2021-07-25 08:00:00

Could ethereum overtake bitcoin?

Bitcoin v ethereum: who will be the eventual winner? Photo: Dado Ruvic/Illustration/Reuters

Robert Metcalf, the founder of ethernet technology, formulated a law that the value of a network increases with the square of the number of users on it. Since July ethereum (ETH-USD) has overtaken bitcoin (BTC-USD) to become the largest network for trustless money settlements, a sign that the world’s pre-eminent cryptocurrency is giving ground to its younger competitor. 

This week data from Bitinfocharts shows that ethereum has 770,144 network addresses, 94,207 more than bitcoin which has only 675,937. Another network metric to evaluate a cryptocurrency’s value is daily transaction volume, and recent figures from Coinbase (COIN) show that ethereum transactions grew by 53% from the first quarter to the second quarter, while bitcoin saw a 14% decline. This is one of many signals that have prompted cryptocurrency observers to speculate that ethereum could eclipse the primacy of bitcoin in the near future.

The mystique behind bitcoin has reached a pseudo-religious ecstasy, emerging from cyber-obscurity in January 2009 when the anonymous Satochi Nakamoto forged the first coin of this revolutionary system of value transfer. Carved in the code of the first block were the words: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”. This has been translated as a declaration that the world was about to see the antidote to inflationary fiat currencies and central bank hegemony. 

Ethereum meanwhile was founded in 2015 by the very identifiable Vitalik Buterin, and has little to offer when contrasted with bitcoin’s now mythical genesis story. However, ethereum has one major factor that could see it eclipse its widely revered elder sibling. Although bitcoin has a longer track record and greater name recognition, it is ethereum’s versatility that could see it rise to primacy. This versatility has seen it referred to as “the infinite garden”, because it can support an unlimited number of financial products and services and provide developers with endless opportunities to create decentralised applications.

Read more: How to spot – and avoid – cryptocurrency scams

Ethereum’s versatility has caught the attention of global financial institutions who see it as both an opportunity and a competitor. Goldman Sachs has taken particular notice of ethereum’s ability to execute smart contracts for decentralised finance. In May, Goldman Sachs (GS) published a report that stated, “the cryptocurrency with the highest real use potential is ethereum, the platform on which it is the native digital currency, is the most popular development platform for smart contract applications”. 

What is bitcoin?

Bitcoin is still regarded as a stronger store of value than ethereum, due to its much larger market capitalisation of $607bn (£441bn) when compared with ethereum’s $240bn. However, Goldman Sachs did argue that using cryptocurrencies as a store of value was problematic because volatility is likely to continue due to the high competition between the 10,772 different tokens and coins in existence. The investment bank labelled cryptocurrencies as “a risk-on inflation hedge” whereas gold was a “defensive inflation hedge”.

A second quarter market report commissioned by Coinbase and produced by market analysis firm Apex:E3 reinforce the narrative that ethereum uptake is accelerating. Its average daily trading volume on the US exchange in the second quarter was $3.2bn. In a statement released 19 July, Marcus Hughes, Coinbase’s managing director for Europe said: “Ethereum is continuing to grow in popularity and cementing its position as the second largest cryptocurrency by market capitalisation… Ethereum traded volumes now make up over 80% of the traded volumes of bitcoin in the second quarter.”

Read more: From Binance to Coinbase: The rise of cryptocurrency exchanges

Both US billionaire Mark Cuban and founder of the cardano cryptocurrency Charles Hoskinson are aggressive ethereum advocates, with Mark Cuban telling CBNC in early May that, “the number of transactions and the diversity of transaction types along with the development efforts in ethereum dwarf bitcoin”. 

Watch: What is ethereum?

Charles Hoskinson, speaking on the Lex Freidman podcast on 16 June, said that “ethereum is getting to the point where it has the same network effect as bitcoin, but the community has a completely different culture, because they love evolving and upgrading. I’d say nine times out of 10 ethereum is going to win the fight against bitcoin.” However, it must be noted that Hoskinson is a co-founder of ethereum and his own cardano cryptocurrency credits itself as a “third-generation platform” built on top of the ethereum network.

Ethereum is due a major upgrade that will bring it closer to a new version of the blockchain that has much reduced gas fees (transaction costs) and one that will use proof of stake as its consensus mechanism to verify transactions. The long awaited upgrade, called the London Hard Fork, is due to happen on 4 August, and could settle the controversy around the large amounts of electricity used in ethereum mining. 

Elon Musk's comments and tweets have direct impact on cryptocurrencies, including bitcoin, which he's now said he may reconsider adopting as a form of payment for Tesla cars. Photo: Maja Hitij/Getty Images

Elon Musk’s comments and tweets have direct impact on cryptocurrencies, including bitcoin, which he’s now said he may reconsider adopting as a form of payment for Tesla cars. Photo: Maja Hitij/Getty Images

This proof of work energy consumption, in the midst of a climate crisis, was cited by Elon Musk as the reason Tesla (TSLA) stopped accepting bitcoin as payment for its cars. If ethereum successfully transitions to proof of stake, it would dramatically reduce its energy consumption because transactions would be validated and new blocks created based on how much ether a miner contributes, rather than how much processing power is used.

However, fossil fuel-heavy energy consumption may be one thing that bitcoin is managing to resolve. At ‘The B-word Conference’ on 21 July, Musk recognised that bitcoin mining could be utilising 50% or above renewable energy, and if this is confirmed after due diligence “Tesla would resume accepting Bitcoin”. 

Read more: What is crypto-mining and can anyone do it?

Bitcoin is still seen as the main contender for an internet-native global currency. Bitcoin’s Lightning Network, a second layer built on top of the blockchain, allows it to obliterate the geriatric speeds of the batch processing systems used by banks to settle monetary transfers. The Lightning Network has been shown to be very successful in El Salvador, the first nation to make bitcoin legal tender.

However, ethereum has taken the potential of blockchain technology to a higher degree and provided a platform of creativity where developers can manifest a myriad of decentralised ideas. If bitcoin is digital gold then ethereum’s vast and growing network of decentralised applications could become a truly un-fragmented peer to peer world computer that could eradicate ‘middlemen’, and one that can never be shut down.

Watch: What are the risks of investing in cryptocurrency?

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