Will Ether Overturn Bitcoin Next Year?

For years, Ethereum devotees have longed for the — hypothetical, as of now — moment when ether eclipses bitcoin’s market value: “The Flippening.”

What better time than Ethereum’s Merge? It’s one of the most significant updates in cryptocurrency history yet, converting its energy-intensive, proof-of-work-backed consensus with its own brand of proof-of-stake.

The merger of Ethereum’s Beacon Chain and its long-running mainnet is expected to be triggered in six days.

But whether that’s enough for ether to usurp bitcoin is another story. Bullish sentiment would suggest June as the bottom for both stocks and cryptoassets – both have fallen around 70% from their respective peaks in November.

Bitcoin hovers around $19,000 and its market capitalization is just under $368 billion, representing 39% of the total digital asset market.

Ether is trading at $1,600, and its nominal value is just over half that of bitcoin, at $196.4 billion, just over a fifth of crypto’s total capitalization.

Back-of-the-napkin math shows that the flip will happen if ether reaches roughly $3,050 — true only in the relatively unlikely event that bitcoin’s price holds steady.

“The ‘flip’ is really just a symbolic victory for ETH maximalists, but perhaps not overly significant for the industry as a whole,” Bobby Ong, co-founder of data provider CoinGecko, told Blockworks.

Ether is unlikely to rise past bitcoin in the next 12 months, Ong said, as both bitcoin (BTC) and ether (ETH) have moved in similar directions due to the macro environment, dogged by inflation.

Software iteration breeds bulls

Ether is eyeing a new run of annual highs against the price of bitcoin, indicating that markets are assigning value to the merger.

But ether came much closer to reversing bitcoin more than five years ago, the early stages of the last bull-bear cycle. As of June 12, 2017, the market cap of ETH was nearly 84% of BTC, with only $7.16 billion separating the two, according to TradingView data.

This number is currently around 52% (with more than 100% indicating a reversal). In January 2020 – at the bottom of the last bear market – the situation was far worse, with ETH at just 11% of BTC’s value ($15.4 billion to $146.7 billion).

However, market values ​​do not tell the whole story.

Comparing on-chain metrics including number of transactions, protocol fees and number of active addresses across networks can also provide insight into their growth.

Ethereum is ahead in terms of number of transactions and protocol fees, said CoinGecko’s Ong, and in larger dapp development. It also regularly catches up to Bitcoin in terms of daily active addresses.

But the number of total bitcoin users – active or not – surpassed that of ether at the height of the previous bull run.

Bitcoin users grew 37.5% between July and December 2021, from 128 million to 176 million, according to a Crypto.com report published earlier this year. On the other hand, only 23 million users had Ether, a statistic that only grew by 1.4% during the same period.

Ethereum’s switch to proof-of-stake could help boost those numbers. Not only is the merger expected to cut Ethereum’s energy consumption by more than 99% — by replacing the GPU-mining issuance model with one based on crypto-secured validator nodes (read: servers) — it also lays the foundation for scaling the network’s base layer more efficiently, proponents say.

This can help to stimulate further ecosystem development and present an attractive investment opportunity for eco-conscious investors, even institutional ones, the case reads.

“We expect renewed interest not only from building projects on the platform, but also from an investment perspective,” Lachlan Feeney, founder of Australia’s largest blockchain consultancy Labrys, told Blockworks.

Nevertheless, large financial institutions still concentrate their exposures, for the most part, to bitcoin.

“This advantage cannot be underestimated as the influence of institutions grows in the market,” said CoinGecko’s Ong. “Whether ETH, or any other crypto, can challenge its market share in this space remains to be seen.”

Cult of personality

Bitcoin and Ethereum are significantly different in primary use cases, diverging their value propositions. Bitcoin’s scope is narrow: It is censorship-resistant money, powered by peer-to-peer payments.

But Bitcoin’s architecture – by design – does not support smart contracts, unlike Ethereum and a number of tier-1 competitors. This essentially limits bitcoin’s use to micropayments and tips. (Remember the Lightning Network-powered Pollofeed?)

Indeed, even with Lightning, Bitcoin is less applicable to the wider Web3 crypto ecosystem.

This magnetizes Bitcoin to its “store of value” selling point – users should rather keep bitcoin than spend it in the same way as ether and other Ethereum-bound assets.

Some argue that the Bitcoin development community prides itself on an unwillingness to iterate as quickly as Ethereum, bucking the “move fast, break things” tradition of Silicon Valley history.

The early abdication of Satoshi Nakamoto, Bitcoin’s pseudonymous founder, contrasts Ethereum co-founder Vitalik Buterin’s continued gravitas in Ethereum crowds — another potential boon for the value support.

“Vitalik actually stepped away from doing a lot of work on Ethereum at the end of the ICO craze, but he’s still setting the roadmap and he’s still getting a lot of input,” Katie Talati, director of research at Arca, told Blockworks.

Added Talati: “And obviously his opinion means a lot. He doesn’t necessarily dictate the day-to-day, but I think it helps to have a bit of a guide.”

Another effect of Ethereum’s proof-of-stake plan is that it will eventually turn the token into a deflationary asset, which industry participants say is likely to generate significant interest.

Bitcoin’s supply limit is known to be hard-coded at 21 million, while ether is floating. The protocol is constantly modifying ETH’s issuance rate and supply, with the network currently burning transaction fees instead of paying them to validators.

Sometimes more ether is burned inside a block than issued, temporarily switching the cryptocurrency from inflation to deflation – a phenomenon expected to occur more frequently after merging.

Blurred signs of The Flipping

Bitcoin’s issuance is slowly declining, halving every four years – but the supply will never formally decrease. This provides anti-inflationary properties at best, although they are amplified when block rewards are reduced to zero next century.

Vivek Raman, head of proof-of-stake at BitOoda, believes Bitcoin’s failure gives Ethereum an edge in creating sustainable monetary policy, complete with high network revenues to inspire longevity.

“It’s almost like a mathematical inevitability,” Raman said of the possibility of Ethereum flipping, estimating that it could happen a year after the upgrade. He argued that bitcoin enjoys its status because of an early mover advantage, supported by the idea of ​​a “pristine” digital asset – immaculate concept by Nakamoto.

According to Raman, Bitcoin’s proof-of-work could ultimately work against its value, especially considering that mining rewards are halved every four years.

Although issuing tapering has not threatened the security model so far, with enough miners on the network despite lower rewards, they still get paid less over time. “This means there is less and less incentive to mine every four years,” Raman said.

So, what are the telltale signs of an impending flip? Rising open interest on ether futures has been floated as one indicator: There is currently $12.8 billion in BTC open interest compared to $8.6 billion for ETH, per CoinGlass.

But Raman suggested that open interest is mostly a short-term signal. And in any case, rising levels of open interest on ether futures may simply reflect appetite for Ethereum’s decentralized finance (DeFi) protocols.

“Ethereum has decentralized finance on top of it. So it has an economy running on it — because of that, there’s more leverage,” Raman said. “If there’s more leverage in the system, you’ll see a lot more open interest from futures and options. But that’s just a function of more speculators, more participants.”

Without clear indicators and a suffocating macro backdrop, predicting the flip is a difficult task.

It doesn’t look like it will happen around the time of the merger — or even in the next year — but it’s clear that the two networks, and their native digital assets, are poised to diverge in a big way.

David Canellis contributed reporting.

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