Do You Know Why ETH is a Poor Investment?

ETH itself is a poor investment as proposed in our prior paper, Ether And Bitcoin Are Not The Same. The most important part of this paper is explaining the network effect. As the number of users increases and the Ethereum network supporting more dApps grows, then Ethereum becomes more valuable, which improves the network, which decreases gas costs.

Technological advances dictate prices decrease.

It is no different from cell phones. As the network and competition grow, the amount of data transferred increases, while the cost to transfer that data decreases. This is a simple economic theory of supply and demand, examining where the curves intersect. Technology shows greater depreciation of price following demand. Shifts in the supply curve are usually the result of advances in the technology that reduced the input costs of production. This has been true for technologies such as televisions, computers, cell phones, and wired/wireless data. It will also be true for blockchain.

Technological advances that improve production efficiency, such as ETH 2.0, will shift a supply curve to the right. The cost of production decreases and consumers demand more of the product but at lower prices. This has proven true for the price of ETH over the last two and a half years; as the network grew in earnest, prices have dropped significantly despite speculative buying.

An often-heard argument against developers and dApp users demanding lower prices on Ethereum is the fluctuation of gas costs priced in ETH. While the price of ETH is variable, the amount of gas can go up or down as a function of ETH price and network demand. However, this is a failed theory. First, adjustments in gas prices, at best, keep ETH prices stable over the long term, which is an argument against investment and speculation in ETH going higher in USD terms. Secondly, if gas prices can simply adjust to promote users at a lower cost on the network, any true relationship of the price of ETH to the use of the Ethereum network is broken, and the argument that buying ETH is buying the growth of the Ethereum network is void.

Because of this, ETH cannot serve as a means of exchange, unit of account or store of value and therefore cannot be seen as a viable currency. Therefore, ETH is only a speculative asset for speculation’s sake, with no true underlying fundamentals.

ETH Price and Network Growth

As of the date that we are writing this article (June 25, 2020), ETH is trading at $233. If you bought ETH a year ago, you lost 37%. Two years ago, you lost 49% and three years ago, you lost 24%. Of course, many people bought between Oct 2017 and August 2018, losing up to 93%. Retail investors buying ETHE:US a year ago have lost 31%.

During the same time periods, The Ethereum network has grown:

  • 3 years ago: 449 dApps
  • 2 years ago: 1515 dApps
  • 1 year ago: 2854 dApps
  • Today: 3479 dApps

It is important to note that Dapp growth began heavily in January 2017, when ETH was $1419.

Ethereum daily gas usage has increased since mid-2017 and has accelerated in recent months as on-chain transactions grew and became more competitive. Ethereum network use has hit a new all-time high, which is why the Ethereum community has recently been debating raising the block size limit. The network utilization chart, which depicts the average gas used over the gas limit in percentage, has currently surpassed 95%. Ethereum’s growing adoption is proving to be its Achilles’ heel.

The issues inherent in gas costs have created congestion, which is a negative network externality. Congestion on Ethereum has led to poor user experience, especially for traders in this highly volatile environment, as their leveraged positions may be liquidated before they can act. Ethereum has created a Braess’ paradox, which suggests that adding one or more roads to a road network can slow down overall traffic flow through it. Ethereum currently has a congested highway as well as expensive toll booths which have created an unpleasant experience with drivers looking for alternative routes.

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