Since its inception in 2009, Bitcoin (BTC) has been on a remarkable rise - one that has outpaced investments such as stocks, property and commodities. Throughout each bullish and bearish market cycle, it has remained the crypto asset market leader, with very few other crypto assets rivalling Bitcoin by market capitalisation.
Bitcoin's price has dropped approximately 75% since reaching an all-time high in November of 2021, and with it, the rest of the crypto market. It is fair to say that we are in the midst of another crypto bear market. Even though this depressed market can be painful, it can also be essential. Frivolous players are removed from the market and replaced by top-performing, resilient competitors. This is where Ethereum has stood out amongst the rest.
Ethereum is a blockchain-based network which supports the creation of decentralised applications (dApps) through smart contract technology. Ethereum has grown exponentially in popularity since its launch in 2015, housing over 45 dApps with more than $100 million worth of value in locked-in smart contracts - that’s 45x more than Bitcoin. Ethereum's vision has always been to add different use cases and programmability above that of Bitcoins offering with its native token, Ether (ETH), acting as fuel to power its ecosystem of dApps.
Over the last decade, Bitcoin's market capitalisation has grown significantly. Different narratives throughout each secular cycle have fuelled its growth, such as:
Whether these narratives are correct or not is anyone's guess, but that's not the real question here.
The real question is, can Ethereum start to win over some of these narratives? And if it does, what does this mean for Bitcoin as the market leader?
Ethereum has undergone its most significant upgrade since its launch in 2015, transitioning from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) system – known as “The Ethereum Merge”. This transition has set the stage for Ethereum to improve its scalability, accessibility, and security - contributing to its goal to become the backbone of the new financial system.
Bitcoin maximalists have long believed Bitcoin to be an inflation hedge due to its similarities to gold. Much like a gold miner pulls gold out of the ground and into existence, so too does a Bitcoin miner mine Bitcoins into existence. These similar features mean that Bitcoin and gold produce closely related inflation rates (1.60% Bitcoin vs gold 2.00%).
Due to Ethereum’s high inflation rate (4.50%), it has never been involved in the inflation hedge debate - until now.
Post the Merge, Ethereum has subsequently reduced its inflation rate to 0.20%, with the possibility of its inflation rate becoming negative - what economics would term deflationary.
Deflationary means that the supply of Ethereum tokens could shrink over time - the exact characteristic needed for an effective inflation hedge.
Another narrative that has stuck with Bitcoin is the belief that it is the store of value and sound money of the crypto asset world.
A store of value relies on belief and confidence in the asset. The market will deem it valuable if it provides a valued form of utility. We can refer to Gold for this example, as it has a rich history of being used to store wealth because of its aesthetically pleasing appearance, durability and scarce supply.
While Bitcoin shares many of the same characteristics as Gold it is still yet to prove itself as a store of value in terms of history and utility.
Ethereum's transition to proof of stake has strengthened its chance to become a global store of value. The inflation rate of 0.2% following “The Ethereum Merge” theoretically makes it more scarce than before. Additionally, its clearly defined use case to host and fuel thousands of decentralised applications undeniably deems the crypto assets' valuable utility function.
As crypto assets develop, many investors are looking for ways to value them, albeit through traditional financial metrics or otherwise.
With this development, there is a case that Ethereum could offer more value than Bitcoin in the future. Simple metrics like the following show this possibility:
Since January 2020, the Ethereum adoption seems to have already started. Ethereum's market capitalisation has risen dramatically when compared to that of Bitcoin's.
The chart below shows the price of Ethereum’s token when valued against Bitcoin, and it speaks for itself.
As you can see, the cost of buying an Ethereum token in terms of Bitcoin has increased from 0.0189 Bitcoin to over 0.0684 Bitcoin - this implies that the Ethereum token has gained over 257% when compared against Bitcoin. This illustrates how investment capital is flowing from Bitcoin to Ethereum thereby increasing the amount of Bitcoin needed to buy a single Ethereum token.
The Ethereum Merge was successful – a monumental day in crypto history. This upgrade could fundamentally change how people and institutions view Ethereum. This new view could start to challenge the traditional features believed only to be beholden to Bitcoin. These factors, combined with Ethereum’s impressive network effects, may lead to the dethroning of Bitcoin - the longstanding king of crypto.
Do you believe the dethroning is already underway?
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