Will Ethereum and Bitcoin See the “Turnaround” in 2022?

With Ethereum (ETH 5.08%) rally these days, maybe it’s a good time to look at the “flip”. The term (and it’s just as fun to say out loud as it is to read or write) is the moment the Ethereum bulls are waiting for. The turnaround will take place at the moment the world’s second most valuable cryptocurrency overtakes the market leader Bitcoin (BTC -0.27%) in terms of market value.

There are no guarantees that the event will happen at all, of course. Bitcoin continues to be the brand that every investor knows. The gap between the two digital currencies is also quite significant. Bitcoin, with its $434 billion price tag, is more than double Ethereum’s $182 billion market cap.

But with Ethereum now possibly weeks away from a historic milestone as it continues to be the blockchain platform of choice, it wouldn’t surprise crypto traders if Bitcoin surrendered market leadership to its closest peer. Don’t sleep on the flip.

Image source: Getty Images.

Switch places

Momentum has been on Ethereum’s side lately. It’s up 37% in the past week as of Thursday morning, compared to a more modest but still potent 15% recovery for Bitcoin. Ethereum has also tripled Bitcoin’s returns in the past month. Stretch the timeline back a year (better times, sure), and even Ethereum’s 23% slide is marginally kinder than Bitcoin’s 28% drop.

Naturally, it will take a lot for Ethereum to turn the script. It must rise 139% from here. And Bitcoin had to stand still. It’s hard to understand because the market needs a reason to disconnect the two leading cryptocurrencies. As one accumulates, the other is ever higher. As investor appetite cools, it tends to cool for both currencies. Bitcoin and Ethereum are both about 70% of the records they hit last year.

If the swing talk isn’t gaining the same kind of traction as it was a year or two ago, it’s because both cryptos need to triple from here to get back to their tops. The bullish case was that Ethereum would pass Bitcoin on the way up rather than pass ships in a less inspiring market climate.

Why is this baton even possible at this point? Ethereum bulls will point to the merger as the catalyst that could catapult their preferred crypto to the top. Bitcoin and Ethereum currently rely on proof-of-work models to generate new tokens. Mining for new Bitcoin or Ethereum relies on computational power, a validation process that is battle-tested and secure, but drains energy resources. Proof of work is a red flag for environmental critics.

Ethereum has spent the last two years transitioning to a proof-of-stake protocol. It is a consensus-based mechanism for validating new coins that is popular among many of the faster and more energy-efficient cryptocurrencies. Ethereum initially hoped to complete the merger into proof of stake last year, but that has proven to be a daunting task. The box has been kicked throughout the first half of this year, and Ethereum programmers (for now) have tentatively circled September 19 as the day for the proof-of-stake migration.

Traders credit the new date for the surge in Ethereum over the past week, but we’ve seen deadlines come and go in the past. Concerns remain that this could be a “trade on the news” moment, especially if Ethereum continues to climb ahead of the merger.

However, this could be the moment when Bitcoin and Ethereum really diverge in terms of market sentiment and momentum. Bitcoin wears the market crown right now because it planted the flag when it comes to crypto. It is the industry standard. Ethereum rose to second place by raising the bar with blockchain technology powering smart contracts that drive functionality beyond just a store of value or means of settling a transaction.

There are of course many other types of cryptocurrencies out there, and they have their own particular strengths. A third digital currency could be the one that eventually passes both Bitcoin and Ethereum to rise to the top.

However, Ethereum is the one we are looking at now. It accounts for nearly two-thirds of the total value locked — or deposited in decentralized financial protocol chains — and many smaller digital currencies are there simply to make Ethereum more useful.

Time may be running out for the turnaround this year, but if the merger goes smoothly and Ethereum continues to distance itself from Bitcoin’s current limitations, a shift in market sentiment could make it the top dog by 2023.