The Great Crypto Reversal: Can Ethereum Overtake Bitcoin?

“Ethereum’s ascent to the top of crypto seems unstoppable,” Nigel Green declared in mid-August. It’s not hard to see why the deVere CEO would think so. DeFi is growing, NFTs are popping up everywhere, and Ethereum (ETH) remains more scalable than Bitcoin (BTC), offering more uses including smart contracts. In addition, Ethereum will soon switch to a Proof-of-Stake (PoS) consensus algorithm, which looks more environmentally friendly than Bitcoin’s energy-intensive Proof-of-Work (PoW) protocol.

Earlier this year, Green said: "Ethereum is years ahead of Bitcoin in every way except price and popularity." He also added: "There is a real sense that 2021 is the year of Ethereum. Its time has come." But is it a foregone conclusion that the world's first, largest and best-known cryptocurrency is ready to relinquish its market cap crown? Maybe not.

“If you look at the homepage of CoinMarketCap for the past five years, Ethereum is usually ranked second, right below Bitcoin. And it really hasn’t moved from that second position since its launch,” Molly Jane Zuckerman, head of content at CoinMarketCap, told Cointelegraph, adding: “History has shown us that only one cryptocurrency can be called the ‘king of crypto.’”

So, is there a chance of a reversal? Reversal is a word often used to describe the reversal of ETH and BTC. Are altcoins still benefiting from Bitcoin's shine? Or are they stepping out on their own and becoming popular? Ultimately, both currencies serve different purposes in the cryptocurrency and broader financial world, so can they still be compared?

Undecided

"It is difficult to determine Ethereum's ultimate dominance," commented Eswar Prasad, professor of economics at Cornell University and author of The Future of Money. He told Cointelegraph that Ethereum's switch to a PoS consensus protocol could bring technical complexity issues, and that there are many risks of DeFi products being attacked, which could undermine confidence in these products and Ethereum itself.

Still, Bitcoin has yet to prove itself as an effective medium of exchange, Prasad said, adding that its blockchain has only “limited functionality” compared to Ethereum, especially when it comes to decentralized finance (DeFi): “Ethereum offers more flexibility, especially with respect to DeFi products and services, and has the potential to become a viable and efficient medium of exchange, characterized by low latency and high throughput of transactions.”

Lee Smales, associate professor of finance at the University of Western Australia, said that perhaps Green was going a little too far. He told Cointelegraph: “Green is being too absolute in saying that ‘Ethereum is ‘inevitable’ to reverse Bitcoin. However, I would say that despite the recent rally of Bitcoin outpacing Ethereum, a reversal is very likely to happen. Perhaps the reversal has been delayed a little bit. I suspect it [the reversal] will happen in the next two to three years.”

So, how long?

Many seem to be betting on Ethereum, but the question is often: not if, but when? Goldman Sachs analysts said in July that Ethereum could surpass Bitcoin as the cryptocurrency world’s top store of value within the next few years, while deVere’s Green believes the reversal “could happen within five years.”

Justin Hartzman, CEO and co-founder of Canadian cryptocurrency exchange CoinSmart, told Cointelegraph: “I think it’s going to be hard for ETH to reverse against Bitcoin in the short term. The next [Bitcoin] halving is in 2024, which will inevitably drive prices higher. Also, keep in mind that ‘Ethereum killers’ like Cardano and Tezos are gaining traction. If they succeed, they could siphon off a ton of potential market cap from Ethereum’s funding.” If a reversal does occur, “I can see it happening in five to six years.”

“I don’t think Ethereum will surpass Bitcoin in terms of market cap and overall valuation,” John Iadeluca, CEO of Banz Capital, told Cointelegraph. He added: “Bitcoin represents the ‘adoption’ of cryptocurrencies globally, at least for the foreseeable future. I don’t think the SEC will approve an Ethereum ETF before approving a Bitcoin ETF, for example.”

Jason Peckham, an analyst at investment management firm Invictus Capital, told Cointelegraph: “I don’t think it’s inevitable. In fact, for an outsider, five years is enough time for ETH and BTC to reverse.” He added that much depends on how the two crypto communities deal with their regulatory challenges, as well as internal factors such as “the speed at which ETH is destroyed after EIP-1559,” which should make it less inflationary and potentially more attractive to investors. He also added:

“If I had to blame it on one thing, I’d say ETH needs the super cycle/double bubble theory to play out. This should allow its various sectors to continue to prosper, which is not possible in a bear market, as we’ve seen historically, where ETH is likely to be more bearish relative to Bitcoin.”

Environmental factors must also be taken into account. Bitcoin mining’s heavy use of electricity has long been known, but when Musk attracted widespread attention earlier this year, the price of BTC plummeted. Although Bitcoin has rebounded since then, Smales said: “Energy [issues] continue to gain attention, and this should only intensify. So, Ethereum’s move to PoS creates an additional advantage that may cause the reversal to happen more quickly.”

What could stop Ethereum?

Green noted that ETH has already risen 300% in 2021, while BTC has only risen 55%, and that ETH has outperformed all other assets in the first half of the year. Can anything stop its momentum?

In order to maintain its competition for BTC, Ethereum needs to maintain its role as the largest smart contract platform, however, some new competitors continue to emerge. Smales said: "POS has not been fully proven so far, and it may develop to the point where a few very large players dominate the market - essentially forming centralization - causing market friction and even potentially higher transaction fees.

The EIP-1559 upgrade was supposed to make Ethereum’s gas fees more manageable, but according to data from YCharts, average gas fees have reached a three-month high. Given the continued pressure on the network’s availability from gas fees, Ethereum’s upgrade to 2.0 won’t come soon enough.

Moreover, Bitcoin is not standing still, technologically speaking. Prasad said: “The planned Taproot upgrade could significantly enhance Bitcoin’s efficiency, privacy, and blockchain functionality.”

Bitcoin also enjoys a “first-mover” advantage, which is crucial to the network. “The advantage of Bitcoin is its remarkable Lindy effect,” Peckham told Cointelegraph, referring to a concept popularized by Nicholas Taleb that the older a technology is, the longer it will last. “At the same time, the long-term trend is for strong market participants to hold the majority of Bitcoin, while the rest of the world continues to be attracted to hold Bitcoin,” Peckham added.

However, Ethereum now seems to have momentum. Zuckerman said: “Since the DeFi summer explosion, followed by the continued popularity of NFTs, the trend of the crypto market has indeed turned towards Ethereum.” Peckham added:

“A large number of users are attracted to Ethereum because of DeFi and NFTs, while Bitcoin’s usage is not as diverse in comparison. Most of the things that crypto users like me are excited about in crypto right now are either built on Ethereum or are competitors to Ethereum.”

Ethereum has the richest ecosystem in the cryptocurrency space. Although DeFi had a downturn in early summer and was considered just a bubble with no intrinsic value, DeFi on Ethereum now has a large amount of locked value.

Hartzman said: "DeFi has been put through its most rigorous test to date and has passed it with flying colors. With applications and use cases growing every day, the number of DeFi users has exceeded 3.25 million. As more applications and users join, Ethereum can leverage Metcalfe's Law and increase its overall network value exponentially."

Are Bitcoin and Ethereum really comparable?

On further reflection, though, does it make sense to compare Bitcoin to Ethereum? One is a (recognized) form of currency; the other is a platform, a new kind of supercomputer powering Web 3.0, on top of which new technologies can be built.

Right now, the two platforms perform different tasks. Once the effects of the Taproot upgrade become apparent and developers begin to build a DeFi ecosystem around the Bitcoin network, this may become a whole new debate. However, for now, Bitcoin is primarily a store of value, while Ethereum is a decentralized application platform. "This is not a 'Coca-Cola vs. Pepsi' debate. This is a 'gold vs. the Internet' debate," Hartzman said.

Iadeluca said: "Ethereum and Bitcoin are both cryptocurrencies, but in terms of vision, they pursue two very different goals. I don't think Bitcoin and Ethereum are competing with each other; on the contrary, I think their respective developments complement each other."

“From a technology perspective, they are completely different,” Peckham said. “But from an investor’s perspective, there is some value in comparing them.”