Ethereum Outperformed Bitcoin in Every Quarter of 2021 – The Tokenist

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Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.

Historically, Bitcoin has been viewed as the digital asset industry’s flagship cryptocurrency – leading in market cap and popularity. As such, Bitcoin frequently acts as a magnet to all other digital assets; when the price of BTC increases, altcoins decrease, and vice versa. In 2021 however, the industry witnessed something different.

Why Does Bitcoin Determine Altcoins’ Price Dynamic?

Being first has many advantages. Bitcoin has had the time to become synonymous with cryptocurrency, accruing greater public recognition and money inflow than any other digital asset. This is why all other cryptocurrencies are commonly called altcoins.

Bitcoin frequently acts as a tidal flow in the crypto market. Altcoins sink or rise with Bitcoin. This largely happens due to three main reasons:

  • Altcoin prices (while set in USD) are mostly set in relation to BTC. This is because BTC’s price activity is commonly seen as an indicator of the larger digital asset industry.
  • Many altcoins can’t be purchased directly with fiat money, but with dominant cryptos, such as Bitcoin or stablecoins.
  • Automated crypto bots have flooded the crypto market, algorithmically in tune with BTC price moves.

Of course, there are exceptions that occasionally break out due to external events, such as Meta-induced metaverse coins breakout. However, although Bitcoin’s market share is great, it started to wane in H1 2021, going from 66% in January to 39% in May 2021 where it holds to this day.

As of January 5th, 2022, Bitcoin’s market cap is $873.6 billion out of $2.2 trillion, accounting for 39.4% of total crypto market capitalization. Image courtesy of CoinMarketCap.com.

Nonetheless, Bitcoin’s still hefty dominance means that it acts as a crypto reserve currency. In fact, this is similar to how USD acts as a global reserve currency against other fiat currencies. For instance, the US Dollar Index (DXY) measures its strength against six other fiat currencies.

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Ethereum as the Most Likely Flippening Candidate

For the reasons stated above, investors count on Bitcoin to lead the way in their trading strategies. However, as Bitcoin’s market share shrinks, its gravitic pull also wanes. This is happening because the crypto market is diversifying into distinct categories: cryptocurrencies as commodities, privacy coins, infrastructural coins, utility coins, and NFTs.

One of the biggest crypto classes that followed Bitcoin’s shadow from the get-go are infrastructural coins, with Ethereum (ETH) in the lead. While Bitcoin provides a store of value, and more recently, cheap money transfers thanks to Lightning Network, Ethereum provides the groundwork for Finance 2.0.

Issues with ETH gas fees notwithstanding, Ethereum has established itself as the go-to smart contract platform for NFT trading, blockchain gaming, borrowing, lending, and staking.

All other smart contract platforms account for only 41% of Ethereum’s gross value locked (GVL).

Can Ethereum Leave Bitcoin’s Orbit?

With Ethereum’s expanded Finance 2.0 utility comes greater potential to power its smart contract rockets and leave Bitcoin’s orbit. This potential future event is commonly called the Flippening, referring to Ethereum (ETH) overcoming Bitcoin (BTC) as the biggest cryptocurrency by market cap, but also becoming less dependent on Bitcoin’s price moves.

At current rate, the Flippening is still far off, at 51.6%.

Image courtesy of BlockchainCenter.net

However, the market cap differential between Ethereum and Bitcoin is just one Flippening indicator out of many:

  1. Google search interest
  2. Active addresses
  3. Transaction count
  4. Transaction volume
  5. Trading volume
  6. Total transaction fees
  7. Node count (5460 ETH vs. 14741 BTC)

Out of those 7 Flippening indicators, two have tipped over into Ethereum’s favor. Ethereum transaction count is at 533% over Bitcoin’s, while total transaction fees are at 7,193% over Bitcoin’s. The latter is not that important compared to the former, considering the meteoric rise in ETH gas fees is also responsible for the rise of competing blockchains such as Solana (SOL), Avalanche (AVAX), Terra (LUNA) and others.

Yet, there is still one external Flippening indicator very important for traders and investors alike: profitability. Compared to Bitcoin, Ethereum has had 8 consecutive quarters in terms of positive returns, from Q1 2020 to Q4 2021.

Image courtesy of Skew Analytics

In contrast, Bitcoin’s longest consecutive profitability streak in the last two years was half that of Ethereum, at only 4 quarters, from Q2 2020 to Q1 2021.

Image courtesy of Skew Analytics

With Ethereum L2 scalability solutions gaining prominence, and the upcoming GameFi/Metaverse projects yet to take lift off, 2022 may be the year where the majority of Flippening indicators prevail. However, much will depend on Ethereum’s Beacon Chain docking in H2 2022, and its impact on problematic ETH gas fees.

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Do you think Bitcoin’s physical Proof-of-Work consensus will be valued more for security reasons compared to the economic Proof-of-Stake prevalent among smart contract platforms? Let us know in the comments below.

About the author

Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird’s US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.



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