The Ethereum virtual currency logo is displayed on an automated teller machine (ATM) at the Coin Trader bitcoin retail store in Tokyo, Japan, on Wednesday, Aug. 30, 2017. (Tomohiro Ohsumi/Bloomberg)
To say that cryptocurrencies took the market on a wild ride this year would be like calling the Hindenberg a birthday balloon. Bitcoin exploded sixfold. The second-most valuable cryptocurrency after Bitcoin, Ethereum rocketed 3,700% this year. It started 2017 at a humble $8 and soared to $308, as of Nov. 12. But for many reasons, it may not be in a bubble. It still has miles to go before reaching Bitcoin, $5,700, and Bitcoin Cash, $1,588.
After jaw-dropping gains this year, the top cryptocurrencies have fallen into a bear market. Bitcoin has corrected 23% from last week’s all-time, intraday peak of $7,776, according to CoinMarketCap.com. Bitcoin Cash has tumbled 36%, as of Nov. 12, from an intraday apex of $2,477 reached earlier the same day. Ethereum is off 22% from an epic high of nearly $400. A 20% drop or more from a 52-week high is considered a bear market.
Ethereum Facts as of Nov. 12, 2017:
- Price: $308
- Year-to-date price change: 3,700%
- Total circulation: 95,687,997
- Market cap: $29,465,300,729
The cryptocurrency craze of 2017 has been compared to the Internet bubble of the late 1990s and early 2000s. If it is a bubble, it’s still a far cry from the magnitude of the dot-com crash.
As massive as the cryptocurrency market is at nearly $192 billion strong globally, it pales in comparison to the tech bubble, which erased $1.7 trillionin shareholder wealth. From an aerial view, Ethereum looks minuscule compared to other assets. Bitcoin, at $97 billion in market value, dwarfs Ethereum, valued at about $29 billion, according to CoinMarketCap.com.
The U.S. market for rare coins, which you would never use to buy something, comes to $5 billion in sales through auctions, shows, etc. annually. Global sales are estimated to be high as $8 billion. There’s no telling the value of all collections’ parked in vaults across the country.
Deloitte values the global art market at around $3 trillion with $50 billion in annual sales. The amount of money sloshing around in the U.S. stock and bond markets totals more than $26 trillion and $31.2 trillion, respectively.
A major difference between two most popular cryptocurrencies is that there are no limits on the number of Ethereum tokens to be issued whereas Bitcoins are capped at 21 million. Besides being a store of value, the Ethereum platform lets developers build applications such as smart contracts and initial coin offerings, ICOs.
“Of the many cryptos, I see Ethereum as the most credible as it makes creating new blockchains easier,” said Harry Dent, an economist and author of the forthcoming book, Zero Hour. “It advances the whole industry, and I obviously think this is a major trend, not just a near-term bubble, which it is.”
Ethereum allows individuals and organizations to build out and conduct complex transactions independent of a central server or relying on any one party to approve the submission, explains Dominic Marella. He’s a principal at Icon Alternatives, a Chicago-based alternative investment firm that specializes in futures contracts.
“JP Morgan built Quorum using the Ethereum protocol,” Marella said in an email. “The network allows for fast, secure and more transparent processing of customer transactions, such as bill payment and transfers.
“NotarEth, a notary service that verifies your identity via the blockchain technology and eliminates the need to show an ID with a stamped document.
“UJO is a music licensing and payment system that gives more rights directly to the artists, as opposed to big record labels.”
Investors seem even more enthusiastic over Ethereum than Bitcoin on the Nasdaq Stockholm exchange in Sweden. CoinShares Ether ETNs — Ether Tracker One and Ether Tracker Euro — pulled in $10 million in investor inflows in their first week of trading. By contrast, the firm’s Bitcoin ETNs took a year to attract $10 million in assets.
“The community that was demanding the product has shown up in full force,” Ryan Radloff, principal at CoinShares, said in a statement. “And now, the community has a new request: research.”
CoinShares Bitcoin ETNs launched in 2015 and have attracted $330 million in assets. The Ethereum ETNs debuted in October.
Cryptocurrencies have emerged as an asset class like rare cars, gemstones, antiques, real estate, baseball cards and the list goes on and on.
“To not include a crypto-currency in a retirement portfolio of someone in the under-45 crowd, could be the equivalent of failing to expose ’90s investors to various technology companies — Google, Amazon, Yahoo, etc. — because of their relative newness,” said Anthony Ure, an investment advisor with Anthony Capitalin Garden Ridge, Texas. “While the dotcom crash came, those who were diversified and focused their investment into the most well known companies have made money hand over fist. In today’s crypto-market, Bitcoin is the largest but also the most expensive and most appreciated, which makes Ethereum more investable for many younger investors with smaller portfolio values.”
People in their 30s planning their retirements often opt to buy Ethereum and other cryptocurrencies in regular investment accounts rather than tax-advantaged individual retirement accounts, IRAs, Ure added.
“Generally, that is so they can access (the money) for potential life events like marriage, children, home purchase, etc. although several have noted that they want more consistent returns for their retirement accounts,” Ure said. “And owing to the new nature of the crypto-currencies, they want to be able to pull the money out if they foresee problems.”
Cryptocurrencies, of course, are very speculative. They don’t have government rules and regulations like other asset classes. Governments could ban them altogether.
“Cryptocurrencies including Bitcoin and Ethereum are still very new technologies,” said Tracie McMillion, CFA, head of global asset allocation at Wells Fargo Investment Institute in Winston-Salem, N.C. “At this point, they have concerning issues, including price volatility, the potential for hacking, and they face the possibility of greater regulation in the future.”
Ethereum is a work in progress that presents many uncertainties surrounding its form and function.
“The first unknown approaching quickly, possibly by the end of the year, is the controversial move to change how transactions are verified,” Marella of Icon Alternatives, wrote. “Code-named Casper, the update is intended to make transactions less resource intensive. However, with the developers unable to agree on what that looks like, a premature rollout could be a major blow.”
Marella added: “The second is how the SEC plans to handle ICOs (initial coin offerings), many of which are built on the Ethereum protocol. Should the SEC deem ICOs to be securities, it may suppress the enthusiasm for building on the network, as development costs would skyrocket. And those companies would be required to comply with the heavy regulation.
“This would hopefully keep out many malicious wrongdoers. But it also places a significant hurdle in front of well-intended innovators.”
A bug in the cryptocurrency wallet Parity has locked up $280 million worth Ethereum, exposing its flaws. Yet Ethereum’s price held steady.
“Don’t invest more than you can afford to lose,” said David Mondrus, a cryptocurrency expert and CEO of Trive, based in Fort Lauderdale, Fla. “Read everything. Look at the teams, learn the technology, people, etc. Who in the days of Netscape would’ve predicted their demise? And who foresaw Google, YouTube or Uber? It’s still early.
“Invest with caution, invest in the people, trust no-one except your own intelligence and intuition. And keep your eyes open. But the future is bright.”
Ethereum Classic Investment Trust
The Ethereum Classic Investment Trust, aka ETC Trust, from New York City-based Grayscale Investments, is the closest product on the market to an ETF or mutual fund that offers exposure to the cryptocurrency. But so far it is only available to accredited investors. Each share represents nearly a whole token. Launched in April 2017, it’s returned a juicy 275% since inception, as of Nov. 10.
If it follows in the footsteps of Grayscale’s Bitcoin Investment Trust (GBTC), the Ethereum Classic Investment Trust should be available to retail investors in two years. The trust charges a hefty 3% annual management fee. A third of it goes to supporting the Ethereum Classic Cooperative, a group dedicated to marketing and developing applications related to Ethereum.