Analysis: Why do listed companies buy Bitcoin crazily but not Ethereum? Will institutions become the new pillar of Ethereum?

Since March, Meitu has purchased a total of about $90 million worth of cryptocurrencies, including 31,000 Ethereum, which is worth more than Bitcoin. Meitu founder Cai Wensheng said that Meitu is the first listed company in the world to use Ethereum as a currency value reserve.

As we all know, the two major driving forces behind this round of bull market are the purchase of Bitcoin by institutions and the rise of Ethereum’s DeFi ecosystem. So, is it possible that institutions will also begin to recognize Ethereum in the future?

Among the companies currently listed in the United States, MicroStratedy, Tesla, Square, etc. have only bought Bitcoin but not Ethereum. The Grayscale Fund's Bitcoin holdings are also 7 times that of Ethereum. So why don't institutional investors buy Ethereum?

1 Ethereum is more volatile than Bitcoin

In fact, among the numerous listed companies in the United States, only a very small number have bought Bitcoin. The reason why listed companies do not buy Bitcoin, in addition to compliance requirements, is more because the volatility of Bitcoin prices is too large. From the perspective of cash management, a company is often unwilling to hold assets with too much volatility.

However, compared to Bitcoin, Ethereum's price volatility is greater. The reasons for this volatility are mainly the following three points:

1. Bitcoin has better liquidity than Ethereum. According to data from bitinfocharts, the value of assets sent on the Bitcoin chain every day is 33.6 billion US dollars, while that of Ethereum is 4.3 billion US dollars, which is only about one-eighth of Bitcoin. Lower liquidity brings higher volatility.

2. Compared with Bitcoin, Ethereum’s distribution is not evenly distributed. According to a report released by the analysis company Santiment (1), in the Ethereum network, the total wealth of wallets holding more than 10,000 ETH accounts for 68% of the total Ether. This distribution makes the price of Ethereum more susceptible to the influence of whales and more volatile.

3. Ethereum's financial derivatives are still developing. For institutional investors, after buying digital currencies, they often need to trade derivatives on compliant exchanges to hedge the risks brought by digital currency price fluctuations. For Bitcoin, CME has already provided a sufficient variety of futures and options products. For Ethereum, CME only launched futures products this year, and options products are still a long way off. The lack of hedging tools has also increased the volatility of Ethereum prices.

2 Ethereum’s “value storage” attribute is not as prominent as Bitcoin

Compared to Bitcoin’s total of 21 million, Ethereum does not limit its total amount. Its annual inflation rate is currently around 4%, and will continue to decrease in the future. Although Ethereum’s growth rate will gradually decrease, it is still not as popular as Bitcoin’s limited total amount.

Of course, even if there is no upper limit on the total amount, it does not prevent Ethereum from being used as a way to store value. However, compared with Bitcoin, the Ethereum network is not "stable" enough. Since its birth, Bitcoin has never undergone a large-scale upgrade. Even if it has given up some expansion needs, it has always ensured the overall stability of the network. Such stability undoubtedly gives investors confidence. The same is true for gold in traditional value storage methods. Despite the inconveniences in storage and trading, gold, as a metal that is extremely difficult to corrode, has made it the best way to store value for thousands of years.

Ethereum, on the other hand, has experienced the controversial The DAO hard fork in 2016. Today’s ETH token is actually a forked coin similar to BCH to BTC, and today’s ETC (Ethereum Classic) is similar to the original chain of BTC. Due to the continuous upgrade nature of Ethereum, institutional investors will inevitably worry about similar events in the future. From the perspective of value storage, Ethereum is obviously not as stable as Bitcoin.

3 Impact of future upgrades

For Ethereum, the most eye-catching upgrades are undoubtedly EIP-1559 and ETH2.0. From the starting point, these are undoubtedly for the long-term development of Ethereum, but in the short term, they may cause some concerns for potential institutional investors.

For EIP-1559, its original intention was to reduce the high transfer fees of the Ethereum network. At the same time, by destroying transaction fees, it can also reduce the supply of Ethereum and increase its value in the long run. However, this proposal has aroused opposition from large mining pools with considerable computing power, which has brought certain uncertainties to the upgrade and naturally brought potential concerns to institutions that want to invest.

For ETH2.0, it faces the problem of regulation. Generally speaking, digital currencies that adopt POW (Proof of Work) are often not recognized as securities by the US SEC. Therefore, even if Ethereum was issued in the form of IC0, it was not recognized as a security by the regulator. But if Ethereum switches to POS (Proof of Stake), coupled with its staking (holding coins to earn interest) feature, it may be recognized by the SEC as an unauthorized securities issuance. Although this is only a possibility, and even if it is recognized as an unauthorized securities issuance, it can pay a fine and settle like EOS. For institutional investors, these are risks that have yet to be resolved. Before the situation becomes clear, Bitcoin is obviously a better choice as a way to store value.

4. Possibility of future institutional investment

In the long run, since Bitcoin will basically not undergo any major upgrades and its performance cannot be further improved, the imagination space for its future can only be focused on the aspect of value storage. Ethereum, as a global decentralized intelligent computing platform, has much greater imagination space. DeFi based on Ethereum has changed the financial industry to some extent. In the long run, it is likely to penetrate into various fields, promote its demand, and thus push up prices. As prices increase, the problems of liquidity and volatility will be solved accordingly.

The activation of EIP-1559 and the conversion to ETH2.0 will significantly improve the performance of the Ethereum network after eliminating investors' concerns, so that it can theoretically accommodate more users. During this period, Ethereum's financial derivatives will also be launched step by step. After these basic conditions are met, when future listed companies consider digital currency investment, in addition to Bitcoin, they will most likely consider Ethereum investment at the same time, just like Meitu. In particular, some more aggressive institutions and listed companies may choose Ethereum, a product with a higher return on investment and higher risk.

[1]:https://twitter.com/santimentfeed/status/1368397797263896582