Ethereum

Ethereum has always played second fiddle to its bigger brother Bitcoin in the cryptocurrency world. Ethereum’s role as a currency is secondary though, and in several respects, it is both more functional than Bitcoin and also has more potential, as a currency and for several other important uses as well. Ethereum also serves as an investment of sorts that has attracted a lot of speculation lately.

Ethereum Has Taken Off Like a Rocket

Ethereum has very recently vaulted to the number two position in the cryptocurrency or digital currency market, due to a phenomenal rise in popularity and value during the months of March and April of 2017.

EthereumThe huge rise in the value of Ethereum gives you a taste of how volatile cryptocurrencies can be, as well as their potential upside. Ethereum began the month of March, 2017, valued at $15.80 with a market cap of about $1.4 billion. A little over 2 months later, it rose to $94.02 with a  market cap of over $8.5 billion.

It is now second only to Bitcoin’s market capitalization of  $25.8 billion, who added an additional $5 billion more in value, or an increase of 20%, themselves during these two hot months for the industry.

Cryptocurrencies can go the other way as well, and being still basically in their infancy, with such a tiny footprint compared to traditional hard currencies, the demand for them can fluctuate a lot, and this is all about demand here, since the supply is fixed.

Seeing the possibility of a 500% return on something in just two months certainly as attracted people’s interest. A lot of investors love volatility, especially when investments deliver big on the upside, and the zeal that you see when an investment gets hot like this can drive a lot of new people into these markets, hoping to get in on the fun while it lasts.

These situations do tend to create bubbles so to speak, and the stampede can go the other way as well, and just as fast if not faster. There’s just no other good explanation for the meteoric rise of Ethereum lately other than it is indeed attracting a lot of speculators, and with the excitement that comes with this, one needs to exercise the appropriate amount of caution, which is a lot.

This is not to say that one should avoid markets like this, and if one is indeed careful, not being too greedy in other words and not waiting until a lot of people have taken their profits from the rise to act, opportunities like we are seeing lately with Ethereum and other cryptocurrencies, can be quite fabulous indeed.

What Is Ethereum?

Bitcoin started the cryptocurrency craze back in 2009, based upon the concept of the decentralization of databases known as a blockchain. Rather than storing all of the information on a central server, with users gaining access to it, blockchains distribute all of the information in the chain to all the users.

This is far more significant than it first appears, as it not only allows users to interact efficiently with one another, it also adds the security of all of the information being verified and stored on all the machines in the chain, and while that’s a fabulous idea for managing a digital currency, its potential is far greater.

With digital currency, in order for a transaction to be verified, it would reference all of the information contained within the chain, all of the previous transactions that have ever been conducted, and you couldn’t just hack one database to alter this, you would have to hack them all. The currency itself and the transactions are fully transparent, with users getting access to the funds through secure private keys.

This doesn’t mean that digital currencies are completely hack proof, and there have been instances of hacking already with it, it’s just extremely hack resistant, which seems to be as good as it may get.

So you have to prove you have the currency in your possession, via the public ledger, and then and only then can they be transferred to another user. This also eliminates the need for intermediary payment processors, the money flows from one user to another, upon successful validation.

There are over 700 different cryptocurrencies in existence at the present time, although most of the market is held by just a few of them.

Ethereum was the brainchild of former Bitcoin programmer Vitalik Buterin, and was launched in 2014. While Ethereum is used as a digital currency, it is so much more, and has taken this concept and expanded it to include a multitude of other applications, through its robust open source platform

The basis of Ethereum is the concept of smart contracts, where users or even machines can enter into agreements that are digitally maintained and executed, through the Ethereum Virtual Machine, which is considerably more sophisticated than anything that has come before it.

Ethereum in Action

For example, this is being looked at in the derivatives market, where investors can directly set up positions in futures and options and the program will maintain and execute the contracts. The main idea here is to decentralize the data and allow public access to it while still maintaining, and actually adding to the security of the arrangements.

The Etherium platform is a tool that can be easily used by other programmers to design all sorts of applications that can apply to many different things, just about any arrangement you can imagine. This has the potential to profoundly change the way we do computing, and has attracted the interest of several very large users, including Microsoft, who is looking to use Ethereum’s technology to transform its cloud.

Cloud computing has really taken off lately, and smart contracts take this to a new level. Up into now, the cloud was a way to interact with a database, but with Ethereum, the users become the cloud so to speak.

This is even being looked at as a way to run elections, where people’s votes would be added to a blockchain, and this would make things not only more efficient but would write these votes into the chain in such a way that would be completely tamper proof and transparent.

Ethereum is also being looked at as a way to maintain identity profiles, as a way to track the supply chain to see where a product actually came from, to be used with machines interacting with machines, the internet of things as they call it, and a host of other applications.

Ethereum as Currency

The rise to fame of Ethereum’s currency, the Ether, hasn’t been completely smooth. It did have an issue with a project being hacked, an autonomous venture capital project called the DAO. In June, 2016, hackers discovered an exploit in the code and were able to divert $50 million worth of Ether to a new project they created within it.

Fortunately, the programmers had written in code that did not allow for the funds to be withdrawn for a month in the event such a thing happened, allowing a course of action to be decided upon.

Ethereum users were then faced with a hard decision, whether to create a hard fork in the currency, to allow the original investors access to their funds, or to do nothing and let the hackers get away with it. By using a hard fork though, this would run counter to the principal of cryptocurrencies of immutability.

So normally, once a transaction is done, it stands, and this is supposed to apply no matter what, but the result of the hack wasn’t acceptable either. Users chose to use the fork, although not all users agreed, and this gave birth to Ethereum Classic, the version of it that was not altered.

Ethereum Classic still trades today, although it is has a much smaller market capitalization than the main Ethereum currency, of only about $668 million at present. It has the same circulating supply, and is identical right up until the time of the fork, but this represents the path not taken.

Since then, several more forks were needed with the main currency, in order to thwart further hacking attempts. So the idea of immutability is merely an ideal and from time to time, things do need to be altered for the benefit of the currency overall.

Ethereum Classic is still up there among the top 7 cryptocurrencies out there, although it is the main one, the forked one, that has gathered all the attention as of late, and is a far cry from its much bigger brother.

The Outlook for Ethereum Currency

Digital currencies have really become a fad of late, and the Ether does have a more fundamental basis than its main competitor, Bitcoin, due to the Ether being used as a medium of exchange with all Ethereum contracts, now and in the future.

Given that we can expect to see the use of the Ethereum platform really take off in the future, it may one day surpass Bitcoin for the top spot in cryptocurrency. It will probably take a while though for the Ether to build up enough momentum from its projects to grow that much, as well as seeing its general demand grow, but it could and very well may happen in time.

Where Bitcoin is clearly beating Ethereum and everyone else is in the area of liquidity, and retailers just don’t take Ether yet, where more and more of them are starting to accept Bitcoin as a method of payment.

Ideally, with an alternative currency, you want to get to the point where you don’t always have to exchange it for hard currency to spend it, and this is the area that Ethereum really needs to work on in order to really contend with Bitcoin and surpass everyone.

Ethereum does have a lot going for it though, and its use as a currency is for the time being primarily focused on providing currency for its smart contracts, but as the demand for it increases, it may get to the point where it may be used for other purposes, as a medium of exchange for commerce.

In the mean time, anyone can buy Ether, and there does seem to be a lot of speculation going on with it, and this is an investment that can pay some huge dividends if played right.

Ethereum FAQs

  • Is ethereum better than Bitcoin?
    This really depends on what you are looking to do with a cryptocurrency. If you’re looking to use it as an investment vehicle, Bitcoin wins hands down. If you are instead looking to use a cryptocurrency as a currency, Bitcoin is just about the worst for this and Ethereum is much faster and better.
  • What is the difference between ethereum and ethereum classic?
    There used to be just one form of Ethereum until hackers stole $50 million worth of it, which caused Ethereum to be broken up into Ethereum Classic, the original Ethereum, and Ethereum, which was formed from the original by creating a fork in the original blockchain. People can buy either form and they now exist separately.
  • What can ethereum be used for?
    Ethereum is not a cybercurrency per se but instead an application that allows for decentralized databases to be brought together into what are known as smart contracts. Ethereum uses blockchain technology to manage and verify these contracts. Ether, Ethereum’s digital currency, is used as a means of payment.
  • What is the purpose of ethereum?
    Unlike most cybercurrencies, Etherium’s purpose is not to just allow people to exchange value by making payments with a digital currency, although Ethereum does have one, called Ether. Ethereum itself is much more than this and has applications far beyond just cybercurrencies and provides a novel way to manage information and relationships.
  • Can I invest in ethereum?
    While you can’t actually buy Ethereum, you can buy and sell its cryptocurrency, called Ether. People do invest in Ether for speculation purposes. While this and other cybercurrencies have no corresponding value in the real world, as long as there is a demand to buy it, this demand in itself will establish a value for it that can rise over time.
  • How do I buy and sell ethereum?
    The first thing you need to do in order to buy Ethereum is to set up an Ethereum wallet, which can either be a hardware wallet or a software one. You then set up an account at a cybercurrency exchange that trades in Ethereum. You then can buy and sell Ethereum on your exchange of choice.
  • What Blockchain does ethereum use?
    Ethereum uses its own blockchain, which is used not only to track and verify transactions with its currency, Ether, but can be used for any purpose where blockchain technology may be of benefit, such as verifying arrangements between parties as well as just about anything else that requires verification
  • What makes ethereum different?
    Ethereum stands out the most due to its currency merely being a sideline to its main focus of blockchain verification. It is therefore of far more practical use than your typical cybercurrency, because it just isn’t a cybercurrency it is a structure for organizing decentralized applications, with almost limitless possibilities.
  • How do you transfer ethereum?
    Ethereum can either be sold to an exchange, used to make payments to merchants who accept it, or can be sent to another party through a peer-to-peer transfer. All of these transactions involve paying a small fee to people called the miners, so you always want to account for this and need to add a little extra to the amount.
  • How many transactions can ethereum process?
    Ethereum can process about 20 transactions per second these days, which is better than the 7 per second that Bitcoin can handle, but a lot slower than fellow cybercurrency Ripple which processes 1,500 per second. Visa and Mastercard, the industry leaders, can handle about 24,000 per second.
  • How big is an ethereum block?
    The size of the Ethereum block is currently 9 GB, and its size has grown at a much faster rate than competitor Bitcoin. There are some who are concerned that Ethereum’s block may one day reach a critical size such as 1 TB and this may present some big challenges to getting things confirmed in a reasonable manner.
Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.