BITCOIN VS ETHEREUM ?

Fifth Era/Blockchain Coinvestors Newsletter

Vol. 3, No. 9, May 2021

Bitcoin vs Ethereum?

During the last couple of weeks a new debate has begun to surface. As the most valuable cryptoasset - Bitcoin - has seen its dominance begin to fall (the % of all cryptoasset market capitalization that it represents), so observers are asking should smart investors put more into the second most valuable cryptoasset by value - Ethereum? 

Today we examine the question of Bitcoin vs Ethereum, and we conclude that it is a misplaced debate. You should consider investing in both.

Traders vs Investors

To begin, let's acknowledge that the world can be broadly split into traders and investors. Traders focus on short term price movements and arbitrage opportunities and rightly are excited by Bitcoin versus Ethereum relative movements right now. Investors focus on what the future will be like, the tailwinds driving projects forward and how value will be captured by some and lost by others. We don't pretend to be traders (or speculators). We are affirmed long term investors who have focused on Internet, Fintech and Blockchain investing for the last two decades and more. 

While we acknowledge that searching for Bitcoin vs Ethereum arbs is a worthwhile short term trade, for the rest of this newsletter we look through the long term investor lenses that we wear.

Apples vs Oranges

At Blockchain Coinvestors our investment thesis since 2014 rests on the central premise that all the world's monies and all the world's assets will be made digital. Enormous value will flow to those that enable this outcome. Both Bitcoin and Ethereum are playing key roles in this transition. But they have very different aspirations, and certainly in this timeframe are doing very different things.

For the world's media to hype up a Bitcoin vs Ethereum investment debate is like the same commentators asking whether you should invest in Gold or Google? It's not that it is a bad question per se. However, before picking specific investments you first have to know what asset class each investment opportunity fits into. So in this case, a better first question is should you invest in precious metals or into advertising focused business models? Based upon recent investment performance the answer would have been both. So let's discuss what asset classes each of Bitcoin and Ethereum are in.

Global Leading Cryptoasset

Bitcoin is first and foremost a cryptoasset. While it was originally conceived as a distributed, sovereignless form of secure electronic cash, the reality is that when Satoshi Nakamoto turned up the design 'control knobs' of immutability, security, transparency, and distributed to position '10' the result was that Bitcoin became a not very good solution to global payments. As we now understand, although it took most of us five years or so to appreciate it, the benefits of extreme immutability, security, transparency, and distributed design added in a high degree of computing complexity. This in turn made the Bitcoin blockchain not fit for purpose for high volume, low value global electronic cash transactions - let alone the microtransactions that are beginning to come fast now as we turn on the Internet of things, web 3.0 search, store, share and socialize, and non fungible tokens to name just three innovations that require blockchains that can operate with massive capacity, throughput, speed, at low cost, and with low energy usage. The Bitcoin developer community is working hard to mitigate this reality, but it will be hard for them to create the fastest, cheapest, highest capacity, and lowest energy usage blockchain given where they are starting from. Perhaps they will succeed?

Today, Bitcoin is the world's best cryptoasset. Tens of millions of holders agree that it has value, benefit from its security, transparency and immutability and enjoy being able to buy and sell it in very rapid and relatively low cost ways. At least compared with the buying and selling of other scarce assets which have much more severe legacy issues to solve (e.g. real estate or precious metals).

In addition - and at last - every sovereign central bank, and essentially every major financial institution has now agreed that digital monies and assets make sense. They are now furiously working to design and launch stablecoins, embrace digital asset focused wallets, custody solutions, exchanges and so on, and most are getting ready to offer Bitcoin access to their clients. If that was not enough, there is a real debate emerging about whether the world will have a new digital reserve currency, and whether it will be a digital dollar, digital yuan, or perhaps Bitcoin.

In this context, Bitcoin has a chance of remaining the world's leading cryptoasset.

Global Distributed Software Development Platform

Ethereum, conversely, is the leading global distributed software development platform. It allows computer engineers and developers to build their software solutions on top of its protocol, software, and reusable modules of code. 

The way to think about Ethereum in layman terms is the following (apologies in advance for the over simplifications):

  • Once we had mainframe computers that required proprietary custom software to be written for them. This was a complex, inefficient and costly task.

  • Only a few could afford to hire software engineers to develop operating systems so most went without.

  • Then a few companies (think Data General, DEC, and IBM) began to offer packaged operating systems.

  • By the 1980's IBM/Microsoft DOS was displacing the early, and fragmented, operating systems.

  • Soon we saw Windows and a revised Apple OS pull ahead of the pack.

  • By the 1990's networked computers were a reality.

  • Then we saw the emergence of the world wide web and web based solutions.

  • Microsoft and Apple shifted their operating systems to the cloud and the first large scale open source operating system - Linux - was launched.

  • A few years later came the development of Android which Google bought and then gave to the world.

Today we take for granted the notions of cloud based operating systems, simple API's upon which computer engineers can develop, and open source and/or decentralized software development. We use the outputs of this work all the time - even if we don't realize it.

Ethereum, along with other blockchain based software protocols/networks like Cardano, NEAR, Polkadot, and Solano to name just four of many, are moving that evolution forward. In Ethereum's case there are two very fundamental ways - Ethereum is enabling distributed open source cloud based software development, and is using certain powerful aspects of blockchain to create 'smart contracts' that are about to replace most contracts that we use today. Contracts that are often still paperbased (as in real estate or fund investing) or at best are 'dumb' first generation computer code. By combining the two, Ethereum has a chance of remaining the leading global distributed software development platform.

Right now, large numbers of computer developers are betting that it will and are choosing to develop their solutions on top of it. Meanwhile, the Ethereum developer community is furiously working to upgrade Ethereum in important ways including the Berlin and London hard forks. Unfortunately, they are beginning to see that prior generations of operating system software engineers often lost the operating system wars not because they were bad developers, but because the burden of legacy code makes continuous improvement difficult when you seek to upgrade an operating system that is already in use.

Invest in Both

So to summarize, Bitcoin and Ethereum are pursuing fundamentally different long term aspirations and are in quite different asset classes. Bitcoin has a chance of remaining the world's leading cryptoasset. Ethereum has a chance of remaining the leading global distributed software development platform. Both positions of leadership would capture trillions of dollars of value. So if you are a long term investor you should consider investing in both.

Looking back just a handful of years, if you had bought BOTH at inception we know where you would be today. If you buy BOTH today, we think you will be happy in ten years time. But keep vigilant - other promising cryptoassets and distributed software networks/platforms are launching everyday.

Thank you for reading.

Alison Davis
Matthew C. Le Merle

ABOUT BLOCKCHAIN COINVESTORS

Since 2014 our goals have been to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and to capture superior returns from investing in the leading blockchain venture partnerships. The strategy is now entering its 8th year, and so far we are investors in 20 pure-play blockchain venture funds in the Americas, Asia and Europe and in a combined portfolio of more than 300+ blockchain and crypto projects including 20+ blockchain unicorns. Simply put, our funds, SPVs and syndicates represent the best way to invest in blockchain businesses.

FUND PERFORMANCE

Blockchain Coinvestors Funds are continuing to generate strong returns. To date, over 80% of the funds we are invested in are performing as top quartile funds against the Cambridge Associates benchmark. This remarkable performance results from powerful tailwinds driving the world towards a future in which digital monies and digital assets are ubiquitous and the businesses and projects providing blockchain and crypto products, services, and infrastructure benefit disproportionately.

BLOCKCHAIN COINVESTORS FUNDS

Blockchain Coinvestors’ goals are to provide broad coverage of the emerging unicorns and fastest growth blockchain companies and to capture superior returns from investing in the leading blockchain venture partnerships:

  • Fund III is open only to investors who meet the Qualified Purchaser definition with a minimum subscription of $250,000.

    • A “qualified purchaser” is an individual or a family-owned business that owns $5 million or more in investments. The term “investments” shouldn't include a primary residence or any property used for business.

  • Fund III Parallel is open to investors who meet the Qualified Client definition with a minimum subscription level of $250,000 at the discretion of the Manager. Please contact ir@fifthera.com if the minimum is of concern.

    • Currently, an individual or entity is a qualified client if he, she, or it: (i) has a net worth of $2,100,000 prior to investment in the fund (excluding the value of his or her primary residence).

While the two funds are substantially the same, there may be some funds and investments that are only available in the Qualified Purchaser vehicle. Blockchain Coinvestors funds can take investments via IRAs. We support several providers, including AlgoIRA, Kingdom Trust, Millennium Trust Company and Pacific Premier Trust Company (Pensco).

Please visit the Blockchain Coinvestors website to learn more about our offerings. You can also reach our Investor Relations team directly at ir@fifthera.com.

BLOCKCHAIN COINVESTORS SWISS

We are excited to announce that Blockchain Coinvestors Funds are now available through Swiss certificates for those of our non-US investors who prefer this approach. The underlying fund is the same, however, our Zurich based team at Blockchain Coinvestors Swiss, who will introduce in future weeks, can provide detailed information regarding this investment option. Email us at mlemerle@fifthera.com to learn more.

LINQTO
'Private Investing Made Simple'

While our funds are only available to Accredited Investors who are also Qualified Clients we believe in the democratization of investment access to all investors and look forward to that day. In the interim, we have partnered with Linqto which is an easy to use Mobile and Web app that makes it exceptionally easy to invest into attractive opportunities. The provide access to Accredited not Qualified Client investors as well as much lower minimums. Go to Linqto.com or download the app from your App store to use this approach.

BLOCKCHAIN COINVESTORS ANGELLIST SYNDICATE

Continuing the theme of the democratization of investing, we have a rapidly growing Blockchain Coinvestors syndicate on AngelList providing access to selected coinvestments. Please join us and our partner Lou Kerner on AngelList.

REGISTER NOW FOR UPCOMING WEBINARS AND CALLS

Our investment team hosts bi-monthly webinars and calls to help educate our community about the Fifth Era, fintech, blockchain and crypto. We discuss important trends, tailwinds and investment themes including what we have learned and how we are using our knowledge to inform our own investment thesis and actions. Below is a list of upcoming webinars for which you can register by clicking the links:

 Securing Global Early Stage Access in Blockchain

- May 17th, 7:00am PST

- May 17th, 12:00pm PST

Options for Investing in Blockchain & Crypto

- May 24th, 7:00am PST

- May 24th, 12:00pm PST

Blockchain Coinvestors Fund III First Closing

- June 7th, 7:00am PST

- June 7th, 12:00pm PST


Recordings of past webinars and calls can be found at www.fifthera.com/webinars.

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"The best way to invest in Blockchain businesses"

Matthew Le Merle