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2024-12-13 12:04:46Bitcoin is digital money and an asset (store of value). Ethereum, the largest altcoin by market cap, is a blockchain based global virtual computer with a tokenised settlement layer. This allows smart contracts to be run on the EVM (Ethereum Virtual machine). Smart contracts are neither smart, nor contracts. They are simply code which automatically executes given specific conditions. Ethereum is tokenised meaning that you can create financial settlement contracts based on specific agreed conditions. For example, if you order goods from a merchant, a contract can be established whereby the goods are only shipped once payment has been guaranteed by locking it into a smart contract, but that money is only released to the merchant once the goods reach the destination, confirmed electronically by the shipping company. If receipt of goods is not confirmed within a specified amount of time, that money is returned to the customer. So Ethereum is not a financial instrument, it is a type of virtual computer that has money built in to allow real world electronic transactions to occur. So why would you buy the Ethereum monetary token “Ether”? Well purely to enable you to conduct business or build contracts on the Ethereum Virtual Machine. You cannot operate on Ethereum without “Ether”. A side effect of the popularity of the EVM for conducting business is that the “Ether” token has become more valuable over time. Investors who have never used the EVM see the “Ether” token increase in value and so purchase this token purely to benefit from the increasing value of this token. Therefore there is a huge amount of “Ether” sitting unused in wallets accumulating value for its own sake. Now let’s take a slightly hypothetical situation. Let’s say that Amazon gift vouchers used their own currency called “AMZ”, so if you wished to buy somebody an Amazon gift voucher you would be buying Amazons native currency. Now imagine that as Amazon grew as a company the value of that currency increased relative to the USD, EURO or GBP. Speculators would start buying Amazon gift vouchers with no intention of spending them, but simply holding them eventually looking to sell once a certain profit had been reached. We now have an investment market for something unintended. Of course in the real world, Amazon gift vouchers are only available in government national currencies such as USD or GBP, so their is no incentive to buy one unless you are gifting it to a friend or family member. And the recipient will use it within weeks or months to purchase goods from the online retailer, which is its intended purpose. This is the problem with Ethereum and many other altcoins. They were intended to provide financial utility for the underlying functionality of their computer code and blockchain. Not by investors as a speculative asset. Bitcoin is different. It was designed to be a monetary system to replace the shortcomings of government backed national currencies. Since 1971, when the gold standard ended and government (fiat) currencies were no longer backed by any physical asset, those currencies have been eroding in value and are on a path to hyperinflation. The first tremor happened in 2007/8 during the financial crises when almost all banks around the world collapsed due to the enormous amount of unbacked debt. During this time, a pseudo anonymous individual or group who went by the nom de plume “Satoshi Nakamoto” created an alternative currency based on the best attributes of gold and cash, but for the Internet era. As it has become adopted as money around the world, it has become increasingly valuable and has provided increasing utility. Bitcoin has also become a speculative asset invested in by millions of individuals and companies with no intention of spending it as money, instead saving it as a store of value to be realised at some time in the future. Some question whether it should be used this way and valid arguments criticise its use as an asset. This criticism has validity, however gold and cash (money) has always been accumulated as a store of value and most people hold more money than they need if they are able to, as it allows financial freedom. Using Bitcoin as an asset is a natural consequence of Bitcoin the money.