Digital Currencies Show Potential To Be New Asset Class As Demand For Bitcoin Rival Ethereum Rises

Author

Laura Shin

June 10, 2016

For the past year or so, “blockchain, not Bitcoin” has been a common refrain among the financial services set — meant to imply both that the technology behind Bitcoin is what’s truly revolutionary, not the currency itself, and that private blockchains (akin to Intranets) can be just as transformative as public ones like the Bitcoin blockchain (more similar to the Internet).

But even as 2016 has shaped up to be the year financial incumbents race to create their own private blockchains, grassroots excitement over another public digital currency network, Ethereum, has shown that the battle between blockchain tech and cryptocurrencies — if such a competition truly exists — is far from over.

With Bitcoin and Ether (Ethereum’s currency) at $7 billion and $1 billion market capitalizations, respectively, and trading infrastructure building up around them, digital currencies look to be growing into a viable asset class while private blockchains have yet to take off.

Yesterday, virtual currency exchange Coinbase confirmed it will, on Tuesday, start offering trading of Ether (ETH) on its institutional grade trading platform, Coinbase Exchange. CoinDesk reported the news after screenshots of ETH/USD and ETH/BTC trading on Coinbase Exchange (unintentionally published) began generating excitement on social media.

Coinbase Exchange will also rebrand as Global Digital Asset Exchange, or GDAX, “to more accurately reflect the type of services it’s providing,” said vice president of business development Adam White. (San Francisco-based Coinbase also offers a consumer wallet at Coinbase.com, which will begin offering Ether this summer.)

GDAX logo

The company, which has $106 million in venture capital from the likes of the New York Stock Exchange, making it one of the most well-funded digital currency startups, decided to add Ether because of the excitement over and rate of progress seen with the Ethereum network. 

“[Ten] months ago [Ethereum] didn’t really exist,” said White. “It was still a white paper, a concept. And now here it is with hundreds of dapps or decentralized applications built on top of it, a ton of developer interest in it — if you check out dapps.ethercasts.com, you can see a list of all these emerging applications. It just surpassed a $1 billion market cap, so there’s a lot of value in the Ethereum network in a short period of time.” White called customer demand for Coinbase to support Ether “unprecedented” compared to requests for other altcoins.

Ethereum has been generating a lot of buzz recently. Not only has the price risen from $.95 at the beginning of the year to almost $15 now (Bitcoin was trading at over $450 but appears to have dropped to $440 in the last 24 hours), but it’s also giving rise to some popular projects. Most notably, a distributed autonomous organization, or a company run not by an executive team but by computer code, called the DAO that was built on the Ethereum network and launched in late April has so far raised $164 million (as of press time) making it the most well-funded digital currency organization (it functions primarily as a venture fund) ever. Microsoft also began offering Ethereum for enterprise clients on its cloud service Azure.

Chris Burniske, analyst and blockchain products lead at ARK Investment Management, the first public fund manager to invest in Bitcoin, says Coinbase’s decision validates Ether as a cryptocurrency. While smaller exchanges such as Kraken, Bitfinex and Gemini (founded by investors Cameron and Tyler Winklevoss and licensed in New York state — a distinction not yet awarded to Coinbase) had already begun to offer Ether trading, “I would argue Coinbase is the gold standard within the Bitcoin community both on the wallet side and increasingly so on the exchange side,” Burniske said. “They are the most liquid U.S. Bitcoin exchange and they custody more Bitcoin than anyone else. Their choice to offer Ether really validates Ether as the second cryptocurrency at scale, further defining cryptocurrencies as an asset class.”

Burniske defines an asset class as having its own market behaviors, risk/reward profile, and politico-economic profile in terms of who governs it, the use cases, etc. He also said an asset class should be stable — and “given the growing liquidity of both Bitcoin and Ether, they’re both working their way towards that.”

“From my study of Bitcoin and Ether, they differ from all other asset classes out there and are at a scale that — a billion dollar market cap is the size of some companies that ARK invests in. That’s a significantly investable asset,” said Burniske.

Coinbase’s decision to rebrand the institutional exchange to GDAX reflects the vision of digital currencies coming into their own as an investment.

In a followup email, Burniske wrote, “GDAX’s name rings true within the financial services landscape, joining the ranks of NYSE, NASDAQ, CME, ICE and so on. This is an important step for people to realize Bitcoin, Ether and other cryptocurrencies are no longer fringe technologies.”

White said GDAX’s name encapsulated the vision — to be global and offer a variety of digital assets, not just Bitcoin and Ether. “As this nascent model continues to build, you can look at new and emerging digital assets, be that a digital currency like Ethereum, Bitcoin, Litecoin and so on, or even digital assets, like DAO tokens — these are second-order digital assets built on top of digital currencies,” said White, though the company has no plans to add DAO tokens as of yet. (DAO tokens, which investors in the DAO received, give them voting rights.)

“We do see a world developing where there will be a need for liquidity where people will be able to convert into and out of one digital currency to another but also from fiat currency,” said White. “Coinbase, which is still our parent company — our goal is to connect that Finance 1.0 to Finance 2.0.”

Indeed, many are already trading between digital currencies. Over the last 24 hrs the ETH/BTC pair was the top three of four liquidity drivers for Bitcoin markets and the top three drivers for Ether volume (though much of this trading is likely due to interest in the DAO). And the sheer amount of money raised so quickly by the DAO shows pent-up demand for ways to invest Ether or other digital currencies.

One question that remains is whether people will invest in and transact with Ether differently than they do with Bitcoin, since the two currencies have different monetary policies. Bitcoin caps the total number of bitcoins in circulation at 21 million, though it will be around the year 2140 before all are released. It’s not 100% clear what the monetary policy of Ethereum will be, but it appears it is intended to reach a steady state.

If that’s the case, Burniske predicts Bitcoin will be used more as a store of value, whereas Ether, which is needed to power the smart contracts that are the main appeal of the Ethereum network, will be used more as a means of exchange.

“For that reason [Bitcoin] could long-term maintain its larger market cap,” said Burniske. “Bitcoin is still 7x the market cap of Ethereum, and I would expect it over the long term to maintain that lead because it will be thought of as this digital gold, whereas Ether is this crypto tool which you [use] to execute the logic of smart contracts.”

As for the private vs. public blockchain debate, Burniske said the move by Coinbase “points to a bright future for permissionless innovation or permissionless” — public, not private — “blockchains and all the new business models that go with this permissionless innovation.”

The rapid rise in developer interest in Ethereum and demand for Ether trading has re-invigorated Coinbase, which was founded in 2012 and was the first high-caliber, venture-backed Bitcoin startup. As blockchain became a buzzword over the last year, Coinbase stayed focused on Bitcoin while other startups bringing blockchain to enterprise such as Chain and R3CEV generated quite a few headlines.

“Many of us in this company got interested in Bitcoin in the early days and were here when Bitcoin first kind of took off in 2013 and 2014,” says White. “And since then, honestly, it’s been a lot of growing pains. The legal and regulatory infrastructure coming in place, applications and services creating a safe and stable and trusted environment to trade and store Bitcoin has come online, but we really haven’t seen the end products and services use Bitcoin as quickly as we would have liked. With the introduction of Ethereum, we have not seen this type of energy and excitement from the community in quite a while.”

This article was written by Laura Shin from Forbes and was legally licensed through the NewsCred publisher network.

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