Bankless: Why is it said that the merged Ethereum will surpass Bitcoin?
Compilation of the original text: Deep Tide TechFlow
Compilation of the original text: Deep Tide TechFlow
The merger has ended, 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 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 cryptocurrency as a whole, other than our own personal financial interests? What's wrong with BTC being the boss? Isn't it great so far? If it's good for cryptocurrencies, why hasn't it happened yet?
first level title
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 also substantially reduces risk due to its simplicity and proven track record.
However,
However,The reliability of Bitcoin does not mean that the asset will maintain its value, or accumulate value in terms of purchasing power or fiat currency.
On the contrary, Bitcoin's core design is not programmable, and its mining cost structure will lead to serious value leakage if there is any value added to the holder.
This is why, for Bitcoin, reliable is not the same as investable.
With that background out of the way, let's understand how BTC works, starting with historical returns.
What happened in 2016?
From 2013 to 2016, if you buy low and sell high, BTC returns about 6 times.
However, if you bought BTC at the 2013 high and sold it in 2016, you made nothing, zero.
After 2016, the situation is completely different. If you bought BTC in 2016 and held it until today, you earned 20 to 40 times. How about buying BTC at 2016 lows and selling at new 2021 highs? You earned 130 times.
Someone might protest,"Before 2016 was the dark age of cryptocurrency, it didn’t matter 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? What happened to Bitcoin before or around 2016 to create huge returns?
In fact, Bitcoin itself has not changed. After all, immutability is the characteristic of Bitcoin and part of its first-class reliability.
Of course, the Lightning Network was launched after 2016, but it hardly helped.
What else might have happened around 2016 to unlock Bitcoin's potential? Or, something that BTC gave birth to that we can't see and brought it to maturity in 2016?
first level title
BTC rides the Web3 ride
So, what happened?
In my opinion, the fact that best fits the historical narrative and data is that since 2016, every major catalyst in the cryptocurrency market has been driven by the promise or realization of Web3 applications, which Bitcoin does not support.
In 2016, a small project called ethereum, an effort to make public blockchains run as computers, started to wild success.
So far, BTC, in its recent bull run, has only been surfing a giant wave of actually useful stuff that the Ethereum community (and a few others) have created.
At this point, a Bitcoinist or cryptocurrency basket investor might reasonably retort: "Wait, if BTC is just a bystander, why are investors buying it? BTC dominance is about 38% today." "Are you kidding? 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.
first level title
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, providing no value accumulation to BTC holders. This makes BTC no income, especially considering the expensive cost of mining.
BTC has an annual inflation rate of approximately 2% until the 2024 halving. That sounds good, what could be wrong with just 2% inflation?
The issue is,Due to the economics of mining, inflation (issuance) in PoW is the most direct consumption of capital in valuing BTC.Coupled with the thin liquidity of the spot price, it means that the miners' selling of BTC has caused great damage to the market value of BTC.
In the medium term, on average, miners have to sell most of the BTC they earn because they need to spend up to $1 in hardware and energy costs to compete for $1 of BTC. This is a huge problem for BTC (and ETH before yesterday's merger), as selling X% of supply hurts market cap far more than X%.
Selling $1 of BTC could cost $5 to $20 in market capitalization, according to some estimates.
The open secret in cryptocurrencies is that you can't sell more than a fraction of the total supply at the spot price, order books are thin and liquidity is thin.
Therefore, not everyone can sell at today's price, then by definition, miners are using up scarce resources by constantly selling.
This means that,BTC miners may only be selling 2% of the total supply per year, but they receive far more than 2% of net fiat inflows per year.Since BTC fees are low and fully paid to miners, there are two very important effects 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 flat.In 2021, a daily net inflow of fiat currency of approximately $46 million is required to maintain BTC parity. In other words, I have this huge investment for you, and we only need $46 million a day in other people's new money to avoid losing our principal..."
2. When a BTC investor gets a 50% return, or 5x, or 40x, these profits can only come from new entrants.There is no meaningful fee income accruing to holders, nor any meaningful application on Bitcoin, and the price of BTC cannot keep itself flat due to the cost of mining, so, by definition, any No one buying BTC at new highs can make money on a sustainable basis.
social imbalance
Who would knowingly buy an unsustainable long-term investment? Who would recommend buying it? How did we end up with BTC dominating about 40% of the total cryptocurrency market cap of $3 trillion last year?
As far as I know, a handful 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 investment, some types of investors are mentioned below:
1. The first category, new entrants buying BTC.For example, senior hedgers, long-term institutional investors, ultra high net worth individuals and retail investors turning to Web3. These new entrants appear in Web3 - statistically, more during bull runs - they are all excited, they know that cryptocurrencies are new and complex, and they are reasonably proportioned to a basket of top cryptocurrencies assets.
Proportional is an investment term that, in this case, means"I'm going to buy things in proportion to today's market value."These newcomers are often the lambs of the future, slaughtered by BTC as an unsustainable investment.
2. The second category, long-term investors buy BTC.These people could be crypto OGs who got in 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 have confidence in where the space is headed, and they don't want people to think they're wrong. To make matters worse, these people are often pundits who have been instrumental in helping push new entrants into investing in BTC.
3. The third category, speculators buy BTC.They might all sell out by the next new high school. These are often the brightest, savviest, and/or hungriest of crypto OGs, VCs, and finance folks moving 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 crashed, it would mean huge losses for some of the biggest and most powerful investors in cryptocurrency, which could damage the entire space and their portfolios.
4. The fourth category, traders.They buy BTC and rotate the profits into BTC, the cryptocurrency’s de facto reserve currency. Traders just follow the trend and they know that in this current era, BTC performs better in bad times and worse in good times. Traders have very short time horizons and simply use BTC as a home base to play riskier games. In a way, traders are the most rational and/or least destructive of all BTC buyers.
5. The fifth category, BTC nativists.These are die-hard fans of BTC 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 necessarily translates into an excellent long-term investment and/or the best cryptocurrency investment to date on a risk-adjusted basis.
Of the five types of BTC buyers, only BTC nativists are expected to persist after the collapse of BTC dominance. Collectively, bitcoin buyers are playing one of the biggest speculative games in modern finance, and among them only those speculators have even an inkling of the nature of the game.
Granted, this breakdown of the kinds of BTC buyers is an oversimplification, but I think it's useful. Reading this, BTC nativists and skeptics may have grown more confident:
“Since you say BTC is doomed as an investment vehicle, why hasn’t ETH overturned BTC yet?"
Here's why: Numbers, here's why.
Historically, ETH miners have been paid much more than Bitcoin miners.If the two chains swapped cost structures, i.e. if BTC miners earned ETH miners' money, or vice versa, or if the merger was done two years ago, I think ETH's market cap would have surpassed that of BTC.
first level title
standing on the heavy shoulders of giants
If miner sell-offs matter — and they do, as above — then it also matters that ETH miners have been paid 2.5x to 4x more than BTC miners (normalized by market cap) over the past few years:
Last year, BTC miners were paid $16.6 billion, while ETH miners were paid $18.4 billion.
Conversely, if we swapped the cost structures of Bitcoin and Ethereum last year, ETH miners would have earned and dumped ~$6 billion, while BTC miners would have earned and dumped ~$50 billion.
This is a key point, so let me say it again:Last year, Ethereum miners earned and dumped $1.8 billion more ETH than Bitcoin miners dumped BTC.If we imagine reversing the cost structure between the two chains, in 2021 alone, BTC miners will earn and dump about $44 billion more BTC than Ethereum miners dump ETH.
To prove the point: in 2021, Ethereum is very expensive to run compared to Bitcoin, and if the situation were reversed, Bitcoin would need an additional ~$45.8 billion in net fiat inflows (i.e. new buyers of BTC), In order for the market capitalization of both chains to remain the same as it actually is today, all other things being equal.
first level title
no eternal king
What's next?
Ethereum moved to PoS from mergers, 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, due to the above reasons, I think ETH has a 99% probability of surpassing BTC, and 1% is unknown uncertain factors, for example, aliens appear and force us to use BTC as the only global currency.
first level title
fall of rome
That day will be explosive and spectacular.
Of course, we may only be briefly beyond. But zoom in on time, this is a one-way transition of BTC into the antiques of cryptocurrency investing.
Unfortunately, cryptocurrency and Web3 investors could lose heavily in BTC's slow decline and violent crash.
Today, the probability of surpassing is close to 50%.
first level title
What's in it for Crypto: A New Age of Health
I guess that eventually, many years from now, all of us, including most BTC owners today, will look back and see how naive it was to think that BTC could always be number one.
The fate of BTC will undergo earth-shaking changes, and finally become a living fossil of the encrypted world. And only after ETH becomes the first, the real healthy era of cryptocurrency will begin.
Original link
