Understanding Ethereum - Issue #3

Welcome to newsletter number three. Our research will attempt to bring you the best crypto projects that could be invested within your portfolio. With so many failed projects and some being outright scams, we hope to profile those that have lasting potential.

The Short of It

Several different blockchains are out to challenge Ethereum’s dominance in the smart contract space. Though some crypto experts who would bet that Ethereum will stay as the leader of smart contracts. Ethereum has brought us cryptokitties, ICOs and lately, the DeFi craze. DeFi ushered in a high volume DEX (decentralized exchange). Now with Eth 2.0 starting to roll out, Bitcoin looking for all-time-highs, and if DeFi is really cooling off, will we see price rises for ETH?


Portfolios

Over the next several months, we will introduce more portfolios with different strategies and the different crypto assets we have profiled.

  1. The BTC Hold is up 42% since October 1st, slightly over 5 weeks. This will be a long hold, and it is best kept in cold wallet storage or a safe custody solution.

  2. The BTC/USD fund is up 13% since November 2nd, which is only in one week. This will stay on an exchange. We will be keeping a close watch on the daily and weekly charts to see trend changes for that perfect trade in and out of BTC to USD.

  3. Fund 3 will start on November 16, 2020, with $1000 USDT in value and invested into BTC, LTC, ETH and USDT.


Profiling Ethereum

Ethereum, at its core, is very different from other cryptocurrencies like Bitcoin or Litecoin.  In essence, it is the first and most established decentralized software platform.  In 2013, Vitalik Buterin wrote the whitepaper for Ethereum after having a push to add a general scripting language to Bitcoin rejected.  Programmers can create software applications (most commonly, “smart contracts” that conform to the ERC20 standard) that run on top of the Ethereum platform with no possible fraud or interference from third parties.  Of course, to run these applications requires payment in the form of a “gas,” which in this case is called “ether” (ETH) and is what people think of when trading Ethereum from a cryptocurrency point of view.  Ethereum was not built with its intent of being a cryptocurrency. It has ended up being the number one platform onto which countless new cryptocurrencies (called tokens, of which there are currently over 200k) have been launched.

The Ethereum blockchain currently has a timing target of 15 seconds, which in practice causes a new block to be mined and added approximately every 17 seconds.  The proof-of-work algorithm used for mining, which was developed to counter ASIC hardware, is called Ethash and is still mostly mined using GPU power.  Currently, about 50,000 ETH is being mined every day.  There is no upper supply limit, so the total amount increases every year.  Along with the high block creation rate and the vast number of smart contracts, the Ethereum blockchain's size is over a whopping four terabytes.  Running a full Ethereum node requires large and fast data storage as well as a speedy Internet connection to keep up.

While the Ethereum smart contract system, which can be programmed using a language called Solidity, is very robust and secure, it is possible for the developers to make huge mistakes.  This happened in 2016 when a major Ehtereum monetary backer and development project called “The DAO” wrote some code that could be exploited by hackers.  Hackers ended up draining 3.6 million Ether from “The DAO,” completely ruining them unless something drastic was done.  The decision to rewrite blockchain history by the Ethereum developers to remove the Ether theft was a very controversial one and the reason that many abandoned Etherum at that time.  The blockchain was split into two, with the new one not containing the exploitable code or the transactions which stole the Ether.  The original Ethereum blockchain (now called Ethereum Classic using the ticker symbol ETC), with the hacked Ether, still lives today and is kept alive by blockchain purists.  The Ethereum project had lost a lot of trust, but over time people seem to have forgiven them for saving their own skin, and Ethereum is still the number one smart contract platform in the cryptocurrency world.

The developers have long been working on a solution for scalability and accessibility, which is coming in the form of Ethereum 2.0.  The blockchain will be switched from using the Ethash proof-of-work algorithm to a customized proof-of-stake.  This means no more mining.  In general, proof-of-stake depends on participants to hold Ether in their wallets to queue up for a chance to dictate the next block and earn rewards.  This, along with the implementation of blockchain sharding, should greatly ease scalability and growth concerns going forward.  It should also greatly reduce the current high transaction Ether fees, which have been a major concern for many.

Ethereum wins out for the largest and most active pool of open-source developers working in its ecosystem. It is estimated that it comprises approximately 18% of all cryptocurrency developers currently working. This fact alone all but guarantees that the project will continue for a long time into the foreseeable future.


Trends

It is common for investors and traders to use USD or some other government-backed currency (fiat) to base their trades on. Since Bitcoin is our digital gold standard, should we not be basing other cryptos against BTC.

For example, if we look at this chart with ETH/USD, it looks like a great investment if you are considering USD as your base. But if we skip to the chart below, ETH is not in a bull trend as the first chart would show.

This daily chart with ETH/BTC pairing shows how ETH is trending down against BTC. We so often see a tweet or news post showing ETH trending up, but if it is not trending up against BTC, we should be staying in our Bitcoin investment.

ETH is a good investment, and on some occasions, a better investment than BTC. If you are trying to get the most out of your portfolio, continue to do your research and look at BTC as your base and go back to fiat when BTC is overdue for a correction or looking to take some profit off the table.


Bitcoin and Ethereum are both blockchains and cryptocurrencies. But are they so different to compare them to Amazon vs Tesla? Ethereum, in my guess, would be more like Amazon that started with books and then added everything under the sun for sale on their platform. Almost every type of new idea to test is done on Ethereum, unlike Bitcoin that could resemble Tesla with one product, but investors see it as the best automotive investment.

In market cap, Tesla has overtaken all others without nearly the volume Toyota has. Over the next several years, will we see Bitcoin value pass gold and Ethereum’s market cap pass the largest financial institutions? I’d bet on it, are you going to?


Uniswap protocol was built on the Ethereum blockchain for swapping ERC20 tokens. The successful decentralized exchange has had volume of over $900 million USD in 24 hours. Currently, there are 21,710 trading pairs with $239 million in volume. Wrapped Bitcoin (WBTC), an ERC20 token backed 1:1 with bitcoin, is the second-highest token with liquidity on Uniswap.

Uniswap is just one example of the many projects that have had huge success using the Ethereum blockchain that we will cover in more detail.


On the weekly ETH/BTC chart, we can see there have already been 8 weeks of downward movement. The main reason that ETH and most all other altcoins have lost value is that BTC has been on a tear upward.

Will ETH bounce off these lows this week, or will we see another few weeks of potential downward motion? Last week the candle had a good size wick under it. Perhaps showing buyers coming in because of the news of ETH v2 finally rolling out and BTC is taking a few day pause at the $15k levels.

Next week we’ll see how much ETH we add to our Fund 3 as we profile Cardano [ADA]


Disclaimer: Nothing in this newsletter is intended to serve as financial advice. Therefore, do your own research and due diligence before applying any of the techniques highlighted in this post. Any risks or trades based on this newsletter are committed at your own risk.