Flippening: Will ETH Ever Surpass BTC?

When it comes to investing in cryptocurrencies with a longer time horizon, two blue-chip crypto projects often lead the conversation: Bitcoin and Ethereum. As the two coins with the highest market capitalization in the cryptocurrency space, it is safe to say that they are the most popular for those looking to average the value of cryptocurrencies.

However, after Ethereum recently completed the merger without any problems, there has been a lot of speculation regarding the future of the world's second-largest cryptocurrency by market capitalization. With the post-merger roadmap already underway, Ethereum appears poised to become the most capable smart contract platform in the cryptocurrency space. Can this momentum move Ethereum forward in a way that makes flipping a reality? Read on to find out what flipping is and how it will rock the cryptocurrency market.

What is flipping?

Flipping refers to a hypothetical situation where Ethereum overtakes Bitcoin and becomes the leading cryptocurrency by total market capitalization.

To track flipping Blockchaincenter compiled a whole list of factors that take into account not only market capitalization, but also other indicators. In addition to comparing market capitalization, the site also takes into account factors such as transaction volume and active addresses. To the surprise of many, Ethereum proved to be useful, surpassing Bitcoin in the number of transactions and fees paid.

Understanding Ethereum's Dominance

While there is no official indicator to track when this historic event will occur, Ethereum dominance helps to assess the popularity of Ethereum in relation to other cryptocurrencies. It is this indicator that is used to assess the share of Ethereum in the total market capitalization of cryptocurrencies. According to the Ethereum dominance level, ETH came closest to this indicator in June 2017, when ETH dominance rose to 25,32%. For old investors, this was the golden age of initial coin offerings (ICOs), when many altcoins were created based on the Ethereum protocol.

Unfortunately for Ethereum Maximalists, market capitalization Bitcoin has shown no signs of slowing down since then. After the Taproot update, which helped improve overall privacy and transaction efficiency, as well as halving the cost of bitcoin, which made it much more difficult to mine BTC, the popularity of bitcoin has skyrocketed. However, due to tighter macroeconomic factors and catastrophes like the Terra Luna explosion and the FTX crash, ETH’s dominance is now around 19,32% as of Feb 1, 2023. This has led many long-term investors to once again speculate about whether Ethereum has what it takes to beat Bitcoin.

Why will there be a revolution

Are you optimistic about flipping? According to Ethereum maximalists, here are the reasons why Ethereum will overtake Bitcoin in terms of market capitalization in the long run:

Digital Oil Narrative

If you follow the cryptocurrency market, you often hear that bitcoin has a reputation as digital gold. As altcoins are subject to volatility, crypto investors are looking to use bitcoin as a safe haven from wild price fluctuations in the cryptocurrency markets. This gives bitcoin a similarity to gold, as traditional investors would typically 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 now refer to it as digital oil. Just as the global supply chain runs on oil, decentralized financial (DeFi) transactions carried out using smart contracts are primarily powered by Ether (ETH). From transactions in the NFT market to the approval of contracts at a rate, users will have to pay for gas in ETH to process these transactions. Due to the London hard fork introducing the burn mechanism, ETH is burned and withdrawn from circulation every time a user makes any of the said smart contract transactions.

Overall, it is this utility that gives Ethereum a strong case when considering whether a coup will occur. It is believed that as Ethereum gains popularity during the next bull run, the massive influx of transactions will drive Ethereum’s market cap higher as more ETH is burned over time.

Ethereum triple halving

For those unfamiliar with the bitcoin halving, this is a momentous event when the reward for bitcoin mining is reduced in order to maintain a scarcity and counteract inflation. Ethereum, like Bitcoin, has a similar halving mechanism. Since after the merger, Ethereum is moving to a proof-of-stake consensus mechanism (PoS), ETH issuance is expected to decline by more than 80% over time. This reduction in supply is equivalent to more than three bitcoin halvings, leading ETH maximalists to call this phenomenon a triple halving. Curious how the emission reduction will take place? Here are the factors that will contribute to the triple halving.

Along with the flare mechanism, the London hard fork also changed the gas fee system. Previously, users could choose the amount of fees they would like to pay based on the speed of the transaction. Due to the EIP-1559 upgrade in the London hard fork, users must pay a base fee per block. As a result, ETH that would otherwise be profitable for miners will now be burned. This contributes to a decrease in the amount of ETH in circulation and increased deflationary pressure on Ethereum.

In addition, after the merger, Ethereum imposes new requirements for the operation of the validator node on the network. Compared with mining based on proof of work (PoW) which gives rewards based on who has more computing power, the PoS consensus mechanism uses a system that gives out rewards based on the amount of assets transferred to the network.

Since the Beacon Chain is now merged with the Ethereum network and Ethereum has gone full PoS, validators will now have to stake 32 ETH in order for their node to profit from the stake. As more validators reserve their ETH for mining, a significant amount of ETH will be considered retired.

Ethereum and the ESG System

It is common knowledge that institutions use the Environmental, Social and Governance Management (ESG) system to make investment decisions. Since institutional money often determines the price dynamics of cryptocurrencies, it can be extremely beneficial for any project to adjust to ESG guidelines so that institutions consider investments to be low-risk. Unfortunately, Bitcoin does not meet many of the requirements of the ESG. From the perceived environmental impact of PoW mining to the decentralized nature of Bitcoin governance, the risks are too high for investors to justify a large stake in BTC.

In contrast, Ethereum fits the ESG guidelines in many ways, namely: there is an Ethereum Foundation that can be consulted, a coordinated governance process that allows information to be updated frequently, and a PoS-like consensus mechanism that reduces Ethereum issuance. 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.

Why the coup won't happen

To really appreciate the long-term potential of a crypto project, it is important to also take into account its bearish outlook. This is why some speculators believe that flipping will not happen:

The ambiguous nature of Vitalik Buterin's popularity

Some detractors of Ethereum may feel that having a central figure reduces a key aspect of Ethereum's decentralization. After all, if one person controls everything that happens, who will monitor his power? In the case of Ethereum, Vitalik Buterin is the central figure credited for the success of the cryptocurrency. This credit is largely due to Buterin's down-to-earth nature and his commitment to Ethereum's core beliefs, which he remains true to despite Ethereum's meteoric success.

Unfortunately, while Buterin’s popularity is good for Ethereum, his fame can also hurt the project. Just as Elon Musk's actions affect Tesla for better or worse, the same can be said for Ethereum, as Buterin's frequent speeches and interviews support Ethereum's credibility. If something happened to Buterin, the price of Ethereum would certainly suffer as there would be fears of a lack of leadership. By comparison, bitcoin has no authority figure, as Satoshi Nakamoto remains a mystery even after years of trying to figure out who the mysterious creator of bitcoin is. In addition to the fact that decentralization is beneficial, the faceless nature of bitcoin does not allow it to be shocked by the negative news about the founder.

Institutional Absorption Through ETFs

In order to increase the overall exposure of cryptocurrencies, smart money investors may consider investing in an ETF to buy cryptocurrency and avoid the strict rules that restrict them from directly investing in bitcoin. While there are no legally approved cryptocurrency ETFs yet, Bitcoin has the upper hand in this regard. This is because there are already several Bitcoin futures ETFs that caused quite a stir in the market when they were first launched.

If a bitcoin spot ETF is approved, it is possible that the massive influx of funds from institutions could cause the price of bitcoin to rise and deviate significantly from Ethereum’s market capitalization. With funds like Samsung Asset Management planning to launch a bitcoin spot ETF on the Hong Kong Exchange, and Ark and 21Shares wanting approval for their bitcoin spot ETFs, we are certainly not that far off the future when institutions can freely increase their digital currency exposure through cryptocurrency spot ETFs.

What will happen to BTC after flipping?

While we don’t know for sure how “flipping” will affect the crypto industry, we foresee how Bitcoin will be affected if Ethereum overtakes it in market capitalization.

Contrary to popular belief and FUD, there will be no doomsday scenario where bitcoin drops to zero. Rather, the most likely scenario is that Bitcoin will remain a key asset in the cryptocurrency landscape despite losing its top spot. This is due to the unmatched security and decentralization of Bitcoin. With over a thousand nodes worldwide, bitcoin is the most secure payment network and Ethereum overtaking it in market capitalization will not change that fact. Since they serve different purposes, it is likely that bitcoin will remain the primary choice as a store of value and retain the title of “digital gold”.

Сonclusion

In general, with each Ethereum network upgrade that goes according to plan, the likelihood of flipping becomes more and more. Even though Ethereum is only 55% complete after the merger, ETH has already exceeded over a third of BTC’s market capitalization. With the final completion of the Ethereum roadmap and the return of the bull market, we will most likely see Ethereum come out on top again as volatility shakes the prices of all existing crypto assets.