Warren Buffett hates Bitcoin because it is a non-productive asset. He also argues that all cryptocurrencies fall in the same category. And while Bitcoin – like gold – is a non-productive asset, he is most definitely wrong painting many other cryptocurrencies with the same brush.
Many cryptocurrencies are real products or services that generate real income streams and return cashflows back to the holders of the coin.
In this Part VI of the Future Focussed Portfolio series, we explore Ethereum, and why it is most definitely a productive asset that investors and advisors should be across and exploring.
Source: Adobe stock
Most advisors/investors know that Bitcoin has unlocked the ability to govern and transfer money directly in a peer-to-peer fashion. But fewer probably know that Ethereum has unlocked the same for computation (think cloud computing).
Smart contracts are Ethereum’s key innovation.
Smart contracts (Figure 1, above) are computer programs that verifiably execute correctly across a decentralized network where there is no single trusted computer or intermediary required. This opens the use cases for blockchain far beyond what Bitcoin allows.
Ethereum opens the possibility of new ways to run organisations, and for new products and services.
If you can understand how Amazon’s Web Services (AWS) creates value for developers, you can understand how Ethereum creates value too.
Ethereum, like AWS, can be thought of as digital infrastructure. It provides the building blocks for developers to build decentralised applications for users (Figure 2, above).
Ethereum based applications will be useful for end users – and there will be a lot of them. Like websites, not all will be valuable but as the smartphone proliferated and the conversations turned into, “There’s an app for that”, so too will be, “There’s a smart contract for that.”
Setting up a company? A digital artwork? Releasing an album and want to collect royalty payments? You guessed it, there’s a smart contract for that – and the speed of which these applications can be adopted is also fascinating.
Let’s look at an example of the power of Ethereum by comparing two companies: Coinbase and Uniswap.
Coinbase is a Nasdaq-listed company founded in 2012. It has taken Coinbase ten years and over half-a-billion dollars in funding to establish itself as a premium and trusted exchange in the crypto space. Today it is worth US$15 billion, trading several billion dollars per week and has over 3,500 employees supporting its operation.
Uniswap is a decentralized exchange built on Ethereum, it uses a mechanism known as “Automated market makers” as a replacement for an order book. Leaving the detail aside allows a user to retain ownership of their digital assets and swap between other assets on the Ethereum network.
Today, Uniswap does a similar volume to Coinbase (Figure 3, above). But what’s amazing is that Uniswap was a contract built in a year by a first-time Ethereum coder with a small grant. Such is the trust in Uniswap that more than $4 billion is locked as liquidity from users.
Uniswap has less than 60 people working for it and it has more than $2 billion in treasury in the form of their own token (UNI). This token gives governance rights to holders, allowing them to vote on proposals or decide what should happen with those funds (like a special dividend).
In effect, Uniswap has achieved similar heights to Coinbase, but on a shoestring budget, and with no human interaction needed on the exchange. All open source, and every transaction is verifiable.
This is the power of smart contracts.
We can also understand the value Ethereum creates by comparing it with Amazon.
Amazon sells products and services to generate income. It pays for its expenses and with excess money, it will purchase shares back from the market which in effect distributes the value to existing shareholders.
Ethereum has a similar model. Instead of users purchasing goods or services, the Ethereum network is the service. To use the service one requires ETH tokens, and when a transaction is made on the Ethereum network a small proportion of the ETH fee is burned – i.e., the more Ethereum is used the more ETH is burned. This burning of ETH creates scarcity for the holders, driving value into the coin over time, so long as demand continues. In the last 30 days, approximately US$430 million ETH has been burned. For contexts the Ethereum market cap is approximately US$250 billion.
Source: Token Terminal – (Past performance is not a reliable indicator of future performance)
As of May 2022, Ethereum is going through some major upgrades. It will become an asset that shares revenue with its holders, whilst also burning excess fees to the benefit of all holders. A truly productive asset.
So as an investor – an intelligent investor maybe – how should you be thinking about Ethereum?
Ethereum is an essential building block of the decentralised future. It has a business model (token model) where it is driving real value back to token holders, all of which is underpinned by the economic activity on the Ethereum network.
For Ethereum to succeed long term it must win the hearts and the minds of the development community. That much must be understood. Figure 5 below is an excellent visual for what is actually occurring in the digital asset space.
Source: Electric Capital
Investors can be forgiven for seeing all cryptocurrencies as essentially the same. They can also be forgiven for the feelings of annoyance and frustration associated with market understanding and early price discovery.
Ethereum, with its genuine function, value, and general usefulness in a digital future, goes a long way to helping us all with some crypto clarity, and assurance. Take Mr Buffett with a grain of salt. The opportunity is exponential.
The use-cases for ETH are being proven and as adoption escalates it will fast emerge as a key building block of a future focussed portfolio.
Looking for some more information on how to build a future focused portfolio? Click here.
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