Should You Invest in or Mine Ethereum?

Oct 22, 2017

Bitcoin may be the most popular cryptocurrency in the world, but Ethereum wants to be much more than a substitute for fiat currency; promising a potential future which may make it worth considering an ethereum investment for some investors. In early 2013, the now-famous Russian-Canadian programmer Vitalik Buterin published a paper titled A Next-Generation Smart Contract and Decentralized Platform that laid out this vision for a future, distributed computing platform leveraging blockchain technology to power everything from banking to the Internet of Things (IoT).


Our Research Team Recently Published A Whitepaper on Ether As An Asset if you care for more reading by the end.


What is Ethereum?

Ethereum is a blockchain-based platform featuring the Ethereum Virtual Machine (EVM), smart contracts, and a digital value store (e.g. currency) called ether (ETH). Blockchains are digital ledgers of anonymized economic transactions that are stored across an entire network. These transactions are fully transparent and easily verifiable, which makes them extremely difficult for corporations or criminals to corrupt. While the concept of a blockchain was pioneered by Bitcoin, there are now over 700 cryptocurrencies that use the same underlying concepts, including Ethereum and many others. Ethereum is unique in that it is an agnostic platform that lets organizations easily harness the power of blockchains for any purpose. In exchange for a market fee paid in ether, these organizations can execute programs (dApps) running on the Ethereum Virtual Machine (EVM) written in a JavaScript-like language called Solidity. The market value of ether depends on the amount of demand for computing resources from these dApps. A great way to think of Ethereum is to compare it to an internal combustion engine. The EVM and the dApps running on it are similar to the engine in that they perform useful work, whereas ether serves as the fuel for the engine. With more internal combustion engines on the road, the demand for fuel tends to rise as the supply is limited. The same is true for ether as more companies use EVM to deploy their dApps to complete complex computing tasks.

How is Ethereum Used?

There are countless applications for the Ethereum platform. For example, a stock exchange could use Ethereum’s blockchain technology to record ownership of shares, track trading history, handle shareholder voting, and pay dividends in a fully-transparent and immutable way. A bank could similarly record all of its customer transactions and ensure that the failure of a data center wouldn’t translate to a loss of customer records. There are countless applications for the Ethereum platform, but the largest industrial use base may be Internet of Things. The largest industrial use case may be with the Internet of Things (IoT). McKinsey & Co. anticipates that this market could unlock between $4 and $11 trillion of untapped efficiency gains by 2025, but there are no standardized solutions to handle privacy, data security, and network interoperability. The Ethereum platform is well-positioned to address all of these issues by leveraging the built-in benefits of blockchain technology.

A growing number of companies also have adopted Ethereum and its ERC20 tokens to launch their own cryptocurrencies. This process involves companies selling their own cryptocurrencies in exchange for ether. In fact, it Ethereum become the de facto standard for hosting initial coin offerings (ICOs). More than 130 ICOs have occurred since September 2016 and helped raise more than $1.5 billion* at current ether values (*as of research publication).   In terms of market adoption, many companies have started testing Ethereum in their respective industries, including corporate giants like Deloitte, IBM, JPMorgan Chase, and Microsoft. Fidelity even indicated that they were actively mining Ethereum, primarily as a way to learn more about cryptocurrencies. The price of ETH has responded by rising from less than $15.00 earlier this year to more than $300.00 at the time of this writing.

Why Consider an Ethereum Investment?

Long-term investors may be interested in Ethereum for its diversification benefits. Global equities and bonds tend to be rather correlated, but cryptocurrencies have a very low correlation coefficient with equities, bonds, crude oil, and even gold. Greater diversification tends to lead to greater risk-adjusted returns by reducing overall portfolio volatility. This even holds true in cases where more volatile assets are added to diversify a portfolio. Ethereum returns have also been very attractive in recent years. Over the past 6-months, one-year, and three-year periods, the value of ether has increased 1,418%, 2,440%, and 27,908%, respectively (*see research). Admittedly, Ethereum and other cryptocurrencies have a limited history, but Bitcoin’s value has delivered a 70%+ average annual return since its inception in 2009. Past performance is no guarantee of future performance but it can be helpful in showing trends.

When considering these benefits, investors should keep in mind the risk factors involved with Ethereum and other cryptocurrencies. These risk factors range from the well-being of Ethereum’s founder, Vitalik Buterin, to the risk of an error arising in Ethereum’s code. There are also unique risk factors stemming from its currency-like status and industrial use cases, including the risk of inflation and its proximity to regulatory risks.

There are many different ways to purchase Ethereum’s ether, but the easiest way is to purchase it directly through exchanges like CoinBase. CoinShares has launched a series of exchange-traded products in Europe designed to track bitcoin and ether. These exchange-traded notes (ETNs) represent the first bitcoin and ether tracking exchange traded products (Nasdaq Stockholm), which could make them the right solution for traditional investors.

Should You Mine Ethereum?

Those new to cryptocurrencies may be tempted to mine their own Ethereum ether rather than buying it in the open market as an investment. After all, there’s low cost to mining ether other than the cost of hardware that individuals may already own and electricity. In reality, the mining process involves dedicating substantial computational resources to earn a modest ether over time. While the process sounds straightforward, the economic decision to mine ether depends on a variety of different factors, including the hash rate, power costs, pool fees, hardware costs, and any conversions costs to official currencies. Personal computers are no longer sufficient to generate any significant income from ether mining activity. Many Ethereum miners are professional operations with significant computation resources, such as dedicated server farms with economies of scale. This is especially true because mining is an uncertain process that involves a certain level of ‘luck’ on a small scale. For example, a difficult computational problem might take an average of several years to complete, but an individual could be ‘lucky’ and try the right solution early-on.

The Bottom Line

Ethereum is a next-generation, decentralized platform that has the potential to power any blockchain operation via smart contracts and dApps. The platform promises to be much more than a replacement for fiat currencies; or act as a hedge against inflation and geo-political risk. It could revolutionize the way that information is processed and exchanged in industries ranging from banking to Internet of Things. Investors looking to participate in any potential upside may want to consider purchasing the cryptocurrency outright or watching for exchange-traded vehicles which offer a familiar path to investment, such as those offered by CoinShares.

Oct 22, 2017

Bitcoin may be the most popular cryptocurrency in the world, but Ethereum wants to be much more than a substitute for fiat currency; promising a potential future which may make it worth considering an ethereum investment for some investors. In early 2013, the now-famous Russian-Canadian programmer Vitalik Buterin published a paper titled A Next-Generation Smart Contract and Decentralized Platform that laid out this vision for a future, distributed computing platform leveraging blockchain technology to power everything from banking to the Internet of Things (IoT).


Our Research Team Recently Published A Whitepaper on Ether As An Asset if you care for more reading by the end.


What is Ethereum?

Ethereum is a blockchain-based platform featuring the Ethereum Virtual Machine (EVM), smart contracts, and a digital value store (e.g. currency) called ether (ETH). Blockchains are digital ledgers of anonymized economic transactions that are stored across an entire network. These transactions are fully transparent and easily verifiable, which makes them extremely difficult for corporations or criminals to corrupt. While the concept of a blockchain was pioneered by Bitcoin, there are now over 700 cryptocurrencies that use the same underlying concepts, including Ethereum and many others. Ethereum is unique in that it is an agnostic platform that lets organizations easily harness the power of blockchains for any purpose. In exchange for a market fee paid in ether, these organizations can execute programs (dApps) running on the Ethereum Virtual Machine (EVM) written in a JavaScript-like language called Solidity. The market value of ether depends on the amount of demand for computing resources from these dApps. A great way to think of Ethereum is to compare it to an internal combustion engine. The EVM and the dApps running on it are similar to the engine in that they perform useful work, whereas ether serves as the fuel for the engine. With more internal combustion engines on the road, the demand for fuel tends to rise as the supply is limited. The same is true for ether as more companies use EVM to deploy their dApps to complete complex computing tasks.

How is Ethereum Used?

There are countless applications for the Ethereum platform. For example, a stock exchange could use Ethereum’s blockchain technology to record ownership of shares, track trading history, handle shareholder voting, and pay dividends in a fully-transparent and immutable way. A bank could similarly record all of its customer transactions and ensure that the failure of a data center wouldn’t translate to a loss of customer records. There are countless applications for the Ethereum platform, but the largest industrial use base may be Internet of Things. The largest industrial use case may be with the Internet of Things (IoT). McKinsey & Co. anticipates that this market could unlock between $4 and $11 trillion of untapped efficiency gains by 2025, but there are no standardized solutions to handle privacy, data security, and network interoperability. The Ethereum platform is well-positioned to address all of these issues by leveraging the built-in benefits of blockchain technology.

A growing number of companies also have adopted Ethereum and its ERC20 tokens to launch their own cryptocurrencies. This process involves companies selling their own cryptocurrencies in exchange for ether. In fact, it Ethereum become the de facto standard for hosting initial coin offerings (ICOs). More than 130 ICOs have occurred since September 2016 and helped raise more than $1.5 billion* at current ether values (*as of research publication).   In terms of market adoption, many companies have started testing Ethereum in their respective industries, including corporate giants like Deloitte, IBM, JPMorgan Chase, and Microsoft. Fidelity even indicated that they were actively mining Ethereum, primarily as a way to learn more about cryptocurrencies. The price of ETH has responded by rising from less than $15.00 earlier this year to more than $300.00 at the time of this writing.

Why Consider an Ethereum Investment?

Long-term investors may be interested in Ethereum for its diversification benefits. Global equities and bonds tend to be rather correlated, but cryptocurrencies have a very low correlation coefficient with equities, bonds, crude oil, and even gold. Greater diversification tends to lead to greater risk-adjusted returns by reducing overall portfolio volatility. This even holds true in cases where more volatile assets are added to diversify a portfolio. Ethereum returns have also been very attractive in recent years. Over the past 6-months, one-year, and three-year periods, the value of ether has increased 1,418%, 2,440%, and 27,908%, respectively (*see research). Admittedly, Ethereum and other cryptocurrencies have a limited history, but Bitcoin’s value has delivered a 70%+ average annual return since its inception in 2009. Past performance is no guarantee of future performance but it can be helpful in showing trends.

When considering these benefits, investors should keep in mind the risk factors involved with Ethereum and other cryptocurrencies. These risk factors range from the well-being of Ethereum’s founder, Vitalik Buterin, to the risk of an error arising in Ethereum’s code. There are also unique risk factors stemming from its currency-like status and industrial use cases, including the risk of inflation and its proximity to regulatory risks.

There are many different ways to purchase Ethereum’s ether, but the easiest way is to purchase it directly through exchanges like CoinBase. CoinShares has launched a series of exchange-traded products in Europe designed to track bitcoin and ether. These exchange-traded notes (ETNs) represent the first bitcoin and ether tracking exchange traded products (Nasdaq Stockholm), which could make them the right solution for traditional investors.

Should You Mine Ethereum?

Those new to cryptocurrencies may be tempted to mine their own Ethereum ether rather than buying it in the open market as an investment. After all, there’s low cost to mining ether other than the cost of hardware that individuals may already own and electricity. In reality, the mining process involves dedicating substantial computational resources to earn a modest ether over time. While the process sounds straightforward, the economic decision to mine ether depends on a variety of different factors, including the hash rate, power costs, pool fees, hardware costs, and any conversions costs to official currencies. Personal computers are no longer sufficient to generate any significant income from ether mining activity. Many Ethereum miners are professional operations with significant computation resources, such as dedicated server farms with economies of scale. This is especially true because mining is an uncertain process that involves a certain level of ‘luck’ on a small scale. For example, a difficult computational problem might take an average of several years to complete, but an individual could be ‘lucky’ and try the right solution early-on.

The Bottom Line

Ethereum is a next-generation, decentralized platform that has the potential to power any blockchain operation via smart contracts and dApps. The platform promises to be much more than a replacement for fiat currencies; or act as a hedge against inflation and geo-political risk. It could revolutionize the way that information is processed and exchanged in industries ranging from banking to Internet of Things. Investors looking to participate in any potential upside may want to consider purchasing the cryptocurrency outright or watching for exchange-traded vehicles which offer a familiar path to investment, such as those offered by CoinShares.

care for more depth? read the ether asset highlight:  

care for more depth? read the ether asset highlight: