Blockchain enthusiasts are a lot like gold bugs: no matter how the market’s moving, they stick to their guns. Downward price action is irrelevant; in the long run, the price of their chosen commodity will go up. It just has to. It makes so much sense.
Except, of course, that good logic doesn’t guarantee success in finance any more than it does in anything else.
To most people, the blockchain is inextricably linked to bitcoin. And, while the rise of bitcoin brought blockchain into the public consciousness, it’s no more the be-all and end-all of the system than Facebook is the internet. Bitcoin works wonderfully well on the blockchain, but it’s only a small part of what the system can do.
The blockchain is an ecosystem of its own
Blockchain doesn’t derive its security from a centralised body. Instead, every user of the system has their own copy of the blockchain, comprising every transaction (block) that has ever taken place. When a transaction is verified, proof is sent to the network at large. The system is secure because it exists in an encrypted form in thousands of places at once.
In financial terms, this system has clear benefits. But blockchain technology could just as easily be used to record intellectual property, home ownership, or contractual obligations. Any transaction that merits keeping a record would benefit from blockchain technology.
Ethereum is a “a decentralised platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference”.
Like bitcoin, Ethereum uses the blockchain to verify transactions. But unlike bitcoin, Ethereum is an has the express purpose of going beyond currency. It’s a decentralised, bulletproof computing system that never, ever fails. Except when it does – catastrophically.
A thief with a thank-you note
Ether – the crypto-currency that powers the Ethereum platform – has been tumbling since news broke that $53m was lifted from one of the largest institutions operating on the platform. The DAO (decentralised autonomous organisation) holds huge reserves of cash to invest in various ventures – or did, until it was purloined by a hacker.
We’ve seen cryptocurrency hacks before. The value of bitcoin plunged after $500m-worth of the currency was stolen from leading coin exchange MtGox. Ether has suffered badly since the DAO hack. But it was up 1.8% against bitcoin by the afternoon. Today, it’s up 11.4% against bitcoin, and 4.32% against the dollar. The price is changing so fast that I’ve had to revise it by several percentage points in the course of writing this paragraph.
Ethereum – interest over time
Let’s say ether keeps rising (and I’m not saying that it will). What will that tell us?
Perhaps it will mean dip-buyers were a little too zealous – thousands tried to catch the falling knife at once, and managed to send it spinning back into the air. That’s one option.
But if ether continues its perverse recovery, it will be for a slightly less conventional reason.
Ether is not a well-known currency. An intriguing scandal like this one has almost certainly made the platform it fuels better known:
The value of ether increases with its utility. If more people know about ether and Ethereum, more people will use it. The more people that use a currency, the greater its value.
Even more than bitcoin, Ethereum – which allows people to build new businesses on its platform – will benefit from increased adoption. People will buy and spend ether, but they will also develop new businesses on the platform, businesses at which users can spend their currency.
The currency’s value is dependent on this network effect, and once it gains momentum, it could become very hard to stop.
Let’s recap.
A currency that derives value from its ultra-secure system is hacked. $53bn of the community’s money is stolen. And the value of the currency goes up. Does that sound right to you?
Ethereum is young, so we shouldn’t expect it to act as a mature market would. If the bug that allowed this theft is fixed – and millions more people know about Ethereum – perhaps we can chalk it up as a win for the platform. It’s the ultimate proof that there’s no such thing as bad press.
The blockchain is only eight years old, and on today’s evidence, it’s acting its age. But if Ethereum’s users keep the faith, the platform will be worth keeping an eye on.