin Cola in 1994. The same is arguably true for Bitcoin. If a coin is developed with 10x cheaper transaction fees it is still unlikely to overtake BTC mainly because of Bitcoin’s longevity and stability. Unless a new technology contains a more effective consensus mechanism and security protocol, Bitcoin is most likely not going anywhere.

This theory applies to Ethereum as well, but not in the same context as Bitcoin. The speculated risk around Ether, as opposed to Bitcoin, is the fact that Ethereum will not survive without constant innovation. Ether cannot support decentralized applications without effective scaling through the use of sharding.

Previously, Bitcoin was compared to Coca Cola, but Ethereum is more comparative to a company such as Uber. Both organizations offer excellent services, but if Uber survives it will be an entirely different company in 5 to 10 years. Autonomous vehicles will forever alter the transportation market and if Uber does not constantly innovate another company will take its place. The same is true for Ethereum. If another dapp blockchain emerges and innovates successfully, then it will be in a good position to take a substantial portion of market share away from Ethereum. One prominent competitor to Ethereum will be Neo.

It is also reasonable to make the argument that Ethereum is in a great position to adapt to changing technological circumstances, however it is still to early to make an assumption with substantial veracity. Therefore, in order for Ethereum to be the dominant general-purpose blockchain it must continually evolve.

In general, cryptocurrency is at an infantile stage which parallels some of the early internet retailers. For example, pets.com was an online pet store launched in 1998. The site was a great concept considering how successful petsmart.com is today. Unfortunately, pets.com was too ahead of its time because in 1998 most consumers were uncomfortable using online payment methods.This consumer behavior eventually led to a severe lack of demand, and ultimately the failure of pets.com. This kind of failure may be likely to occur in major cryptocurrencies. This is mainly due to the fact that less than 1% of the global population is using cryptocurrencies (2017). Some of the current developing blockchains may be too forward-thinking. In effect, incredibly ambitious technology may be too far ahead of current consumer preferences. Some conceptual layouts may not have sufficient consumer usage until five or ten years down the road.

Additionally, it is important to remember that some of the major players may not be around in five years. For example, in 1996 AskJeeves.com was the primary search engine until Google emerged and dominated the sector. For cryptoassets, it is possible that the winner has not been born yet. Nevertheless, Ethereum has excellent architecture, an established brand, and a popular leader. It is just too early to say.

It is certain that Ether is ripe for disruption. Ethereum may thrive and remain a market leader, but considerable change is required for this scenario to become a reality. For this reason, it is possible that an investment in Ethereum contains greater risk than an investment in Bitcoin.

Disclaimer: I am not a financial advisor. This is not financial advice. Please do your research independently and make objective decisions. This article is intended to educate readers about potential risks of Bitcoin and Ethereum. The author does hold positions in both Bitcoin and Ethereum. The author has no position in Neo.