Is the Bitcoin-Ethereum flipping inevitable?

Is the Bitcoin-Ethereum flipping inevitable?

Mads Eberhardt

Cryptocurrency Analyst

Summary:  For several years it has been an ongoing discussion whether Ethereum will overtake Bitcoin in terms of market capitalization. The discussion has recently been amplified as users are settling more value and paying more fees on Ethereum than Bitcoin. On the other hand, the intense competition and technological challenges for Ethereum speak against a flipping.


In the latest immersive bull run in late 2017, the most discussed topic in the crypto space - besides how far the bull run would take the market - was whether Ethereum would flip Bitcoin in terms of market capitalization?

Source: CoinMarketCap.com

It never happened in 2017, as the Ethereum bull run in 2017 was somewhat unsustainable, as it was mainly driven by the ICO bubble. In short, ICOs are the initial offerings of new cryptocurrencies for raising money for new projects, and close to every project used Ether to invest raise money.

Suddenly the crypto bubble burst, starting the crypto winter in 2018 and 2019. Here, Bitcoin was like a safe-haven for cryptocurrency investors, whereas Bitcoin grew its market dominance significantly.

However, what happened through the crypto winter was rather remarkable. In the crypto winter, serious innovation took place in the crypto community, whereas numerous new use cases on Ethereum were presented, mainly non-fungible tokens (NFTs), stablecoins, decentralized trading, insurance, and lending, counting protocols like MakerDao, Uniswap, Compound, and OpenSea. These have been driving the sentiment boost around Ethereum over the past year, as investors get the sense that Ethereum can facilitate authentic use-cases in strong contrast to previous highly speculative ICOs.

Bitcoin had its own ride the past year

On the other end of the table is Bitcoin. Bitcoin has not been unrecognized in the past year. As inflation has heated up, we have seen numerous individuals and companies praising Bitcoin, even adding Bitcoin to their balance sheets, seeking a hedge against inflation, and acknowledging Bitcoin as digital gold, despite its large volatility. Bitcoin’s scarcity, positive price movement over the past decade, and strong reputation serve as the main arguments for it being a store of value – despite the large volatility in day-to-day prices. At the time of writing, Bitcoin is at a broader scale not more than potentially a store of value due to Bitcoin being severely unscalable effectively only being able to handle 7 transactions per second while taking a long time to confirm transactions.

Various developers and members of the community are working on solutions to make Bitcoin more scalable and faster for it to be working also as a medium of exchange at a larger scale. However, since starting to roll out solutions years back none of them have gained absolute traction across the space. In essence, if Bitcoin becomes more scalable and faster, the question remains whether people will be using it as a medium of exchange due to its volatility. Stablecoins on either Ethereum or other blockchains are immediately a superior medium of exchange due to them being stable while having the advantages of cryptocurrencies. Concurrently, users can use stablecoins on the other blockchains in great synergy with decentralized protocols, creating extended value.

Expanding the functionalities of Bitcoin

In terms of decentralized protocols, they can theoretically be made on Bitcoin. For instance, Twitter co-founder and CEO, Jack Dorsey, has stated he wants to build decentralized finance protocols on Bitcoin. However, in this case, you are still short on scalability, transaction times, and user-friendliness for developers. Arguably, there is a reason why decentralized finance on Bitcoin has not kicked off yet. Without considering the technological challenges, if Jack Dorsey and others are sincere about making decentralized protocols on Bitcoin, they are up against an immense first-mover advantage in the matter of Ethereum. Creating something similar to Ethereum encounters the chicken or the egg paradox, as the users are not embracing the network until developers have embraced it with e.g., decentralized finance protocols and NFT marketplaces. On the other hand, these network shareholders will not use resources on the network until a substantial number of users are using it. Simply, Ethereum has a strong network effect as more protocols and users create increased value to the network.

Flipping already happened, but not on market capitalization

The use of notably decentralized protocols and stablecoins on Ethereum have made Ethereum settle over three times the value of Bitcoin on its network on a daily basis, while the total amount of fees paid daily is 50 times higher than on Bitcoin. Thus, Ethereum has already flipped Bitcoin on these metrics. It is not surprising due to Ethereum’s selling proposition of being able to handle decentralized protocols, compared to Bitcoin’s store of value narrative. In this context, the transaction fees paid markedly say something about Ethereum’s scalability being almost as bad as Bitcoin’s. As Ethereum is able to handle only around 15 transactions per second, the fees have escalated significantly over the past year, effectively acting as a detriment to Ethereum’s growth.

Ethereum upgrading to 2.0

The Ethereum Foundation is working together with developers on making Ethereum significantly more scalable. The update is called ETH 2.0 set to launch somewhat next year. It is intended to make Ethereum significantly more scalable while adopting the verifying consensus mechanism proof-of-stake instead of proof-of-work. This essentially means that holders of Ether get the new supply by staking Ether instead of miners running big computer facilities with large power consumption. The daily issuance rate is likely to drop from approximately 15,000 to 1,500 ETH when the merge happens from the present Ethereum network to ETH 2.0. At the same time, a part of the transaction fees will continue to be burned, and potentially the amount of ETH being burned may exceed the new issued ETH. This may at some points led to deflation, and thus this upgrade should make Ethereum more attractive as a store of value.

Ethereum has its challenges to overcome

Despite the achievements and upgrades for Ethereum, it does not implicitly result in Ethereum flipping Bitcoin in terms of market capitalization. Ethereum has its challenges to overcome. Due to its sky-high fees, Ethereum has made room for competitive cryptocurrencies capable of handling considerably more transactions. For instance, these cryptocurrencies count Cardano, Polkadot, Binance Coin, and Solana. In particular, considering this year up to now, the competing cryptocurrencies have gained traction considering price growth, but more importantly, their ecosystem, as they support progressively more decentralized protocols with substantially smaller transaction fees. Depending on when ETH 2.0 will be implemented, the competition will nothing but heat up. As some blockchains are offering additional features compared to Ethereum, e.g., Polkadot’s interoperability and Solana’s extremely high transaction output, there will by chance invariably be demand for other cryptocurrencies on an equal footing with Ethereum, even when ETH 2.0 has been implemented. Forwarding, nobody is fully aware of how ETH 2.0 will turn out, and whether the update will solve its scalability issues. In theory, even though it is already well-tested, the update can potentially result in substantial issues, causing technological uncertainty.

Is the flipping inevitable?

As long the competition is continuing to heat up while Ethereum is lost in technological antiquity, the flip is less likely to happen unless investors anticipate that Ethereum will safely overcome these challenges. This involves increasing scalability within an acceptable short timeframe, adequately keeping the intense competition coming its way at arm's length. In terms of regulation, decentralized protocols using Ethereum can be subject to heavy regulation, imaginably limiting the growth of Ethereum. On the contrary, the green agenda can hurt Bitcoin due to its extreme energy consumption. More than that, a potential flipping depends on the embracing of the store of value narrative in terms of Bitcoin by novel well-known individuals and companies, as it adds fuel to its first-mover advantage of being perceived as a store of value. There was an expectation earlier this year succeeding the purchases by several companies that others would follow the lead. Since then some minor companies have bought Bitcoin, but not to the degree expected previously.

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