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Cryptocurrency as a long-term investment: Bitcoin or Ethereum?

10:30, 18 March 2022

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Cryptocurrency as a long-term investment
Cryptocurrency as a long-term investment: Bitcoin or Ethereum? – Photo: Shutterstock

The emergence of peer-to-peer electronic cash payment systems that work without the need of a centralised financial institution has put the global financial system on the brink of a digital revolution. 

Bitcoin (BTC) and its underlying blockchain technology is arguably the most exciting new technology the world has seen since the internet of the 1990s.

It started with a pseudonymous person named Satoshi Nakamoto who released a technical paper called ‘Bitcoin: A Peer-to-Peer Electronic Cash System’ in 2008, detailing features and philosophy of a payment system that, as of 16 March 2022, with a market capitalisation of $776.4bn (£589.3bn), is valued at more than Visa (V) and MasterCard (MA) combined.

Adopting blockchain technology and principles of bitcoin, numerous cryptocurrencies have emerged over the last decade to add life to a blossoming digital asset industry. These cryptocurrencies are often referred to as alternate coins or altcoins.  

As of 17 March 2022, blockchain network Ethereum (ETH) is the biggest altcoin by market capitalisation valued at over $331.7bn. It aims to be a ‘world computer’ on top of which the next phase of a decentralised internet is going to be built upon.

The promise of cryptocurrency has created much hype and fanfare leading to mouthwatering gains in cryptocurrency prices. While a fear of missing out (FOMO) has played a substantial role in sometimes absurd gains, not uncommon in the crypto market, many industry experts and analysts believe that we are still in the early innings when it comes to the development and mainstream adoption of blockchain technology.

If you are thinking of crypto as a long-term investment, this article is aimed to help you in your research. Here we will take a look at cryptocurrencies beyond their price actions to help you find cryptocurrency to invest in for the long term.

CRYPTOCURRENCY AS A LONG-TERM INVESTMENT

Bitcoin: A peer-to-peer electronic cash system

“We have proposed a system for electronic transactions without relying on trust,” said Satoshi Nakamoto in Bitcoin: A Peer-to-Peer Electronic Cash System white paper.

Bitcoin relies on a shared public ledger or blockchain on which all confirmed transactions are included. These transactions are made irreversible to reduce the need for trust. 

The network uses the Proof-of-Work (PoW) consensus where miners compete to solve complex cryptographic hash puzzles to validate transactions that are updated to the public ledger. In return, miners are rewarded with bitcoin for verifying blocks of transactions.

Bitcoin is a hard-capped cryptocurrency, which means that only 21 million bitcoins can ever be mined. As of 16 March 2022, the total supply of bitcoin is at about 18.98 million, according to CoinMarketCap. 

Bitcoin is designed to undergo halving events where the reward for bitcoin miners are cut in half every four years, thereby reducing the rate at which new bitcoins enter circulation. As a result, halving events cuts bitcoin’s inflation rate every four years.

Bitcoin as an inflation hedge

Bitcoin’s halving mechanism is particularly important from the standpoint of investor looking for the most promising cryptocurrency for long-term investment.

With US inflation soaring to multi-decade highs in 2022 amid an ultra-low interest rate environment, investors have turned to bitcoin as an inflation hedge. Furthermore, with US Federal debt currently at over 123% of the nation’s gross domestic product (GDP), the allure for bitcoin as a hedge against the dollar is also growing.

“As the Fed increases rates, so too does it increase the federal government’s borrowing cost, not to mention that of a private sector which is also saddled with dollar-denominated debt,” said bitcoin mining firm Cathedra Bitcoin in a shareholder letter.

“If corporates are unable to service or refinance their debt, they will be forced to reduce costs, resulting in higher unemployment. Rest assured; rates aren’t going higher for long. Global balance sheets will not allow it,” the firm added.

BTC/USD price chart, 2017 – 2022

The US Federal Reserve announced a 25 basis point rate hike on 16 March 2022, its first interest increase since 2018.

Bitcoin vs Gold

Bitcoin is seen as an alternative to gold (XAU/USD) for investors when it comes to diversifying outside the universe of equities and bonds.

“There is little doubt that this competition with gold as an ‘alternative’ currency will continue over the coming years given that millennials will become over time a more important component of investors’ universe and given their preference for ‘digital gold’ over traditional gold,” said JP Morgan.

As of 16 March 2022, gold’s market capitalisation of about $12.2tn dwarfs Bitcoin’s current valuation of about $767bn. JP Morgan analysts said the volatility of bitcoin remains the prime reason why bitcoin’s market capitalisation is unlikely to match that of the precious metal in the near term.

“The reason is that, for most institutional investors, the volatility of each class matters in terms of portfolio risk management and the higher the volatility of an asset class, the higher the risk capital consumed by this asset class,” the analysts said in a note.

“It is thus unrealistic to expect that the allocations to bitcoin by institutional investors will match those of gold without a convergence in volatilities. A convergence in volatilities between bitcoin and gold is unlikely to happen quickly and is in our mind a multiyear process,” they added.

Altcoins: Smart contract platform leader Ethereum

The blockchain sector has seen exciting developments in recent times namely the decentralised finance (DeFi) boom of 2020 and non-fungible token (NFT) explosion of 2021, which could be an alternative option for those investing in crypto long term.

This is all thanks to smart contract platforms like Ethereum, which are used to build decentralised applications (dApps) such as decentralised exchange (DEX) Uniswap (UNI), play-to-earn game The Sandbox (SAND) and lending platform Compound (COMP), just to name a few. 

Ethereum pioneered smart contracts – programs that run when specific, predetermined conditions are met. Smart contracts are automated and do not require an intermediary’s involvement to run, thereby championing decentralisation.

“For us, digital assets are not about payments per se. They’re about a new computing paradigm – a programmable computer that is accessible everywhere and to anyone and owned by millions of people globally,” said Bank of America (BofA) in its first Cryptocurrency & Digital Assets paper published in October 2021.

“The next wave of digital assets is likely Decentralised Finance (DeFi) code that builds internet-native contracts, loans, insurance, titles to real-world assets, unique digital goods (known as non-fungible tokens or NFTs), online corporate structures (such as digital autonomous organisations or DAOs) and on and on – this is likely to be a major trend for the next 20 years,” BofA added.

On Ethereum, its native cryptocurrency token, ether (ETH), is used to pay for transaction fees and is rewarded to computers processing and validating transactions. 

Unlike bitcoin, ether does not have a hard cap and is inflationary in nature. It is important to note that each cryptocurrency token has differing supply and demand characteristics, known as tokenomics, behind it.

Bitcoin vs Ethereum

This brings us to the differences between the two biggest cryptocurrency networks by market capitalisation, as of 16 March 2022, Bitcoin and Ethereum.

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“Among other things, Ethereum is a programmable blockchain, built using the concepts introduced by Bitcoin, but designed differently. Rather than seeking to create a decentralised savings account, like Bitcoin, Ethereum developers aspire to create a decentralised open-source app store,” said US-based bank Morgan Stanley in a note.

“If Bitcoin can be viewed as digital gold for holding, Ether can be viewed as digital oil for burning.” - Morgan Stanley 

Unlike Bitcoin, the Ethereum network does not aim to challenge the traditional monetary system but rather aims to be the world computer upon which the next phase of a decentralised internet called Web 3.0 will be built upon.

As of 16 March 2022, Bitcoin holds a 43% market dominance over the entire cryptocurrency market while Ethereum’s market capitalisation contributes about 18% to the global cryptocurrency market valuation.

“If Bitcoin’s demand is driven by users’ desire to hold Bitcoin, a large portion of Ether’s demand is driven by users who want to spend it on transactions. Given these dynamics, if Bitcoin can be viewed as digital gold for holding, Ether can be viewed as digital oil for burning,” said Morgan Stanley.

Currently, both Bitcoin and Ethereum use the Proof-of-Work (PoW) consensus, however Ethereum is set to migrate to Proof-of-Stake (PoS) consensus in 2022, which is less energy-intensive than the former. 

PoW cryptocurrencies have been criticised for their carbon emissions and high energy consumption. On 14 March 2022, a proposal to limit PoW mining on environmental concerns was rejected in the European Union (EU) parliament committee vote.

While Bitcoin’s unique proposition to become a medium of exchange and a store of value makes it immune to competition from other cryptocurrencies, Ethereum on the other hand faces intense competition from rival networks like Binance Smart Chain (BNB), Cardano (ADA) and Solana (SOL) among others, many of which offer cheaper fees and faster transaction times.

With regards to the changing interest-rate environment globally, JP Morgan analysts added:

“The rise in bond yields and the eventual normalisation of monetary policy is putting downward pressure on bitcoin as a form of digital gold, the same way higher real yields have been putting downward pressure on traditional gold.

“With ethereum deriving its value from its applications, ranging from DeFi to gaming to NFTs and stablecoins, it appears less susceptible than bitcoin to higher real yields.

“Bitcoin has emerged as an alternative to gold while ethereum and other smaller cryptocurrencies have emerged as application currencies providing investors with exposure to the advancement of blockchain technology.”

Major hurdle: Regulations

Bitcoin looks to have dodged a bullet in the form of a PoW mining ban as the EU parliament voted 30-23 against the proposal on 14 March 2022. According to Bank of America, the largest near-term risk for the digital asset ecosystem is regulatory uncertainty.

In early March, US president Joe Biden signed an executive order aimed at “ensuring responsible development of digital assets”.

“The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier, but also has substantial implications for consumer protection, financial stability, national security, and climate risk,” read a White House statement.

The executive order called on various US government departments to assess and develop policies to:

  • Protect US consumers, investors, and businesses

  • Protect US and global financial stability and mitigate systemic risk

  • Mitigate the illicit finance and national security risks posed by the illicit use of digital assets

  • Promote US leadership in technology and economic competitiveness to reinforce US leadership in the global financial system

  • Promote equitable access to safe and affordable financial services

  • Support technological advances and ensure responsible development and use of digital assets

  • Explore a US central bank digital currency (CBDC).

China is currently the frontrunner in the race to deploy a CBDC having banned cryptocurrencies in 2021.

“Regulation will likely speed up mainstream adoption of digital assets from today’s believers to broader public participation. It seems likely that regulators globally may step in for increased oversight,” said BofA analysts.

“For now, more speculative digital assets or those viewed as stores of value are complementary and not competitive with regular money. Despite increased volatility as regulatory frameworks appear, clearer rules for digital assets and their applications may accelerate adoption.”

How to evaluate cryptocurrency prices?

In a blog dated 24 August 2019, economists Siddharth Bhambhwani, Stefanos Delikouras and George Korniotis argued that two fundamental factors that drive cryptocurrency prices in the long run are “the trustworthiness of the cryptocurrency’s blockchain and the adoption of the blockchain”.

The blog challenged perceptions that cryptocurrency markets are bubbles, adding that trustworthiness linked to the computing power of a blockchain network and transaction benefits in the form of borderless, censorship-resistant and decentralised payments are important determinants of a cryptocurrency’s value.

“A larger network of users implies greater acceptability of the cryptocurrency as a medium of exchange as well as higher liquidity. Overall, computing power and network should be positively related to prices,” said Bhambhwani, Delikouras and Korniotis.

The proxies for computing power and network are hashrate of a network and number of unique active addresses using the network, respectively.

Cryptocurrency as a long-term investment: Bottom line 

Investors looking for top cryptos for the long term can begin their research by assessing the 10 biggest coins by market capitalisation. 

As of 16 March, there are two stablecoins, tether (USDT) and USD Coin (USDC) among the largest cryptocurrencies by market capitalisation, which are pegged to the US dollar and will not give returns. Other coing in the list of top ten crypto for long term include the giants Bitcoin and Ethereum. 

Other crypto to hold long term could be rival smart contract platforms including Binance Smart Chain (BNB), Cardano (ADA), Solana (SOL), Avalanche (AVAX) and Polkadot (DOT). However, it is important to do your own research before making any decisions about altcoins for long-term investment.

In 2022, the cryptocurrency market will likely remain highly volatile as new regulations come into place. Positive developments seen in 2021 including the adoption of bitcoin as legal tender in El Salvador, increasing market participation from institutional investors and corporations and approval of crypto-related ETFs worldwide are certainly encouraging, but it is imperative to remember that the road to mainstream adoption is long and uncertain.

FAQs

What are the top cryptos for long-term investment?

As of 16 March, bitcoin is the biggest cryptocurrency by market capitalisation and it has a market dominance of about 43% over the entire cryptocurrency market. Smart contract platform Ethereum is the second-biggest cryptocurrency by market capitalisation. Note that it is important to do your own research before making any investing decisions.

Is bitcoin a better investment than ether?

Unlike Bitcoin, the Ethereum network does not aim to challenge the traditional monetary system but rather aims to be a world computer upon which the next phase of the internet, called Web 3.0, will be built upon. Which cryptocurrency is a better investment option for you should depend on your portfolio needs and requirements, attitude to risk and other individual factors. Note that all cryptocurrencies are volatile assets and involve risk.

Will crypto prices rise in the future?

In 2022, the cryptocurrency market is expected to remain highly volatile as new regulations come into place. Positive developments seen in 2021, including the adoption of bitcoin as legal tender in El Salvador, increasing market participation from institutional investors and corporations and approval of crypto-related ETFs worldwide are certainly encouraging but it is imperative to remember that the road to mainstream adoption is long and uncertain

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