Why do we think ETH overtaking BTC is good for the crypto market?

If ETH overtakes BTC, will it be good for the entire crypto market? What’s wrong with BTC being the boss? Isn’t that great so far? If it’s good for cryptocurrencies, why hasn’t it happened yet?

write:《Why the Flippening Is Good for Crypto》by Ryan Berckmans

Compilation: Deep Tide TechFlow

The merger is over, Ethereum token economics have changed dramatically, and the supply of ETH has been significantly reduced.

Ethereum is generating more revenue and greatly improving its position in the competition with BTC.

So, does this mean that the market cap of ETH will eventually surpass that of BTC?

Of course, people like me who own ETH would like such a change, but is it good for cryptocurrencies as a whole other than our personal financial interests? What’s wrong with BTC being the boss? Isn’t that great so far? If it’s good for cryptocurrencies, why hasn’t it happened yet?

These issues are all intertwined and perhaps best investigated by delving into the details of BTC returns.

Reliable does not equal investable

BTC is the most credible neutral asset. This is because the Bitcoin protocol is mature and immutable, and Proof of Work is substantially less risky due to its simplicity and proven track record.

Over the years, it has withstood dozens of failed attempts by groups to unilaterally modify Bitcoin’s underlying code and increase its node size. Regardless of Satoshi Nakamoto’s original intentions, the reliability of BTC has become its core intrinsic value proposition.

However, the reliability of Bitcoin does not mean that the asset will retain its value, or accumulate value in terms of purchasing power or fiat.

Conversely, Bitcoin’s core design is non-programmable, with any added value to holders, and its mining cost structure can lead to serious value leakage.

This is why, for Bitcoin, being reliable does not equate to being investable.

With that background out of the way, let’s start with historical returns to understand how BTC works.

What happened in 2016?

From 2013 to 2016, if you bought low and sold high, BTC returned about 6x.

But if you bought BTC at the 2013 high and sold it in 2016, you earned nothing, zero.

After 2016, the situation was completely different. If you bought BTC in 2016 and held it today, you made 20x to 40x. How about buying BTC at the 2016 lows and then selling at the new 2021 highs? You made 130 times.

One might protest, “2016 was the dark age of cryptocurrencies, it didn’t matter back then, we were just getting started.”

Are you sure this explains everything?

What happened around 2016 that caused BTC to perform better in the years since? Before or around 2016, what changed in Bitcoin that created huge returns?

In fact, Bitcoin itself hasn’t changed, after all, immutability is part of Bitcoin’s nature and part of its top-notch reliability.

Of course, the Lightning Network was launched after 2016, but it did little.

What else could have happened around 2016 to unlock the potential of Bitcoin? Or, did BTC nurture something we can’t see that matured in 2016?

These explanations are unreliable. The idea that Bitcoin somehow evolved or unlocked its potential around 2016 simply cannot be explained by the narratives and numbers we’ve seen over the years.

BTC hits the Web3 ride

So, what happened?

In my opinion, the fact that best fits the historical narrative and data is that every major catalyst in the cryptocurrency market since 2016 has been driven by the promise or fulfillment of Web3 applications, which Bitcoin does not support.

In 2016, a small project called Ethereum began to achieve great success, striving to make public blockchains function as computers.

So far, BTC’s recent bull run has only been surfing the gigantic waves of the Ethereum community (and a few others) creating something actually useful.

At this point, a Bitcoinist or cryptocurrency basket investor might reasonably retort: ​​“Wait, why would investors buy BTC if it’s just a bystander? BTC’s dominance is about 38% today.” “Are you kidding me? You think the $400 billion market cap is just a mistake?”

Yes, that’s exactly what I said, and I’ll try to prove it below.

Here’s why BTC as an investment is unsustainable, why ETH’s market cap overtaking BTC is possible, and why this thing is good for cryptocurrencies – because it will eliminate a non-investable asset as a leader in our industry .

unsustainable investment

Bitcoin fits the definition of an unsustainable investment very well.

If we take a serious look at Bitcoin’s use of proof-of-work, it’s hard to question Bitcoin’s sustainability in terms of value retention or accumulation.

Bitcoin fees are paid directly to miners without providing any value accumulation to BTC holders. This makes BTC no income, especially considering the expensive cost of mining.

BTC’s annual inflation rate before the 2024 halving is around 2%. That sounds good, what can be wrong with just 2% inflation?

The problem is that due to the economics of mining, inflation (issuance) in PoW is the most direct cost of capital to BTC valuation. Coupled with the thin liquidity of spot prices, it means that miners selling BTC will hurt the market value of BTC a lot.

In the medium term, on average, miners have to sell most of the BTC they earn because they need to spend as much as $1 in hardware and energy costs to compete for $1 in BTC. This is a huge problem for BTC (and ETH prior to yesterday’s merger) because selling X% of supply hurts market cap far more than X%.

According to some estimates, selling $1 of BTC could lose $5 to $20 in market cap.

The open secret in cryptocurrencies is that you cannot sell more than a fraction of the total supply at the spot price, the order book is thin and liquidity is weak.

So not everyone can sell at today’s price, so miners are by definition consuming scarce resources by constantly selling.

That said, BTC miners may only sell 2% of the total supply each year, but they receive far more than 2% of their annual net inflows of fiat currency. Since BTC fees are low and paid in full to miners, there are two very important implications that may be overlooked by many BTC holders:

1. On average, someone has to buy a lot of BTC every day to keep the price steady. In 2021, around $46 million in net fiat inflows per day will be required to keep BTC parity. In other words, I have this huge investment for you, and we only need $46 million a day in new money from other people to avoid losing our principal…”

2. When a BTC investor gets a 50% return, or 5 times, or 40 times, these profits can only come from new entrants. There is no meaningful fee income accrued to holders, nor any meaningful application on Bitcoin, and the price of BTC cannot keep itself stable due to the cost of mining, so, by definition, any No one buying BTC at new highs can make money on a sustainable basis.

Bankless: Why do we think ETH overtaking BTC is good for the crypto market?

social imbalance

Who would deliberately buy an unsustainable long-term investment? Who would recommend buying it? Last year, BTC reached a total cryptocurrency market cap of $3 trillion with ~40% dominance, how did we end?

As far as I know, a small number of different types of buyers may be responsible for driving capital into BTC, each with their own reasons, and most are unaware of the true risk profile of their investments, some types of investors are mentioned below:

1. The first category, new entrants buy BTC. For example, veteran hedgers, long-term institutional investors, ultra-high net worth individuals and retail investors who have turned to Web3. These new entrants appeared on Web3 – statistically more during the bull run – and they were all excited, they knew cryptocurrencies were new and complex, and they were reasonably proportional to a basket of top cryptocurrencies in assets.

Proportional is an investment term that, in this case, means “I’m going to buy something in proportion to today’s market cap.” These newcomers are often the lambs of the future, the slaughter of BTC as an unsustainable investment.

2. The second category, long-term investors buy BTC. These people could be crypto OGs who entered early, or crypto VCs with more connections and capital. These people are buying BTC because they really don’t have and/or don’t want to build confidence in where the space is going, and they don’t want people to think their views are wrong. To make matters worse, these people are often pundits who have played a major role in helping push new entrants to invest in BTC.

3. The third category, speculators buy BTC. They may all sell out at the next new high school. These are often the brightest, savviest, and/or hungriest of the crypto OGs, VCs, and finance folks turning to Web3. However, they feel that for the greater good (often theirs), controversy must be avoided and efforts should be made to promote Bitcoin.

They felt that if BTC collapsed, it would mean huge losses for some of the cryptocurrency’s biggest and most powerful investors, potentially damaging the entire space and their portfolios.

4. The fourth category, traders. They buy BTC and rotate their profits into BTC as the cryptocurrency’s de facto reserve currency. Traders just follow the trend and they know that in the current era, BTC does better in bad times and worse in good times. Traders have very short time horizons, they just use BTC as a home base for riskier games. In a way, traders are the most rational and/or least disruptive of all BTC buyers.

5. The fifth category, BTC nativeists. These are hardcore BTC fans who believe that BTC is the most reliable currency in the history of the world. Not only do they believe in BTC’s top-notch reliability, but they also believe that this reliability must translate into an excellent long-term investment and/or the best cryptocurrency investment to date on a risk-adjusted basis.

Of the five BTC buyers, only BTC nativists have any hope of holding on after BTC dominance collapses. Overall, bitcoin buyers are playing one of the biggest speculative games in modern finance, and among these people, only the speculators have any idea of ​​the nature of the game.

Granted, this breakdown of the types of BTC buyers is overly simplistic, but I think it’s useful. Reading this, BTC natives and skeptics may have gained confidence:

“Since you say BTC is doomed as an investment vehicle, why hasn’t ETH overtaken BTC yet?”

It’s because: numbers, that’s why.

Historically, ETH miners have been paid much more than Bitcoin miners. If the two chains swap cost structures, i.e. if BTC miners make ETH miners money and vice versa, or if the merger was fine two years ago, I think ETH has overtaken BTC in market cap.

Let’s explore the numbers…

Standing on the heavy shoulders of giants

If miner sell-offs matter — and it does, as noted — it also matters that ETH miners have been paid 2.5x to over 4x BTC miners over the past few years (normalized by market cap):

Bankless: Why do we think ETH overtaking BTC is good for the crypto market?

Last year, BTC miners were paid $16.6 billion, while ETH miners were paid $18.4 billion.

Conversely, if we swapped the cost structure of Bitcoin and Ethereum last year, ETH miners would have earned and sold about $6 billion, and BTC miners would have earned and sold about $50 billion.

This is a key point, so let me say it again: Last year, Ethereum miners earned and sold $1.8 billion more ETH than Bitcoin miners sold in BTC. If we imagine reversing the cost structure between the two chains, in 2021 alone, BTC miners will earn and sell about $44 billion more BTC than Ethereum miners sell ETH.

To prove the point: in 2021, Ethereum is very expensive to run compared to Bitcoin, and if the situation were to reverse, Bitcoin would need an additional net fiat inflow of ~$45.8 billion (i.e. new buyers of BTC), In order to keep the market capitalization of both chains the same as they are today, all other things being equal.

These extremely large numbers—especially ETH relative to its market cap, where miner selling pressure is greater—is a key driver of overtaking yet to happen.

no eternal emperor

What will happen next?

Ethereum moved to PoS from the merger, eliminating miner dumping. We are now on the path to positive revenue, scaling with L2, and Web3 is gaining global adoption.

Ethereum has become a positive-sum, productive economy.

In the next few years, for the above reasons, I think ETH has a 99% chance of surpassing BTC, 1% is unknown uncertainties, such as aliens appear and force us to use BTC as the only global currency.

The profitability of ETH, the low cost of verification, the huge growth of dApps, and the good vibes of trusted neutrality will all move our industry into a post-BTC era.

Fall of Rome

That day will be explosive and spectacular.

Of course, we may only briefly surpass. But zooming in on time, this is a one-way transition for BTC into crypto investment antiques.

Unfortunately, cryptocurrency and Web3 investors could lose a lot in BTC’s slow decline and violent crash.

Today, the probability of surpassing is close to 50%.

Bankless: Why do we think ETH overtaking BTC is good for the crypto market?

As ETH slowly rises against BTC, we’ll hit a breakout point, and then the outperformance ratio will jump from 70% to 100% in a day, or 80% to 120%, or whatever the final result is, goodbye The age of BTC.

What’s in it for cryptocurrencies: A new era of health

My guess is that eventually, many years from now, all of us, including most BTC owners today, will look back and see how naive the idea that BTC could always stay first.

The fate of BTC will undergo earth-shaking changes and eventually become the living fossil of the encrypted world. And only after ETH becomes number one will the truly healthy era of cryptocurrencies begin.

An era of environmental friendliness, streamlined cost structure, earning profits from valuable applications, Web3 will develop to be ubiquitous in the world, Ethereum will become the global settlement layer – an era of fair competition for all mankind .

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/why-do-we-think-eth-overtaking-btc-is-good-for-the-crypto-market/
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