Bitcoin’s Store of Value vs. Ethereum’s Technical Utility

For the past few months, the cryptocurrency internet has been dominated by Bitcoin ETF discussions. And there’s a reason for that. With a market capitalization of $835.7 billion, the pioneering cryptocurrency accounts for 49% of the total cryptocurrency market, comprising tens of thousands of tokens.

In Bitcoin’s 15-year life cycle, exchange-traded funds (ETFs) represent a pivotal branch, a milestone in its legitimacy. Bitcoin, once derided as a “scam” similar to tulip mania, “rat poison” or “money laundering indices”, has shed this rag of recognition and replaced it with an entirely new coat of arms when it enters the ETF arena.

long-term flowing water in a deep puddle

Approval by the Securities and Exchange Commission (SEC) means the institution can allocate capital to high-yield assets. Bitcoin fits this bill because its supply is much more fixed than gold, and although Bitcoin is digital, it is based on physical properties through a proof-of-work mining network.

As of October 2023, U.S. ETFs held $5.6 trillion worth of stocks. Capital flowing into Bitcoin, even at low single-digit rates, is poised to create a rising tide in a feedback loop due to Bitcoin’s limited supply. Without the hassle of custody management, investors are exposed to these flows represented by shares of an ETF that tracks the spot price of Bitcoin.

One such Bitcoin ETF applicant is BlackRock. The world’s largest asset management company is said to have already secured capital worth $2 billion. source.

Following approval on January 11, the selling pressure expected from a typical “news selling event” occurred, sending BTC price down -7.4% over the week. Nonetheless, it has succeeded in launching a new investment vehicle, Tracking Over $1.4 Billion Achieved AuM and $3.6 billion in trading volume in just two days.

But what about Ethereum, Bitcoin’s long shadow? The Ethereum project, which switched from proof-of-work to proof-of-stake, is perceived quite differently than Bitcoin. What are these differences and how are they reflected in each ETF investment vehicle?

Store of Value: Bitcoin in the Spot ETF Market

For many years, it was unclear what would happen to Bitcoin. Ultimately, Bitcoin went through over 100 hard forks, shattering its original white paper vision of a “peer-to-peer version of a purely electronic currency.”

After Bitcoin’s controversial block size war was resolved in 2017, the Small Blockers faction emerged victorious. Instead of fully increasing the block size, we chose to soft Bitcoin scale through SegWit upgrades. This changed Bitcoin’s fate as a store of value asset instead of a low-friction peer-to-peer digital cash.

Strict restrictions make it impossible to have it both ways. If the large block size forces had won, more computing power and bandwidth would have been required to run full mining nodes, leading to network centralization and potential transaction censorship.

On the other hand, small blocks maintain decentralization but are difficult to scale on-chain. Since there are fewer transactions going into a block, higher network activity leads to queues and thus higher transfer fees. And as BTC transfer fees rise, Bitcoin’s daily currency offers decrease.

At least you don’t have to use a layer 2 scaling solution like Lightning Network that leverages payment apps like Strike. These payment systems can leverage Bitcoin as a means to transfer cash and interface with existing banking systems.

I always use Send to Bank Worldwide through the Strike app. It is close to an immediate cash deposit payment. My family in the Philippines is in awe of the power of God.#Bitcoin

— General Plebian (@GenPlebian) December 23, 2023

Ultimately, Bitcoin has solidified its position as a truly sovereign currency that is peer-to-peer but not inherently low-friction. Rather, Bitcoin is the foundation on which financial buildings can be built. In an era of persistent fiat debasement through central banks, decentralized sovereignty defies low friction and makes Bitcoin a fiat escape.

For those familiar with fiat currency erosion, this is a new concept. But Bitcoin ETF applicants now have an incentive to bring the concept to public attention.

pic.twitter.com/fVndEbD0Ys

— Hashdex (@hashdex) December 28, 2023

This competitive marketing push alone is poised to deepen the capital pool for Bitcoin exposure. And the deeper it goes, the higher the Bitcoin price is likely to go, creating a feedback loop of more capital inflows.

Ethereum’s Technical Utility: Beyond Simple Investment

While Bitcoin pioneered the concept of blockchain-based sovereign money, Ethereum is an infrastructure layer in progress. It is equipped with digital assets and replaces existing financial services.

This purpose drove Ethereum’s shift to proof-of-stake, as the blockchain network relies on economic stakes instead of energy-consuming computing power. However, having a sloppy energy footprint (compared to Bitcoin) is only the starting point for expansion.

Daily operational financial infrastructure requires low friction (minimum fees) to access and truly leverage TradFi. Ethereum has not yet achieved low friction and instead relies on many layer 2 scaling solutions.

This becomes even clearer in the latest roadmap, which emphasizes Ethereum interoperability and security against cyberattacks instead of L1 extensions for low transaction fees.

The 2023 Roadmap diagram has been updated by popular demand! pic.twitter.com/oxo58A2KuG

— Vitalik.eth (@VitalikButerin) December 30, 2023

This approach raises two main problems.

1. By abandoning proof-of-work, the Ethereum blockchain becomes dependent on large stakeholders and cloud computing services such as Amazon Web Services (AWS). This diminishes the perception of Ethereum as a decentralized network that could be a true TradFi replacement.
2. As a result, Ethereum stands among other PoS network alternatives that suffer from similar centralization issues. However, it is built from the ground up for L1 extensions without any additional L2 extension complexity for the end user to interface with.

This cycle, this dynamic has become even more evident. Despite being the second largest cryptocurrency by market capitalization, ETH lagged behind Bitcoin with a +64% year-on-year performance. Ethereum lagged significantly with a +118% YoY performance compared to its direct competitor, Avalanche (AVAX), and a +321% YoY performance compared to Solana (SOL).

Ethereum’s poor performance comes despite its inflation rate being much lower than that of Bitcoin. This could mean that the perception of Ethereum is much more unstable than that of Bitcoin. Bitcoin has a more consistent and focused “sound money” proposition.

This proposal is impossible to replicate due to Bitcoin’s mining network effect. For example, if the Bitcoin code were modified to become a PoS chain, as Greenpeace prefers, without a network onboarder it would simply be dead code.

Ethereum’s network effect comes from maintaining dApp dominance among PoS chains. However, it is not clear whether that dominance will shift to AVAX, SOL, or other PoS networks. Additionally, while it is clear that regulators view Bitcoin as a commodity, Ethereum is still in a fog of regulatory obfuscation.

Market and regulatory dynamics

To date, SEC Chairman Gary Gensler has not explicitly announced whether ETH is a security or a commodity. According to recent speculation, Bloomberg ETF analyst James Seyffart believes that the SEC is already leaning toward product designation by approving an Ethereum future ETF in August.

James Seyffart from the January 4th CryptoQuant webinar:

“So Gary Gensler will not explicitly say whether Ethereum is a security or a commodity, but in their actions, by endorsing the Ethereum futures ETF, they are implicitly accepting Ethereum futures as commodity futures.”

Other PoS chains such as SOL, ADA, and AVAX are in the same boat of regulatory uncertainty. In a lawsuit against Coinbase last year, the SEC named them all “crypto-asset securities.” If Seyffart is correct and ETH becomes a commodity in the CFTC’s favor, Ethereum could gain an advantage over its competitors.

Currently spot-traded Ethereum ETFs are delayed until May 2024, from the Grayscale Ethereum Futures ETF to the Hashdex Nasdaq Ethereum ETF. Likewise, the SEC withdrew Cathie Wood’s ARK Invest, 21Shares, and VanEck’s Ethereum ETF.

Given limited market liquidity and the Fed’s flashy money supply in 2021, Bitcoin is poised to be a bigger beneficiary of a first-mover advantage than Ethereum.

conclusion

There’s a reason the SEC hasn’t approved a single spot-traded Bitcoin ETF since Cameron and Tyler Winklevoss first applied in 2013. Not only was Bitcoin less mature, but the banking sector also did not have a leg up on P2P. compete.

Since then, Bitcoin has overcome its underground, tulip, and money laundering detractors. Digital assets are now protected by the world’s most powerful computing network, creating an ecosystem for mining companies. This further strengthened investor confidence due to Bitcoin’s conservative coding practices.

On the other hand, Ethereum is perceived as a patchwork crypto project that has not yet established itself as a DeFi vanguard to respond to TradFi. Due to technical and regulatory uncertainty, conservative Bitcoin is a much more likely candidate to receive sustained retail and institutional attention in the first ETF vehicle.