If you wanted to invest in a fast-growing industry, chances are you'd gravitate toward marijuana stocks, or perhaps something in the tech sector. But when it comes to cumulative return, no investment has seemingly come close to that of ethereum in 2017. Since the year began, and including its recent swoon, the value of ethereum has increased by more than 2,600% year to date. By comparison, it's taken the broad-based S&P 500 nearly four decades to achieve those same gains.
Why cryptocurrencies are on fire
Why such love for ethereum and other cryptocurrencies like bitcoin?
I'd like to think part of the reason these cryptocurrencies have been so popular is recent weakness in the U.S. dollar. President Trump has to be thrilled with a weaker dollar, as it'll boost exports to foreign countries. Unfortunately, U.S. citizens generally aren't as thrilled with a weaker dollar, and investors are often looking for a place to safely park their cash outside the dollar when it's falling. Traditionally when the dollar is weaker, gold has been the safe-haven choice. Gold is a finite resource and has been used as a currency for centuries.
However, cryptocurrencies also offer the potential as a store of value. Bitcoin, for instance, has protocol written that allows for a cap of only 21 million coins. It's therefore viewed as a scarce and finite resource, and thus an intriguing asset to consider purchasing as the dollar falls.
Second, we're seeing an uptick in the number of countries and/or businesses willing to accept cryptocurrencies as a form of payment. We recently reviewed five brand-name companies that've accepted bitcoin since 2014, and earlier this year Japan announced that it would accept bitcoin as legal tender, assuming it adheres to anti-money-laundering regulations, as with other legal currencies. The more businesses and countries that accept cryptocurrencies as legal tender, the more legitimate they become.
Finally, investors are putting their faith in the technology behind cryptocurrencies such as bitcoin and ethereum. The broad belief is that their blockchain-based technology -- essentially a digital and decentralized ledger that can record virtually any type of transaction -- can make transactions more efficient and secure.
The only real question is, how scalable the underlying technology is for various cryptocurrencies? Bitcoin, for instance, is mostly used as a payment platform and may not be particularly scalable beyond being used for payments. However, ethereum may have considerably larger aspirations.
The Enterprise Ethereum Alliance has some pretty notable members
As CNBC noted in May, the ethereum network has one major advantage over bitcoin: It's geared to support smart contract applications. These smart contracts -- basically computer protocols that facilitate, verify, or enforce the negotiation of a contract -- automate complex physical and financial supply-chain procedures and compliance processes involving multiple parties. In other words, it's designed to allow people to make agreements and oversee enforcement in an efficient and secure manner. And more important, it's geared at attracting big businesses, which bitcoin may not be able to do.
In late February, the Enterprise Ethereum Alliance (EEA) was born, with a goal of allowing enterprises the opportunity to take advantage of the scalability, security, and confidentiality of ethereum's blockchain technology. Some of the founding members included JPMorgan Chase (NYSE:JPM), Microsoft, Intel, Accenture, BP, and Credit Suisse.
Since February, the EEA has grown into the largest open-source blockchain initiative in the world. As of July 18, total membership in the Enterprise Ethereum Alliance exceeded 150 organizations. The newest brand-name members include Cisco Systems, Scotiabank, and MasterCard. That's nine brand-name companies that are embracing the use of ethereum's underlying technology.
You'll also note that ethereum's network isn't geared solely at financial firms, even if there's a pretty healthy representation of them among the 150-plus organizations. For instance, oil and gas giant BP was a founding member of the EEA. BP may be able to utilize ethereum's blockchain technology in its energy trading platforms, while financial firms such as JPMorgan Chase and Credit Suisse could test blockchain technology in everything from post-trade services to equity derivatives. More specifically, JPMorgan Chase is utilizing Quorum, which is its enterprise-focused version of ethereum, to help alleviate major banking issues such as settlement times, risk exposure, and system breakdowns.
Danger, Will Robinson
However, it should be noted that even with more than 150 organizations joining the EEA, it doesn't mean ethereum, or cryptocurrencies in general, are guaranteed to succeed. A lot of the tests we've witnessed with ethereum's technology from enterprise customers have, to date, been small-scale or pilot in nature. No larger-scale tests have demonstrated the effectiveness or safety of blockchain technology, nor have regulators signed off on the technology as being secure.
As CNBC points out, it could also be incredibly difficult to convince enterprises to work with one another to share information. After all, ethereum is an open-source distributed platform, and the idea of sharing data or competitive advantages in an open setting simply may not sit well with the large corporations that are needed to legitimize ethereum's network. Some brand-name companies, such as Goldman Sachs, have broken away from smaller blockchain-backed consortiums to develop their own blockchain projects as a result of having to share information. This leaves the door open for a barrage of competing platforms to ethereum.
And as for investors in ethereum, there's clear concern that speculators are driving its price higher. With most of the public having little understanding of what cryptocurrencies are, and given that the exchanges that trade ethereum are decentralized, which makes it harder to legitimize ethereum as a currency, volatility is probably the name of the game for the near term. Call this Fool old-fashioned, but your investment dollars remain best-served in the stock market, which is arguably the greatest long-term wealth creator.