Bitcoin vs. Ethereum may be a zero-sum game

Editor’s Note: This post originally appeared in slightly different form on The Finanser blog.

As referenced in my recent post about the R3 consortium, there are various camps out there fighting for the cryptocurrency crown. The lead runners are bitcoin and Ethereum, and both have serious backing. However, it’s still early days. I keep stressing that we need to remember we are experimenting here, and the endgame is still a ways away. The end game is that there will be a digital currency we can all buy into, whether it’s bitcoin or bityuan or ekrona or ether or monero or any of them, who knows … it could be all. Equally, it could be none.

This is not a win-lose equation, however, as there is a potential win-win zero-sum game where several currencies and blockchains survive and thrive, with interoperability for different use cases. After all, corporates might use Ethereum while the general public uses bitcoin. So here’s a quick lowdown on how I see it.

Bitcoin

After blogging about bitcoin for six years, I’ve closely followed its peaks and troughs, ups and downs.

Right now it’s peaking with a price of $1,290 per bitcoin. That makes it worth more than gold, and the bitcoinisters are all over the moon. But there’s the usual factions moving here, with the hype of the bitcoinisters versus the reality of the markets. For example, I’m pleased the price of bitcoin is way up there but (a) it’s meant to be a currency you spend, not an investment you hoard; and (b) it’s still tiny (in terms of the size of the market) when compared with other currencies and commodities.

On the former note, I’m seeing too many people buying into bitcoin because they’re being suckered by the hype and believe it’s a good investment. It’s a currency, not an investment; or that’s what we should be thinking. On the latter, this quote from Fran Strajnar, co-founder and CEO of Brave New Coin, makes sense: “The gold supply is 180,000 tonnes of ‘above ground’ gold, valued at $7 trillion. The bitcoin market value is $20 billion, so gold vs bitcoin is psychological more than anything.”

Yep.

Bitcoin has had a lot of people buying into the market, but it’s still a small $20 billion market. A long way to go before we can believe it’s mainstream, and there are plenty of competitors out there such as Zcash, which claims to overcome the deficiencies in bitcoin.

It is notable that the gold rush of recent bitcoin activity is caused by a variety of factors, from Japan’s legitimizing the currency to China’s outlawing it to the Winklevoss twins' creating a potential SEC-approved ETF to trade in it. All of these factors, along with Brexit and the Trump presidency, are fueling people to invest. This then creates a virtuous circle of the more who invest, the more who invest. This may all come tumbling down quickly, or it may move mainstream. We just don’t know. What I do know is that we no longer talk about bitcoin as a Wild West, the dark net currency, ridiculous or stupid. People are taking it seriously now, and that’s probably a good thing. Even so, there are many who don’t buy into it, with the currency announced as dead 124 times to date. It’s still not dead, though.

Ether

Ether is the currency of Ethereum, and this is proving popular with corporates. In fact, it’s so popular that the Ethereum Enterprise Alliance was announced last week, driven by Microsoft, Intel and JPMorgan. That’s saying something.

So why is Ethereum more popular than bitcoin for corporate users? Because of Microsoft. Microsoft saw the potential of Ethereum for blockchain-as-a-service using their cloud Azure platform early on, and has been driving that project forward ever since to its enterprise account base as the platform of choice. Equally, Ethereum and ether differs from Bitcoin and bitcoins (former is the infrastructure, latter is the currency), because it allows both permissioned and permissionless transactions to take place, whereas bitcoin only works in a permissionless way. For corporates, having transparency of transactions and a completely public ledger just wouldn’t work, which is why corporates and banks aren’t buying into bitcoin.

Ethereum is not proven, however, as demonstrated by the infamous DAO hack and hard fork last year. However, it does show the nature of factions and different views when you google “Ethereum fail” and the top results include two next to each other: "Why Ethereum Succeeded Where Bitcoin Failed" (Motherboard) and "How Bitcoin Succeeded Where Ethereum Failed" (Coinjournal).

The competition between the various blockchain and distributed ledger models was well summarized recently by Penny Crosman for American Banker in an article focused on Microsoft and IBM’s competing projects, respectively, the Enterprise Ethereum Alliance and the Linux Foundation Hyperledger Project.

It just goes to show that there are lots of tribes fighting for survival here, and it’s not pretty. The two leading tribes are bitcoin and Ethereum, but there are plenty of others, as I outline above. For banks this leads to choices: do we invest in Ethereum and join the Ethereum Enterprise Alliance or do we become part of R3 CEV’s consortia? It is not even as simple as that, as there are plenty of other alliances out there.