Ethereum as a Store of Wealth

Ethereum’s Footprint Is Still Very Large

There is nothing modest about investing or speculating in Ethereum, and with huge profit potential comes huge risk, and things just don’t keep going up forever of course. This still left Ethereum with a market cap of about $100 billion, which is nothing to sneeze at and in fact is a very impressive amount of money indeed.

This is about twice the market capitalization of silver, and silver has been traded for millennia, and was toppled by Ethereum and Bitcoin in a very short period of time indeed.

Silver is known to be pretty volatile, the most volatile of the precious metals on average, but Ethereum delivered volatility that was orders of magnitude larger, and this is really what has it standing out.

The only thing that we have ever seen in history that even compares is the Dutch Tulip Mania, which for centuries stood as testament for what can happen when demand is way out of control for a time. Ethereum’s volatility even exceeds Tulip Mania though, and has certainly set the new standard for how much something can go up.

In terms of massive losses of value, the Dutch Tulips are still in a class by themselves, and something losing 30% of its value in 10 days is certainly very impressive and to some even alarming, but Ethereum has a long way to go to match the fall of the tulip market.

We may or may not ever see something like this, which only time will tell, but one thing’s for certain, this isn’t gold or silver or anything close to them.

The market cap for gold still dwarfs anything we’ve seen thus far with cybercurrencies, with gold’s market capitalization being measured in the trillions of dollars. Although how much gold there is in the world is a matter of some debate, its value is much larger than Ethereum or all of the cybercurrencies combined.

One thing that we are sure of is that there is a lot of money in gold that at least potentially could be re-allocated to cybercurrencies like Ethereum, in addition to all the other investments out there that could be redeployed to some degree.

Where Might Ethereum’s Price End Up?

There is a limit of course to how much Ethereum’s price could rise one day, and one of the biggest limitations is simply how much money could be put into it as opposed to being held elsewhere. If Ethereum rose another 14,000% for instance, that would involve a total of around 14 trillion, which is possible in theory but probably not realistic. There is certainly some room to grow though in spite of how much Ethereum has risen already, and while the sky is certainly not the limit, it may rise in the sky even more than it has already.

Whenever you have a major pullback like we’ve seen already, this does serve to at least dampen the mania that has been present lately, and those holding the cybercurrency may end up not being as concerned about it not going up as they are about it not going down too much further.

Bull or bear markets are usually measured in years, but in the case of Ethereum, it is so volatile that it may be more appropriate to measure this usually longer term trends in weeks.

A 30% pullback would normally be considered to be a major move, and in a real sense it is, but this is actually not the first time Ethereum has given back that much in value, as we saw a similar move in the Summer of 2017 when it went through an even bigger decline, going from almost $400 to below $200 for a time, before recovering.

There are many who have been prognosticating doom when it comes to cybercurrencies like Ethereum, where their expectation has been a massive bursting of the bubble like we saw with the Dutch tulip market in the 17th Century, but this is not the 17th Century and it is not absurd to value digital coinage at any amount, like it was with tulips.

The biggest difference is that the tulip mania was simply mania, so out of touch with reality that a complete collapse was inevitable, because tulips cannot possibly hold the same value as an entire farm, even though they may be traded for farms, out of pure mania.

Digital coins have no intrinsic value of course, and a tulip bulb is at least worth a bit of money, although having no comparable value in the physical world is actually Ethereum’s biggest advantage. There is both no intrinsic value nor any intrinsic comparison, and a single coin could be worth a dollar or a trillion dollars and assigning any base value or speculating on what a coin should be worth would be meaningless.

Given the fractional nature of cybercurrencies, its value is not subject to physical limitations like other commodities, which makes their rise all the easier. One could for instance by a quadrillionth of an Ether coin or a Bitcoin, as opposed to buying a quadrillionth of an ounce of gold, or anything remotely close in smallness.

Since there are no physical assets associated at all with Ethereum, its existence is in the pure world of numbers, without relying in any way on anything existing in the physical realm, which is actually a huge advantage if you want to take the lid off of the potential growth of something.

Ethereum and other digital currencies are pure financial assets, worth exactly what people have invested in them and are willing to pay for them, with no other limitations. This is one of the reasons why digital currencies are so exciting to speculators.

Should People Invest in Ethereum?

Ethereum is not unlike any other financial asset, as far as providing people the ability to own it for a time with a view on making a profit from its value going up, or even speculating that its value will go down, which is also possible these days.

Ethereum can satisfy any trader’s appetite for risk, including being able to trade it with huge amounts of leverage through contracts for difference brokers. With something this volatile being traded with extremely high leverage, if one exposed their whole account to this, even very slight movements could wipe you out and then some, and this is not a strategy that would be used by anyone not contemplating financial ruin.

From there, people can choose levels of risk that are many times higher than would be possible with trading anything else, and Ethereum is plenty risky even without any leverage involved.

One must be prepared to accept and manage the additional risk in speculating on Ethereum though, although what ends up happening is a lot like you see with stocks hit the skids, with many individual investors left unprepared to deal with these circumstances.

Proper risk management is rarely a simple thing, and even if people have a plan such as they will liquidate if a certain drawdown happens, such as losing a quarter or a third of one’s value in a decline, we then have to ask whether that idea is based upon sound judgement or some arbitrary figure, or worse, based upon a certain threshold of pain being exceeded.

Ethereum may or may not end up being a reliable store of wealth like gold has become, and we may even wonder whether we should approach gold that way either, given the way that its price can bounce around over the long term.

Ethereum is similar, other than the swings are much, much larger, or have been thus far, and the time periods are much, much shorter as well. This is much like condensing decades of the performance of other assets into a very short period of time, where both time and movement are accelerated many times more than you would ever normally see with financial assets.

This requires traders to be exceedingly nimble, not just short term traders but everyone who has certain expectations of value with Ethereum, especially if people want to protect themselves from the risk of massive drawdowns, risks that are clearly present in this case.

This runs completely counter to the buy and hold philosophy that rules investment strategy generally, and the fact that these people tend to view instruments like Ethereum so unsuitably is really a matter of it not suiting their way of investing, at all.

Those who are accustomed to successfully managing their trades more tightly, actual traders and not investors, are more likely to profit in the end from trading Ethereum and other cybercurrencies, because benefiting from doing so places effective risk management at such a premium, and when the risks are much higher, managing them is much more important.

For those who do not possess such skills, one can still benefit from trading Ethereum, provided one is at least aware of the risks as well as the need to at least make one’s best efforts to pay attention to taking into account market circumstances as they present themselves.