Ethereum—The Oil of Cryptocurrency

In a previous post we touched briefly on the second largest cryptocurrency by market cap—Ethereum. If Bitcoin is the new "digital gold", then Ethereum would be more akin to oil as a commodity.

It's true that Bitcoin and Ethereum are similar in many ways. Both are digital currencies that trade on online exchanges and are stored in various types of cryptocurrency wallets. Both currencies are independent of a central bank or controlling legal authority. Both use the online ledger known as blockchain.

When Bitcoin arrived on the scene, its technology spawned many new ideas for its use. Although Bitcoin was intended to be used for transactions, it has gravitated instead towards being an digital store of value, and other currencies became more useful by their construct to be used for every day use. Out of necessity, came Ethereum. Ethereum was intended to complement, rather than compete with bitcoin. Over time, it has emerged as a competitor for crytpocurrency market cap.

Ethereum uses blockchain technology, like bitcoin does, but it is also useful for storing computer code, which can be used to power tamper-proof financial contracts and applications. Applications and contracts are powered by the network's currency—ether. If Ethereum is like oil, ether would be similar to gasoline. It is used to power the network.

Blockchain technology has been rapidly evolving to go beyond just enabling the transfer of value between two parties. Ethereum is now the largest and most established open-ended decentralized software platform. Ethereum enables the deployment of smart contracts and applications to be built and run without any downtime, fraud, control or interference from a third party. Ethereum comes with its own programming language which runs on a blockchain. This enables developers to build and run distributed applications securely.

The potential applications of Ethereum are huge. The application is powered by its native cryptographic token, ether (commonly abbreviated as ETH). As discussed last week, ETH became available in 2014 in a presale. Ether is like the fuel for running commands on the Ethereum platform and is used by developers to build and run applications on the platform.

Ether is used mainly for two purposes—it is traded as a digital currency on exchanges in the same fashion as bitcoin, and it is used on the Ethereum network to run applications. According to Ethereum, “people all over the world use ETH to make payments, as a store of value, or as collateral.”

Both bitcoin and ethereum are powered by the principle of distributed ledgers and cryptography, but they differ technically in many ways. Transactions in Ethereum often contain executable code, while any data on the bitcoin network is generally only for keeping notes. When it comes to speed, Ethereum is much faster. A transaction is confirmed in seconds compared to minutes for bitcoin.

The biggest difference between Bitcoin and Ethereum is what their overall goals are. Bitcoin was created as an alternative to national currencies and aspires to be used as a medium of exchange and a store of value. Although it doesn't get used as much as a medium of exchange, it has become the gold standard as a digital store of value. Ethereum, on the other hand, is designed to be a platform to facilitate immutable, programmatic contracts and applications using its own currency.

BTC and ETH are both digital currencies, but the primary purpose of ether is not to establish itself as an alternative monetary system, but rather to facilitate and monetize the operation of the Ethereum smart contract and decentralized application platform.

Ethereum is another use for a blockchain that supports the Bitcoin network. In theory, it shouldn't compete with Bitcoin. In reality, the popularity of ether has pushed it into competition with all cryptocurrencies, especially from the perspective of traders. Although Ether consistently brings up the number two spot in terms of market cap, the ether ecosystem is much smaller than bitcoin's. It is intended that Ether will always be worth a fraction of bitcoin.

For speculating, it isn't important to know the technical differences between Ethereum and Bitcoin. We consider them each to be a credible version of a cryptocurrency, with both likely here to stay. There are different ways to value ETH. One way is to check its value in your home currency. In my case, I would look up the price of ETHUSD to see what the dollar price is. Another way to check the relative value of ETH is to price it in Bitcoin. Most charts will allow you to chart ETHBTC to give you the price priced in bitcoin. Pricing ETH in bitcoin allows you to see if it is strengthening or weakening relative to Bitcoin. While the value of ETH has steadily risen compared to Bitcoin, there are times when the values have stretched to the point where BTC offers better value from a trading standpoint. Right now, we can see from the chart below that ETH is the most expensive it has ever been compared to bitcoin. Another way to look at it if you were a value investor is that BTC has never been as cheap compared to ETH than it is right now.

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I've been trading and traveling my entire adult life. I'm currently trading from my boat in the Caribbean. Over the years this has gotten easier and easier to do. Drop the anchor, tether your phone to your laptop, browse some charts, and trade. At Wanderer we first began investing in Bitcoin in 2017 when it was worth $2,500. Fortunately, we recognized its potential, unfortunately, we didn't realize it even earlier. Today it is worth about $50,000, and we believe it is here to stay. Bitcoin will have its ups and downs along the way, but years from now we expect it will be much higher, and we'll still be bopping around in the islands.

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