If Bitcoin is digital gold, will Ethereum become the crypto equivalent of Treasury bills? Cathie Wood sees a correlation and a potential catalyst
One of the key reasons for that Bitcoin (CRYPTO: BTC) it has performed so well, surpassing $108,000 at one point last year, and has been more resilient than the rest of the crypto sector as investors view the token as a potential hedge against inflation. Only 21 million Bitcoin tokens can ever be mined and there are already 19.8 million of them in circulation, making the world’s largest cryptocurrency a finite asset with similar dynamics to gold. Now ARK Invest chief executive Cathie Wood has said she believes Ethereum (CRYPTO: ETH) has begun to develop some unique characteristics of its own that could potentially position it as the crypto-equivalent of US Treasuries. If Wood is right, this could prove to be a major catalyst for Ethereum.
Towards the end of 2022, Ethereum switched from a proof-of-work protocol to a proof-of-stake consensus mechanism to manage its network. As networks like Bitcoin and Ethereum became more and more popular, the process of validating and mining new tokens became quite energy intensive, consuming more and more computing power. An alternative approach involves Ethereum holders “staking” their tokens — locking them up for a period of time — for the chance to confirm new transactions. Validators are chosen randomly, earn the right to mint new blocks and are rewarded with new tokens for doing so. Those with more staked tokens have a higher chance of being selected.
Many investors are now investing in the Ethereum network and earning fees to lock their tokens. In this trend, Wood sees a correlation with US Treasuries. Not only can investors in the Ethereum network earn returns on their tokens, but tokens are also often used as collateral in digital asset transactions.
There are still many differences, of course, between the two tools. For example, most bonds have fixed maturities once issued, but Ethereum holders can continue to earn rewards until they decide to stop investing their holdings. While the bonds are backed by the US government, the invested Ethereum supports the security of the network and the value of the Ethereum token.
Ethereum also presents some advantages over traditional bonds. The network cannot pay for invested Ethereum like a government or company could because that invested Ethereum is not a debt, but a way of managing the network itself. However, invested Ethereum as an asset has similar risks as bonds. It may suffer from inflation, for example. If a new release of Ethereum exceeds the burn rate (some tokens are burned in each transaction and withdrawn from circulation), this leads to a higher supply, which reduces the net yield. Another big difference is that since bonds are viewed as low-risk instruments, the return on Ethereum invested can vary widely as the amount of Ethereum invested changes, which changes the rewards investors can earn on average. Other factors such as transaction volume can also affect returns.
