Ether vs Bitcoin: Analysing the Crypto Market for An Indian Investor

In today’s digital age, the way we live, and work has changed and so has money. Account based electronic money has been around since decades. The new entrant, in the money ecosystem, is token-based digital money called cryptocurrency.

Cryptocurrencies have come a long way since 2009 when Satoshi Nakamoto released the paper on bitcoin “A peer to peer electronic cash system). The paper gave birth to a new transformative terminology, Blockchain. Today, we have different flavours of cryptocurrencies -- stablecoins (backed by fiat currency), Central Bank Digital Currencies (a direct liability on the central bank) and meme coins.

In 2019, Facebook announced “Libra” (now rechristened as “Diem”), a new digital currency “stablecoin” backed by sovereign money. Unlike Bitcoin, stablecoins are relatively stable as they are pegged against fiat currency. Facebook’s announcement forced central banks to have a hard look at digital currencies. Central banks, across geographies, are conducting experiments to understand how Central Bank Digital Currency can make existing payment systems efficient and act as a tool for targeted monetary and fiscal policy implementation. This has changed the discourse around cryptocurrencies and interest in digital currencies has soared over the last couple of months.

The value of cryptocurrencies has almost tripled since 2017 and 2021 has witnessed an unprecedented rally. Bitcoin prices, which roughly account for two-thirds of total crypto market value, led to the bull run in the first quarter of 2021. The Bitcoin bull run was also abated by Elon Musk’ decision to buy 1.5 billion bitcoins and acceptance of bitcoins as a means of payment for buying Tesla cars. Of late, Bitcoin prices have been at the mercy of Musk’s tweets, and his whims and fancies about meme coins whereas Ethereum prices have risen on account of the rise in the number of various applications and services built on top of the Ethereum ecosystem. The Ethereum network is more scalable than bitcoin. With the migration from energy intensive Proof of Work consensus model to Proof of Stake, Ethereum has become an enterprise and environment friendly protocol.

Recent reports from Bank for International Settlements suggest that more than 80 percent of central banks, across the globe, are exploring Central Bank Digital Currencies (CBDC) and few implementations are powered by solutions built on top of the Ethereum network. Recently, Consensys launched CBDC as a Service sandbox for banks, central banks, banks, payment service providers and institutional players to design and build digital currency settlement infrastructure. This sandbox is powered by Consensys Quorum network which empowers enterprises to use Ethereum for enterprise grade blockchain applications. Today, more than 13 billion worth of value is locked in Ethereum smart contracts, propelling the Decentralized Finance (DeFi) revolution. DeFi, also known as Open Finance, has started a new movement towards democratization of financial services powered by distributed ledger technology.

Ethereum prices are expected to move as a function of the value it brings to the payments, central banking system and enterprises whereas Bitcoin would continue to have wild swings in the short term. On the other hand, meme coins, such as Dogecoins, are more of a fad than a phenomenon and the longevity of such coins is anybody’s guess. However, this does not rule out the emergence of such coins in the immediate future.

Cryptocurrency in India

The cryptocurrency market will witness a few upheavals till there is a global consensus on regulations with respect to anti-money laundering, KYC, taxation etc. The Reserve Bank of India has unofficially sent feelers to all banks not to engage with cryptocurrency entities. Despite the regulatory vacuum in the country and the fear of impending ban, more newbies and even folks in the 60s are entering the crypto market. As an asset class, crypto would continue to attract attention from investors, both retail and institutional. As a business imperative, cryptocurrency exchanges should start working towards a self-regulatory model to weed out rogue elements and aggressively educate investors about best practices on crypto investments.

Anyone who wants to enter the crypto market should hold a long-term view of the market, acknowledge the risks associated with volatility, and evaluate digital currencies on merit. Be a fair judge of your risk appetite and invest sensibly in digital currencies only when you have done your research. Check out various cryptocurrency communities, forums on Reddit, Telegram, Twitter etc to acclimatize yourself to the nuances and vocabulary of the crypto world. It is important to resist FOMO (Fear of Missing Out) so that you do not end up losing your hard-earned money. Be aware about tax implications to ward off unnecessary legal wrangles. Cryptocurrency investments are not a way to make quick money. It is more of a marathon than a sprint.

 

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