Since its launch in 2009, bitcoin has remained the dominant cryptocurrency by market capitalisation. Bitcoin’s dominance (its share of the total crypto market capitalisation) currently stands at a historically relatively low level, at just over 40% – vs 70% at the end of last year.
Ether, the second largest cryptocurrency has long been seen as a potential challenger to bitcoin’s position as the leading cryptocurrency. In the crypto market, the possible reversal of the ranking at the top spot is referred to as “the flippenning.”
As the chart shows, Ethereum’s market capitalisation came very close to bitcoin’s at the beginning of 2017, as the Ethereum platform got past its early teething problems and experienced extraordinary growth in the user base with active addresses doubling every two months. With Ethereum’s broad functionality and fast ecosystem growth fueled by the gathering ICO boom, Ethereum overtaking bitcoin was increasingly seen as a real possibility. However, after the ICO bubble burst and the crypto winter set in, bitcoin slowly regained its overwhelming dominance as it was seen as the stable bellwether relative to the riskier speculative “altcoins”.
This trend started slowly reversing in 2020 as a new bull market was building on more mature foundations and with real use cases growing ecosystems of their own. With the Ethereum protocol capturing and maintaining a dominant market share for applications to build on, Ethereum working on its upgrade to make the protocol more scalable, and real world applications such as decentralised finance becoming established, Ethereum’s market capitalisation relative to bitcoin’s has grown from just over 10% to close to 50%. As the underlying trends continue, and bitcoin’s energy inefficiency has come into increased focus, there is a growing expectation that Ethereum will succeed in overtaking bitcoin.
Arguments in favour of “The Flippenning”
- As a second generation blockchain, Ethereum is from a technological perspective superior to Bitcoin with faster transaction times and better scalability. While a Bitcoin transaction takes around 10 minutes to be confirmed by the network Ethereum’s average transaction time is 14 seconds. The currently ongoing upgrade to Ethereum 2.0 will exponentially increase the platform’s scalability, from the current 15-30 transactions per second to 100,000.
- Unlike Bitcoin, Ethereum allows the efficient deployment of smart contracts, one of the main innovations of the blockchain space and the building block for real world applications on top of blockchain protocols. Ethereum has an enormous lead on competing protocols as the platform of choice for applications, and bitcoin is very far behind in this regard. The digitalisation of the economy is an ongoing megatrend, and Ethereum is the primary beneficiary of this trend currently.
- Ethereum’s upgrade to a proof-of-stake consensus algorithm will make Ethereum extremely energy efficient. As a newer technology, it is already more efficient than bitcoin, but the upgrade will further reduce the energy consumption by 99.95%. Meanwhile bitcoin has no plan to upgrade its energy intensive consensus mechanism, and bitcoin’s very high energy consumption is increasingly seen as a serious issue by the market.
- Although Ethereum initially positioned itself as not seeking to compete with bitcoin as a medium of exchange or store of value, there is no reason why it couldn’t do so. The narrative on this has evolved over time, and the Ethereum community has started pitching ether as “ultrasound money” over the past year. With a recent upgrade to the supply mechanism making ether more disinflationary, many now regard it as fundamentally better money than bitcoin.
- As Ethereum moves to proof-of-stake and rewards tokenholders with a staking yield, we may well see more demand for ether, including from yield oriented investors. Meanwhile bitcoin’s transaction fees and block rewards continue to accrue to the miners rather than the tokenholders.
- As Ethereum has a tangible business case as the dominant platform for real world applications, it is a more relatable investment case for many institutional investors that are entering the crypto market for the first time. Meanwhile bitcoin is seen as a macro play that may or may not thrive depending on the state and future path of the global monetary system.
Arguments against “The Flippenning”
- Bitcoin has “name recognition” in its favour. As many new investors and users enter the crypto market, bitcoin is often their first, and for a while only, cryptocurrency of choice.
- Mainstream commentators embrace the possibility of bitcoin becoming a global reserve currency and countries have started making it legal tender (El Salvador). No such developments or narratives are developing for ether.
- There is specific regulatory risk around ether with the Ethereum 2.0 upgrade as this may make the SEC reconsider whether ether is a security. Whether such a regulatory move would make sense or not is less the issue, it is more that it opens an attack surface and as regulators have shown themselves to be somewhat capricious, this is a risk for Ethereum.
- Other smart contract focused platforms have also been making significant headway, and several of them have implemented superior technologies. It is possible that the demand based on the real world applications building on top of blockchain protocols is spread across several tokens while bitcoin remains the primary beneficiary of the demand motivated by the state of the global financial system.
Developments to watch
- How the narrative on ether as “better money” is evolving, whether the use of ether in real world transactions is increasing, and any mainstream suggestions that ether may be considered as a potential reserve currency.
- Regulatory developments that suggest that the SEC may challenge Ethereum’s status after the upgrade.
- Delivery on Ethereum 2.0, both in terms of the timeline and any issues encountered.
- Market share taken from Ethereum by other smart contract platforms.
- How the energy related narrative is developing with regard to bitcoin – it may well be one of the catalysts for the flippenning if the market decisively turns away from the energy inefficient network that bitcoin is.
- Institutional investor oriented narrative on Ethereum being a better investment, especially from large investment banks and the mainstream financial media.
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