Why I’ve Bought in to Ethereum

  • I have now reduced my cash holdings from 30% to 25% in order to hold 5% Ether.
  • I’m investing in Ethereum because I like what I read from Vitalik Buterin.
  • It is possible I will lose the full investment because crypto has an uphill battle against traditional currencies that work quite well.
  • I see that knowledge about digital security and transactions is growing – my bet is that this will prove valuable and that value will accrue to the Ether token.

Background:

Until now, I have held my investments as follows (link here to my explanation why):

  • 30% Berkshire Hathaway
  • 30% Store Capital (a real estate investment trust)
  • 30% cash
  • 5% gold index fund
  • 5% Bitcoin

I have now reduced my cash holdings to 25% in order to hold 5% Ether. This brings me to 10% holdings in crypto across Bitcoin and Ethereum (plus a much smaller amount of some altcoins).

Note: To avoid spamming everyone on this channel with crypto, I have moved my crypto writing over to a pseudonym at Pinotio.com .

What is Ethereum and what is Ether?

Ether is a cryptocurrency, much like Bitcoin. Ethereum is the software platform on which it Ether is transacted.

The purpose of Ethereum is a lot broader than the Bitcoin network. In addition to allowing transactions involving Ether, Ethereum (the software platform) allows you to write lines of code that are executed and recorded publicly.

Many of the altcoins (the lesser known cryptocurrencies) are built and hosted on the Ethereum platform. For example, there is an automated cryptocurrency exchange called Uniswap.org that is built and runs on the Ethereum platform. Uniswap allows you to exchange one cryptocurrency for another at the prevailing market rate – without the need of a bank or a trusted third party. Everything is automated via lines of code.

To execute lines of code on Ethereum, you must pay the network. Those payments must be made in Ether, which is the native currency of Ethereum.

Why invest in Ether?

Ethereum was invented by Vitalik Buterin a young Russian-Canadian polymath. Reading his website – Vitalik.ca – it is clear that Vitalik is highly knowledgable and thoughtful.

While there are owners of Ether, there are no owners of the Ethereum platform, which is open source. The influence that Vitalik bears on the Ethereum network is not a formal one, but achieved through the what he shares through his writing online, his contributions to code that, and The Ethereum Foundation – a non-profit to promote the growth of the Ethereum network.

I’m investing now in Ethereum because:

  1. I like Vitalik Buterin and Ethereum is an imperfect embodiment of Vitalik’s ideas. Since Vitalik is young, I believe he has many decades left during which he will continue to contribute in ways that improve upon the Ethereum platform.
  2. Ether is the second largest cryptocurrency by market capitalization, after Bitcoin.
  3. I have read about other technology-forward thinkers holding a combination of Bitcoin and Ether – notably Balaji Srinivasan and Mark Cuban.

Pitfalls with Ethereum

Fiat Currencies Remain Strong. As with any crypto, I expect it is possible that I will lose all of my investment. As Tyler Cowen recent pointed out on Lex Fridman, crypto has a lot of work to do in order to displace fiat currencies (US dollar, Euro etc.). The currencies we have today work very well and getting consumers to adopt something new is an uphill battle. My view is that the use cases for crypto remain weak. At best, it seems that we may be able to reduce remittance and currency exchange fees. However, I believe the technical progress being made – by people like Vitalik – on improved encryption and data storage methods is impressive. You can read Vitalik’s writing on zk-snarks or you can read the Bitcoin Whitepaper for examples of this progress. Einstein discovered beautiful equations, but their full utility only became apparent with time. That is the hope – not the guarantee – of crypto.

The Ethereum Network is Overloaded. Right now, the ethereum network is not able to cope with the number of lines of code being executed. The cost of doing a transaction can fluctuate to above $100. There are technical solutions to this but they are taking time to roll out. For the technically interested, a big improvement will come as the network moves from proof of work (like Bitcoin) to proof of stake – which is a much lower energy (and hopefully cost) way of implementing transactions. Alternatives to Ethereum are emerging that provide improved speed. However, Ethereum remains far more widely used and, like Facebook does, Ethereum is likely to learn from the best ideas in other software platforms (like Facebook adopted Snapchat’s Stories feature).

In conclusion

It is clear to me that knowledge is growing rapidly in the area of decentralised transactions and information exchange. I see investments in Bitcoin and Ethereum as ways to gain exposure to this trend, although I may be completely wrong that this knowledge proves valuable over time, and/or wrong that the value accrues to the Bitcoin and Ether tokens.

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