Bitcoin lags Ethereum in recovery as merger nears
After dovish FOMC minutes dropped on July 27, the market rallied moderately. However, rally winds seem to slightly favor Ethereum over Bitcoin. Over the last month, ETH outperformed BTC by +37%.
Ethereum is heavy on anticipation, every Merge news is scrutinized and added as a “sell the news” driver. Although the Federal Reserve followed up with a subsequent rate hike of 75 bps, it was Powell’s framing at the press conference that made all the difference for the market.
“We’re at 2.25 to 2.5 and that’s right in the range of what we think is neutral.”
The market interpreted it as the Fed’s acknowledgment that raising interest rates is pushing the economy into recession, suggesting lower rate hikes in the future. That also put the 100 bps hike off the table, for now. In the following days, the crypto market increased.
Why Ethereum outperformed Bitcoin?
Even before the Fed-related news, Ethereum was boarding the hype train as it moves from proof-of-work to proof-of-stake. After several years of delays, it is most likely that The Merge will finally happen in the second half of September. However, because there will no longer be any Ethereum miners, as they are replaced by validators, Ethereum Classic (ETC) has been the best performer.
As the original proof-of-work network from which the current Ethereum has descended, Ethereum Classic is now in the speculative pot, seen as a neglected safe haven. After all, a lot can go wrong when it comes to coding, which is why there were so many ETH 2.0 delays.
Tim Beiko, who runs Ethereum core protocol meetings, announced a busy August. Before the real merge happens, it must first be tested on the Goerli testnet, which simulates active Ethereum network. More importantly for over 411k Ethereum validators, Beiko remarked this is the last chance for validators to prepare before the mainnet PoS transition.
What will the merger actually do?
Aside from cutting the energy footprint by an estimated ~99.95%, one should not expect ETH gas fees to be at the paltry level of Polygon, its scalability sidechain. For such an improvement to occur, Ethereum’s main chain must undergo scaling itself. This upgrade is called sharding, which is planned for the end of 2023 at the earliest.
What that means is that the current Beacon Chain, which runs proof-of-stake consensus, will become Ethereum 2.0. Already, 411,639 Beacon Chain validators have staked 13.17 million ETH ($21.8 billion), for an average balance of 33.71 ETH. This is to be expected given that the minimum stake is 32 ETH (only for those proposing blocks).
With miners gone, Ethereum is on track to process up to 100,000 tps, a drastic upscaling from the current 15 tps. As mentioned, this level of performance will begin after The Surge upgrade phase, where the new Ethereum will be sharded.
Similar to Polkadots or Polygon’s network architecture, sharding breaks the network into smaller pieces – shards – so that the traffic load is spread out. If all goes well, there should be zero network downtime after the merge.
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Is Bitcoin/Ethereum likely to reverse?
During Terra’s (LUNA) meltdown, we’ve seen how it directly affected Bitcoin’s dominance. In May, as people sought a safe haven not based on phantasmal algorithmic stablecoins, Bitcoin’s market share surged to an annual high of 48%.
When the dust settled, and crypto contagion ended, it fell just as sharply to today’s 42.18%. Both late 2017 and H1 2021 have seen the biggest reductions in Bitcoin dominance. This coincides with the launch of utility altcoins and PoS blockchains that recreate traditional financial services via dApps.
With NFT marketplaces and metaverse coins in play, the crypto market is now more diluted than ever, with multiple types of assets driving the utility. Overall, it’s notable that Ethereum recovered +66% from the bottom of the year, while Bitcoin only recovered +22%. Some Bitcoin maximalists see this as temporary, even doubting Ethereum’s viability.
However, it is more likely that both Bitcoin and Ethereum’s market shares will shrink. Those PoS blockchains that technologically surpass Ethereum but lack the first-mover advantage, such as Avalanche, EOS or Solana, will exert constant adoption pressure. As for Bitcoin, it should always be a safe haven against still experimental DeFi and $150 million bridge walks.
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It will take years for Ethereum to reach its technological potential. Do you think this is a sufficient time window for other PoS networks to enter? Let us know in the comments below.
About the author
Tim Fries is the co-founder of The Tokenist. He has a B. Sc. in mechanical engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate in the investment team at RW Baird’s US Private Equity division and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.
