- The possibility of Bitcoin flipping the ether has rarely looked stronger, although some analysts argue that this is not enough.
- Ethereum integration is expected to spur additional outside investment due to a 99% drop in energy consumption
For years, Ethereum proponents have been craving for the moment — virtual, as of now — when ether would lose the market value of bitcoin: “The Flippening.”
What is the best time to integrate Ethereum? It is one of the most significant updates in cryptocurrency history to date, as it transforms its power-intensive, Proof-of-Work consensus with its own Proof of Stake brand.
The integration of Ethereum’s Beacon Chain and its long-term mainnet is expected to begin within six days.
But whether it will be enough for ether to usurp bitcoin is another story. Bullish sentiment suggests that June is the bottom of both stocks and crypto assets – both of which are down about 70% from their November highs.
Bitcoin is hovering around $19,000 and has a market capitalization of just under $368 billion, which represents 39% of the total digital asset market.
Ether is trading at $1,600, with a face value of just over half of bitcoin, at $196.4 billion, just over a fifth of the cryptocurrency’s collective capitalization.
The back math from the napkin shows that the flip will happen if the ether reaches close to $3,050 – and that’s only true in the relatively unlikely event that bitcoin’s price stays flat.
“The ‘volatility’ is really a symbolic victory for ETH fanatics, but perhaps not very significant for the industry as a whole,” Bobby Ong, co-founder of data provider CoinGecko, told Blockworks.
Ong said that ether is unlikely to rise after bitcoin in the next 12 months, as both bitcoin (BTC) and ether (ETH) move in similar directions due to the macro environment, which is hampered by inflation.
Program repetition breeds bulls
Ether is once again eyeing yearly highs against the price of bitcoin, which indicates that the markets are allocating value to the consolidation.
But the ether was a lot closer to flipping bitcoin more than five years ago, the early rounds of the recent bear bull cycle. On June 12, 2017, ETH had a market capitalization of nearly 84% of BTC, with only $7.16 billion separating the two, according to TradingView data.
This number is currently around 52% (with over 100% indicating volatility). In January 2020 – at the bottom of the last bear market – the situation was much worse, with ETH at just 11% of the value of BTC ($15.4 billion to $146.7 billion).
However, market values do not tell the whole story.
Comparing on-chain metrics, including the number of transactions, protocol fees, and the number of active addresses across networks, can also provide insight into its growth.
Ong told CoinGecko that Ethereum is ahead in terms of the number of transactions and protocol fees, and in the development of the main dapp. It is also steadily catching up with Bitcoin in terms of daily active addresses.
But the total number of bitcoin users – active or inactive – far outpaced ether at the height of the previous rally.
Bitcoin users grew 37.5% between July and December 2021, from 128 million to 176 million, according to Crypto.com. Report Posted earlier this year. On the other hand, only 23 million users owned ether, a statistic that grew by just 1.4% over the same period.
Ethereum’s shift to proof-of-stake could help boost these numbers. Not only is the consolidation expected to reduce Ethereum’s power consumption by more than 99% — replacing a GPU-based miner-based release model with one based on cryptographic validation nodes (read: servers) — it also lays the foundations for scaling the network base with a more efficient layer. Supporters say.
This may help stimulate further development of the ecosystem and present an attractive investment opportunity for environmentally conscious investors, even institutional investors, so goes the bull.
“Not only do we expect renewed interest from building projects on the platform, but also from an investment perspective,” Lachlan Feeney, founder of Australia’s largest consultancy Labrys, told Blockworks.
However, large financial institutions are still concentrating their exposure, mostly, to bitcoin.
“This advantage cannot be underestimated as the influence of institutions within the market grows,” said Ong of CoinGecko. “Whether ETH, or any other digital currency, can challenge its market share in this space remains to be seen.”
Bitcoin and Ethereum differ greatly in their initial use cases, which leads to their varying value propositions. Bitcoin’s scope of application is narrow: it is censorship-resistant money, driven by peer-to-peer payments.
But Bitcoin’s architecture – by design – does not support smart contracts, unlike Ethereum and a host of first-tier competitors. This essentially restricts the use of Bitcoin for small payments and tips. (Remember the Powered Lightning Network bulovid?)
In fact, even with Lightning, Bitcoin is less viable on the broader Web3 crypto system.
This pulls Bitcoin into a “shop of value” sales offering – users should instead hold their Bitcoin rather than spend it in the same way as ether and other Ethereum-linked assets.
Some argue that the Bitcoin development community prides itself on not wanting to replicate as quickly as Ethereum, breaking the “move fast, break things” tradition of Silicon Valley.
The early concession of Satoshi Nakamoto, founder of pseud Bitcoin, contrasts with Ethereum co-founder Vitalik Buterin’s continued allure within the Ethereum crowd – another potential boon to underpin its value.
“Vitalik has already moved away from doing a lot of work on Ethereum at the end of the ICO craze, but he is still mapping out the roadmap and still getting a lot of input,” Katie Talati, director of research at Arca, told Blockworks.
Talati added, “And his opinion obviously means a lot. He doesn’t necessarily dictate the day-to-day matters, but I think it helps to have a bit of a mentor.”
Another effect of the Ethereum proof-of-stake scheme is that it will eventually turn the coin into a deflationary asset, which industry participants say is likely to generate significant interest.
It is known that the Bitcoin supply limit reaches 21 million, while the ether is floating. The protocol is constantly adjusting and supplying ETH issuance rate, as the network is currently burning transaction fees instead of paying them to validators.
Sometimes more ether is burned inside a block than is issued, temporarily shifting the cryptocurrency from inflation to deflation – a phenomenon that is expected to occur frequently after consolidation.
The tell-tale signs of permutation are unclear
Bitcoin issuance is slowly declining, halving every four years – but the supply of it will never officially fall. This, at best, imparts anti-hypertrophic properties, although amplified by mere rewards drop to zero the next century.
Vivek Raman, Head of Proof of Stake at BitOoda, believes that Bitcoin’s mistakes give Ethereum an advantage in creating a sustainable monetary policy, complemented by high network revenues to inspire longevity.
“It’s almost like a mathematical determinism,” Raman said of Ethereum’s potential for volatility, estimating that it could happen a year after the upgrade. He argued that bitcoin has its place due to early movement advantage, supported by the idea of a “native” digital asset – Do it right by Nakamoto.
According to Raman, Bitcoin’s proof of work may eventually work against the value boost, especially given that mining rewards halve every four years.
While the declining release has yet to threaten its security model, with enough miners on the network despite declining rewards, they still get paid less over time. “That means there is less and less incentive every four years,” Raman said.
So, what are the warning signs of an impending coup? The rise in open interest on Ether futures was floated as a single indicator: There is currently $12.8 billion in open interest in Bitcoin versus $8.6 billion in Ethereum per CoinGlass.
But Raman noted that open interest is often a short-term signal. In any case, the increased levels of open interest on Ether futures contracts could simply reflect the desire for Ethereum’s Decentralized Finance (DeFi) protocols.
“Ethereum has decentralized finance sitting at its head. So, it has an economy running on it – and because of that, there is more leverage,” Raman said. “If there is more leverage in the system, you will see more open interest from futures and options. But that is just a function of more speculators, more participants.”
With a lack of clear indicators and a stifling macro background, predicting volatility is a challenging task.
It doesn’t seem likely that it will happen around a merger – or even within the next year – but it’s clear that the two networks, and their original digital assets, are about to differ dramatically.
David Kanellis contributed to the report.
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