When first-time crypto investors make their first trades, most are faced with a choice between two of the largest coins in the crypto universe: Bitcoin and Ethereum. Some opt for one over the other. Some choose both. But even if they decide on the latter, they often allocate more funds to one or the other. What accounts for the difference in their preference?
The choice between bitcoin and ethereum is not just a matter of “coins,” but rather two completely separate crypto categories. Although bitcoin was initially developed as an alternative form of money, most investors see it as a store of value cryptocurrency; a hedge against inflation.
Ethereum, on the other hand, may still be a store of value but it’s main contribution to crypto is in the area of “smart contracts.” Ethereum is a smart contract cryptocurrency.
What are Smart Contracts?
Think of smart contracts as computer programs or codes designed to execute, control, or document an action: a contractual agreement, transaction, or a one-of-a-kind digital document.
Smart contracts are stored in the blockchain and largely inalterable by outside parties. They’re verified not by individuals but by a selected majority of computers (nodes) in the ethereum network. This makes them potentially more secure, precise, efficient, cost-effective, and reliable. Let’s break this down a bit.
What Value Does Smart Contract Tech Bring to the Table?
So, as a smart contract crypto, what value does ethereum add to the crypto space?
Revolutionize how we do business…
The area of legal contracts is the first to be affected by smart contract technology. Government and corporate lawyers will have to learn to write using the protocols of this new code. Beyond this space, innovations in supply chain operations, voting, decentralized finance (DeFi), decentralized apps (Dapps), and autonomous organizational functions are an easy next step. Add in IoT, AI, and robotics, and the future will look entirely different across almost all sectors of the economy.
Precision in rules and execution…
The conditions of the contract are agreed upon before execution and they’re immutable within the blockchain network. When contracts are executed automatically according to code, room for human error is slim to non-existent. The caveat here is that the rules have to be accurate prior to the initial agreement and transaction.
Cost-effective and efficient…
Imagine an agreement between two parties without the need of a middleman. This can be a financial transaction, a contractual agreement, or an exchange of digital art (such as an NFT) for cryptocurrency. This limits the costs to ethereum’s transaction fees (aka “gas fees”). Although gas fees can at times be costly, what’s absent from the cost is the middleman who profits from the transaction.
Trustworthy transactions…
Contracts and transactions are verified not by people but by computers in the blockchain network (aka “nodes”). This makes them nearly impossible to change, as all verifying nodes must agree to the exact conditions of the “block” created by the transaction. This is why blockchains are called “trustless”: you don’t have to trust any individual or institution since all verifications are automated and computer-driven.
Details of the data are permanent…
All transaction details are stored on the blockchain. They can be accessed by any of the involved parties at any time. The details are immutable,, making them a reliable source of truth should any dispute on the contract terms come up in the future.
Not without Risk
As innovative as smart contract technology may sound, Ethereum shares similar risk to its other crypto counterparts. But if you’re trading a regulated derivative such as Ethereum Futures or Micro Ethereum Futures (launching on Dec 6th), then your range of crypto risks may become narrower:
- Volatility risk: Ethereum is vulnerable to large swings up and down, and this may not be suitable to all traders and investors.
- Overnight risk: Crypto trades 24/7, more than any other financial asset. You can wake up the next day to see that the price of ethereum had moved in your favor or against it while you were catching z’s.
- Global regulatory risk: If a country decides to ban the use of a particular crypto (like bitcoin or ethereum), this will have ripple effects across the entire crypto spectrum, affecting its price.
Fortunately, if you’re trading ethereum futures or micro futures, the risk of losing your crypto wallet, private keys, or getting hacked are largely absent since you’re not holding “spot” crypto. The futures can give you exposure to ethereum’s price swings without having to be responsible for actual crypto ownership.
GFF Brokers is a member of NFA and is subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.
Notice from CFTC: Customer Advisory: Understand the Risks of Virtual Currency Trading
Notice from NFA: NFA Investor Advisory—Futures on Virtual Currencies Including Bitcoin
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.