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When it comes to investing in crypto with a longer time horizon in mind, two blue chip crypto projects often lead the conversation: Bitcoin and Ethereum. As the top two coins with the highest market cap in the crypto space, it's fair to say they're the go-to names for anyone keen on dollar cost averaging into crypto.
However, since Ethereum recently executed its Merge without a hitch, there has been rampant speculation with regard to the future of the world’s second-largest cryptocurrency in terms of market capitalization. With its post-Merge roadmap already underway, it seems Ethereum is poised to become the most functional smart contract platform in the crypto space. Will this momentum carry Ethereum forward in a way that allows it to make the Flippening a reality? Read on as we discuss what the Flippening is and how it’ll shake up the crypto market.
The Flippening refers to the hypothetical situation when Ethereum overtakes Bitcoin to become the top cryptocurrency in terms of overall market capitalization.
To keep track of the Flippening, Blockchaincentre has compiled a whole list of factors that take into account other metrics beyond just market capitalization. On top of comparing market capitalization, the website also takes into account factors like transaction volume and active addresses. To the surprise of many, Ethereum has proven its utility as it surpasses Bitcoin in terms of transaction count and fees paid.
While there’s no official indicator to track when this historic event will take place, Ethereum dominance helps in gauging Ethereum’s popularity relative to the rest of the crypto space. It’s the indicator that’s used to gauge Ethereum’s share of the total market capitalization of cryptocurrencies. According to Ethereum dominance levels, ETH came closest in June 2017 when ETH dominance rose to 25.32%. For older investors, this was during the golden age of initial coin offerings (ICOs), where plenty of altcoins were being created off the Ethereum protocol.
Unfortunately for Ethereum maximalists (maxis), Bitcoin’s market capitalization showed no signs of slowing down since then. With the Taproot update that helped improve overall transaction privacy and efficiency alongside a Bitcoin halving that drastically made it harder to mine BTC, Bitcoin soared in popularity. However, due to the tougher macroeconomic factors and catastrophes like the Terra Luna implosion and FTX’s collapse, ETH dominance now finds itself at about 19.32% as of Feb 1, 2023. This has led to many long-term investors once again speculating on whether Ethereum has what it takes to take down Bitcoin.
Remaining optimistic for the Flippening? According to the Ethereum maxis, here are the reasons why Ethereum will flip Bitcoin in market capitalization in the long run:
If you're in touch with the crypto market, you'll often hear of how Bitcoin has the reputation of being digital gold. As altcoins get rocked by volatility, crypto investors tend to seek Bitcoin as a safe haven from the rampant price fluctuations in the crypto markets. This gives Bitcoin a gold-like similarity as traditional investors used to add gold to their portfolio and use it as a hedge against traditional assets and inflation.
In the case of Ethereum's positioning relative to Bitcoin, many are now calling it digital oil. Much like how the global supply chain is powered by oil, decentralized finance (DeFi) smart contract transactions are mostly powered by Ether (ETH). From NFT marketplace transactions to staking contract approvals, users will have to pay gas fees in ETH to process said transactions. Thanks to the London hard fork’s introduction of a burning mechanism, ETH is burned and removed from existing circulation each time a user engages in any of said smart contract transactions.
All in all, it's this utility that gives Ethereum a massive bull case when considering if the Flippening will happen. As the popularity of Ethereum picks up traction in the next bull run, it’s believed that the massive influx of transactions will help in boosting Ethereum’s market capitalization as more ETH gets burnt over time.
To those unfamiliar with a Bitcoin halving, it’s a momentous event when Bitcoin mining rewards are reduced so that scarcity is maintained and inflation is counteracted. Like Bitcoin, Ethereum has a similar halving mechanism. As Ethereum transitions to a proof of stake (PoS) consensus mechanism post-Merge, issuance of ETH is expected to dip by more than 80% over time. This reduction in supply is equivalent to more than three Bitcoin halvings, leading to ETH maxis terming this phenomenon the triple halving. Curious about how this reduction in issuance will be accomplished? Here are the factors that will contribute to the triple halving playing out.
Along with the burning mechanism, the London hard fork also altered the gas fee system. Previously, users were able to select the fees they would like to pay based on the speed of the transaction. By incorporating the London hard fork’s EIP-1559 upgrade, users have to pay a base fee for each block. As a result, ETH that would otherwise profit miners will now be burnt. This contributes to less ETH in circulation and greater deflationary pressure on Ethereum.
Additionally, post-Merge Ethereum now has new requirements when it comes to running a validator node on the network. Compared to proof of work (PoW) mining which gives rewards based on who has higher computational power, the PoS consensus mechanism utilizes a system that dishes out rewards based on the amount of assets committed to the network.
Since the Beacon Chain is now merged onto the Ethereum mainnet and Ethereum has fully transitioned to PoS, validators will now be required to stake 32 ETH in order for their node to reap the yields of staking. As more validators reserve their ETH for staking, a significant amount of ETH will be considered as removed from circulation.
It’s common knowledge that institutions make use of the Environmental, Social and Governance (ESG) framework to make investment decisions. As institutional money often drives crypto price movements, it can be extremely beneficial for any project to tailor itself to fit the ESG guidelines so institutions will deem the investment as low-risk. Unfortunately for Bitcoin, it fails to check many of the ESG boxes. From PoW mining being perceived as harmful to the environment to the decentralized governance nature of Bitcoin, the risks are far too high for investors to justify a large BTC exposure.
In contrast, Ethereum suits the ESG guidelines in numerous ways, namely that there’s a core Ethereum Foundation that can be consulted, a coordinated governance process that allows for frequent updates and a consensus mechanism like PoS that reduces Ethereum’s emission levels. This ultimately makes Ethereum more institutional-friendly and paves the way for billions of assets under management to be invested in the ESG-friendly Ethereum blockchain.
To truly evaluate a crypto project’s long-term potential, it’s also important to take into account its bear cases. Here’s why some speculators believe the Flippening will not happen:
Some Ethereum detractors might feel that having a central figure reduces a key aspect of what makes Ethereum decentralized. After all, if one entity controls all the happenings, who is there to police the entity's authority? In Ethereum's case, Vitalik Buterin is the central figure who gets credited for the cryptocurrency’s success. This credit has largely come from Buterin’s down-to-earth nature and aspiring core beliefs for Ethereum that he remains committed to despite Ethereum’s meteoric success.
Unfortunately, while Buterin’s popularity is good for Ethereum, his fame can also harm the project. Much like how Elon Musk’s actions impact Tesla for better or worse, the same can be said for Ethereum as Buterin’s frequent addresses and interviews prop up Ethereum’s credibility. If something were to happen to Buterin, Ethereum’s price would certainly be impacted as there would be fears of a lack of leadership. In comparison, Bitcoin has no figure of reference as Satoshi Nakamoto remains a mystery, even after years of trying to unearth who the mysterious Bitcoin creator is. On top of being beneficial for decentralization, Bitcoin’s faceless nature prevents it from being rocked by negative founder news.
In order to increase the overall exposure to crypto, smart money investors could look towards investing in ETFs to buy into crypto and avoid the strict regulations that restrict them from directly investing in Bitcoin. Although there aren’t any crypto spot ETFs that have been legally approved yet, Bitcoin does have the upper hand in this regard. This is because there already are a few Bitcoin futures ETFs that generated some hype in the market when they first launched.
If a Bitcoin spot ETF is approved, it’s possible that the massive amount of inflows from institutions could cause Bitcoin to rally in price and greatly deviate from Ethereum’s market capitalization. With funds like Samsung Asset Management looking to launch a spot Bitcoin ETF on the Hong Kong exchange as well as Ark and 21Shares looking to get their spot Bitcoin ETF approved, we certainly aren’t too far from a future where institutions can freely increase their digital currency exposure via crypto spot ETFs.
While we won’t know for sure how the Flippening will impact the crypto industry, we do foresee how Bitcoin will be impacted if Ethereum overtakes it in terms of market capitalization.
Contrary to popular belief and FUD, there won’t be any doomsday scenario where Bitcoin goes to zero. Rather, the most likely scenario is that Bitcoin remains a key asset in the crypto landscape despite losing its top spot. This is because of Bitcoin’s unmatched security and decentralization. With more than thousands of nodes across the world, Bitcoin is the most secure payment network and Ethereum overtaking its market capitalization will not change this fact. Since they serve different purposes, it’s likely that Bitcoin continues to remain the go-to choice as a store of value and that it retains its digital gold title.
All in all, the Flippening looks to be more and more likely with each Ethereum network update that goes according to plan. Even though post-Merge Ethereum is only 55% complete, ETH has already eclipsed more than a third of BTC’s market capitalization. With the eventual completion of the Ethereum roadmap and return of the bull market, we’ll likely see Ethereum head for another run on the top spot as volatility shakes up the prices of all existing crypto assets.
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