Can Ethereum possibly overtake Bitcoin in market cap?
Former Goldman Sachs fund manager and macro-economist Raoul Pal thinks so. So does “Bitcoin Jesus” Roger Ver who mentioned it back in 2018. The Blockchain Center also believes in this and that it is already going in that direction. Bitcoin maximalists might frown reading this.
If you look at the cryptocurrency market in early 2021, Bitcoin has a majority market dominance with a market cap of over $500 Billion. Ethereum trails behind in second place with $100+ Billion. Bitcoin maximalists predict BTC will hit a market cap of $1 Trillion and become more valuable than gold. If that is the case, how can Ethereum surpass Bitcoin? It can actually be explained based on the trends and the potential the Ethereum ecosystem has in bringing more liquidity and capital investments.
Although Bitcoin and Ethereum both use cryptocurrency and blockchain technology(BTC and ETH respectively), they are not the same. Bitcoin’s purpose is becoming more of a store of value like a bank, while Ethereum is a world computer platform for decentralized applications. Ethereum is becoming more of a transaction and settlement layer.
Ethereum 2.0 aims to deliver on scaling and performance improvements to support a growing ecosystem. The Ethereum blockchain is being utilized in decentralized finance for providing liquidity, trading, and exchanges. There is a more heightened activity with ETH because of the vast ecosystem developers have built on the platform. Bitcoin does not have such platform in place, and it is not possible to build applications on top of Bitcoin like with Ethereum.
If the blockchain started the revolution in finance, Ethereum was an innovation that resulted from it. Both BTC and ETH utilize blockchains, but Ethereum introduced programmable money through smart contracts. This has been the main feature that gives Ethereum so much potential, but scalability has become an issue. Bitcoin also has scaling issues, but it seems to be more acceptable now as it is becoming more about storing value rather than a medium of payment for processing transactions. Ethereum assumes more of the latter role, as it can perform more transactions per second (tps) than the Bitcoin network. With Ethereum 2.0, it is expected to increase transaction processing exponentially to 100,000 tps. Just think about Ethereum capturing the transactions processing market from the likes of Visa and Mastercard, and it is huge.
You can make the argument for both cryptocurrencies regarding who will have a larger market cap. Bitcoin is all about storing value, so wealth will flow into BTC from various sources like pensions, reserve currency, futures, and index funds. Ethereum will handle processing transactions that include derivatives, exchanges, loans, payments, and digital assets. There are other viewpoints on why Ethereum will flip Bitcoin (in the long run), which provide unique perspectives.
Raoul Pal uses Metcalfe’s Law to explain how Ethereum can flip Bitcoin. Metcalfe’s Law is most often used in engineering, specifically in telecommunications and data networks. How this relates to cryptocurrency is through the network effect. This states that:
…. the effect of a network is proportional to the square of the number of nodes in said network.
The network has a utility (u) that is represented by:
u = n * log(n)
The total size of the network increases its overall value as well. Let us say you have n= 10,000 (users), in this case that could represent token holders of cryptocurrency.
u = 10,000 * log(10,000) = 40,000
The utility of the network increases with the number of users. Thus it also increases value as more capital flows into the system, increasing the volume of transactions and generating fees from those transactions. Overall valuation increases with utility.
The pricing of both BTC and ETH are related to the growth in the number of holders of the cryptocurrency. This has been consistent with data collected which shows the relationship. Pal provided a chart that shows the market cap with the number of active addresses. In both networks, it shows that the growth in market cap is proportional to the number of active addresses on each network.
If ETH continues to trend upwards in this cycle, according to Pal, it can outperform BTC and overtake it in market cap. The Ethereum network resembles how the Bitcoin network was like in its early days. As BTC gained further adoption, it continued to rise in value. ETH is growing faster than BTC. Some analysts are seeing that ETH is starting to outperform BTC. This can be seen in higher lows or level of support compared to BTC.
The Blockchain Center uses a metric called the Flippening Index. This index looks at 8 different metrics that compare the Bitcoin and Ethereum network. The metrics are the following:
- Market Cap — The percentage of the Ethereum market capitalization in relation to the Bitcoin market capitalization.
- Active Addresses (In Digital Wallet) — The number of unique addresses that send or receive a transaction in a given week.
- Transaction Count — Shows the relation of total onchain transactions that happen on the network.
- Transaction Volume — Total amount of USD that gets sent over the network.
- Trading Volume — Exchange trading volume for BTC and ETH.
- Total Transaction Fees — USD value of fees paid to make a transaction on the network.
- Node Count — Publicly reachable nodes on each network.
- Google Searches — Analytics figures for Google searches regarding Bitcoin and Ethereum.
According to the metric, when all of the metrics hit 100% for Ethereum, the flippening has occurred. This is when Ethereum has flipped Bitcoin. The current index was at 66.5% (1/12/2021), so it is getting closer.
Some key metrics for indicators to look at are active addresses and transaction volume. Active addresses are not 1:1 with users since users can have multiple active addresses. As more wallets are created, they can generate more active addresses which can also increase transaction volume when used.
There is no expected date when the flippening will occur or if ETH will actually flip BTC. Right now, these are all assumptions based on data. You can call it an educated speculation if you are skeptical of the possibility it can happen. Either way, whichever cryptocurrency becomes the larger in market cap, they will be priced differently. ETH does not have a fixed supply, thus, the market cap may be higher but not the price value per coin. The Ethereum network is going to implement EIP 1559 though, as a deflationary mechanism for ETH supply. BTC, on the other hand, is worth much more per coin because of its finite 21 Million supply.
An argument can be made that scarcity is eventually what will make BTC more valuable. That is true per coin (1 BTC), but it is still possible that ETH will have a larger market cap. The derivatives market could be worth over $1 Quadrillion. If this capital source is tapped into the Ethereum blockchain, it will bring so much liquidity. This market could propel ETH much further than BTC. Overall this is good for cryptocurrency since the liquidity can flow to other altcoins. Thus BTC can remain as a store of value, while ETH will have the larger market cap as the layer for transactions.