The true difference between bitcoin and ethereum, according to Grayscale’s CEO

 The true difference between bitcoin and ethereum, according to Grayscale’s CEO

The value of each of the two largest cryptocurrencies — bitcoin (BTC-USD) and ethereum (ETH-USD) — fell earlier this week amid an outright ban on cryptocurrency trading in China and indication of forthcoming regulations from the U.S. Securities Exchange Commission

In general, ethereum prices tend to move in tandem with bitcoin. But the two coins are used for very different purposes that should be taken into account by investors, says Michael Sonnenshein, CEO of Grayscale Investments, which calls itself the world’s largest cryptocurrency asset manager.

That investing advice applies to the wide array of coins on offer, Sonnenshein said, urging investors to understand the use cases of each cryptocurrency in order to assess its viability as an investment.

“Things like bitcoin are inherently built to be a digital form of money or a store of value,” says Sonnenshein during Yahoo Finance’s All Markets Summit Plus: Crypto Investing. “Whereas things like ethereum are meant to be more of a gas to power decentralized applications, and the list goes on and on.” 

“There’s a challenge for investors,” he adds. “There are now hundreds, if not thousands, of digital currencies out there.”

“Many investors, I think, first have to understand the underlying technology, as well as the use cases around various digital currencies to decide what may make sense for them,” he says.

While prominent critics of bitcoin question its efficacy as a form of money, many bitcoin supporters say it can be used for transactions, and point to companies like Overstock.com (OSTK) and Starbucks (SBUX) that offer customers ways to pay in bitcoin

Speaking on a panel in July, Ark Invest CEO/CIO Cathie Wood said, “Right now high-value transactions take place over bitcoin and that is a very useful role.”

Meanwhile, ethereum comprises both the second-largest cryptocurrency and the blockchain that supports most non-fungible tokens, or NFTs, which amount to unique digital assets that can be traded but not replicated. NFTs drew attention in March when a digital work by the artist Beeple sold at auction for $69 million.

Regardless of the variation between coins, some investors will pass up on the cryptocurrency opportunity entirely, acknowledged Sonnenshein, of Grayscale.

“The truth of the digital currency ecosystem is that it’s not necessarily going to be appropriate for every investor,” he says. “We tend to find that those who want to allocate to digital currencies are those that have a higher risk tolerance, a longer time horizon for their investment.” 

A woman walks past the Bitcoin ATM in Hong Kong, Thursday, Dec. 21, 2017. Bitcoin is the world's most popular virtual currency. Such currencies are not tied to a bank or government and allow users to spend money anonymously. They are basically lines of computer code that are digitally signed each time they are traded. (AP Photo/Kin Cheung)

A woman walks past the Bitcoin ATM in Hong Kong, Thursday, Dec. 21, 2017. Bitcoin is the world’s most popular virtual currency. Such currencies are not tied to a bank or government and allow users to spend money anonymously. They are basically lines of computer code that are digitally signed each time they are traded. (AP Photo/Kin Cheung)

The risk in the space owes in part to the uncertain regulatory environment. Treasury Secretary Janet Yellen last month urged speedy adoption of rules for stablecoins, a form of cryptocurrency that pegs its value to a commodity or currency, like the U.S. dollar.

Last month, SEC Chair Gary Gensler described the crypto market as the “wild wild West” and has since indicated a desire to regulate it. 

Still, crypto proponents say the market will remain intact, even if the U.S. imposes new regulations. Kristin Smith, executive director of the Blockchain Association, told Yahoo Finance on Monday that regulation “doesn’t pose an existential threat to crypto.”

As the crypto market has evolved, investors have diversified their portfolios beyond bitcoin and ethereum, Sonnenshein said.

“With that, we’ve seen a trend amongst investors to ensure that if they do invest, they’re also doing it through a diversified lens, investing beyond just assets like bitcoin [and] ethereum, where much of the market cap is concentrated today,” he says.

Read more:

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTube, and reddit.

Related post