Upfront disclosure: I am long both Bitcoin and Ethereum (personally and also indirectly via USV).

In preparation for the annual meeting at USV, we have been putting together some slides on the cryptocurrency market. Looking back at the last year I was most surprised by the run-up in Ethereum as part of the ICO craze. I did not see that coming to nearly the extent that it did. While the ICO is an important innovation, there has definitely been an excess both in the amount of money raised for some individual projects and in projects raising that either have very little chance of succeeding or are outright scams.

So where are we today? At least temporarily there seems to be a slow down in ICOs. This could turn out to just be a lull before more activity resumes but it could also be a welcome return to more sanity (if the latter, there is likely going to be an over correction). In either case Ethereum faces a strong headwind not only from this change in sentiment but also from relatively costly and slow on chain computation. The bull case for Ethereum is that sometime in 2018 we will see a couple of Ethereum based projects launch successfully and get broad adoption *AND* progress is made on Ethereum scaling (either directly or through projects such as Raiden or Plasma). The bear case is that at least one, or possibly both of these don’t happen.

How about Bitcoin? Oddly I think that Bitcoin continues to be misunderstood by many people in the cryptocurrency space who want it to be more than it has to be for it to succeed. It is one of those cases where the more you know, the more you are likely to overthink it. Yes, Bitcoin has all sorts of drawbacks as a blockchain, but it is the one cryptocurrency with a widely understood use case: censorship resistant store of wealth. Fiat currencies, precious metals and real estate (including land) all have more government control and/or are more difficult to move around and transact in than Bitcoin. With everything crazy that’s going on in the world politically, the demand for censorship resistant wealth storage is high and growing.

Bitcoin has issues resulting from mining concentration and the attendant attempts to create additional wealth ex nihilo through forks. The large amounts of money involved have made it nearly impossible to have rational discussions on questions of technical merit. The bull case for Bitcoin is therefore easier than the one for Ethereum: all it takes is for the current forking noise to die back down and one chain to continue to be recognized as Bitcoin (above all other contenders). As a side note: Should Bitcoin’s self-inflicted troubles mount, it will make Zcash and Monero a lot more attractive.

In summary then: for the time being I am cautiously bullish on Bitcoin and at best neutral on Ethereum. As always though please don’t take this as investment advice and keep in mind that all cryptocurrencies continue to be highly risky.