Ecoinometrics - Ethereum, Bitcoin and the Flippening

September 06, 2021

Ethereum is on the rise. In just a few months its market cap jumped from 20% of that of Bitcoin to 50%. 

What’s driving the move? Is it sustainable? Is there going to be a flippening?

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Ethereum, Bitcoin and the Flippening

I guess we are at this time in the cycle where the good old question comes back: will Ethereum flip Bitcoin?

For those of you who don’t know what that means, it refers to the market cap of Ethereum overtaking the market cap of Bitcoin making the former the largest cryptocurrency on the block.

So how is that coming along?

First let me preface all this by repeating what I always say. Bitcoin and Ethereum aren’t in competition.

People tend to pit BTC and ETH against each other just because they are two cryptocurrencies. But really, you should know better.

Bitcoin competes in the store of value space. It is a digital native, Internet native store of value. The network is stable, the monetary policy is set in stone and it is great at doing what it does. In the store of value category Bitcoin’s competitors aren’t even close. 

Ethereum competes in the category of networks enabling web 3.0. On its own Ethereum would be mildly interesting. What is built on the network is what really matters. In this space Ethereum has many competitors but honestly none of them have the network effect to be a threat at this point. 

So simply put, you are not investing in the same thing when you buy Bitcoin and Ethereum. Maybe an easy way to think about it is:

  • Bitcoin is more like “funds are SAFU”. Think store of value, boring, reliable. 

  • Ethereum is more like “move fast and break things”. Think web 3.0, constant evolution, experimental.

The one thing Bitcoin and Ethereum have in common though is that, in the current phase, their growth is driven by adoption. That’s what gives you the exponential growth pattern.

The exponential part of the growth trajectory is interesting in itself. But since we are talking about flippening here, the more important aspect is the relative move of ETH vs BTC. 

And in that respect, the current cycle does not look exceptional when compared to the previous one. You can check out below ETH/BTC since Bitcoin’s 3rd halving (dark red) vs the same thing for the 2nd halving cycle (light red).

Yes ETH has risen vs BTC, but the question is whether or not this is sustainable. Because when you look at the evolution of the market cap of Ethereum we’ve seen two occasions where it got pretty close to match Bitcoin:

  • First was the ICOs boom of 2017. 

  • Second was the delayed crash in 2018 after  Bitcoin peaked at $20k.

See for yourself.

And arguably the ICOs boom has been so far the only time when ETH really decoupled from Bitcoin. But that was just one moment in time. 

After Bitcoin crashed and most ICOs under delivered you can see on the chart that Ethereum gave back way more of its market cap than BTC during the bear market.   

And since the bear market the correlation of these two cryptocurrencies has been off the chart. I.e. Bitcoin is in the driver’s seat.


Ok, so the ICOs movement wasn’t sustainable. But since the beginning of the year the market cap of Ethereum is gaining back against Bitcoin.

As I write those lines it sits pretty much at 50%. What’s the deal then?

Off the top of my head I can think of four factors:

  1. One BTC is worth around $50k these days. New people in the space might think it is “expensive” and worry that they have missed the boat. So they’d probably go for the next best “cheaper” thing which is ETH.

  2. Ethereum is in the (complicated) process of transitioning to Proof of Stake. In the PoS system you generate yield by staking ETH. A bunch of bigger fish are probably trying to accumulate as much as they can to live off the yield later on. That’s bound to put some buying pressure.

  3. DeFi is getting more mature and that’s attracting new players who buy ETH to get into the DeFi game. Still pretty complicated to interact with but progress is being made.

  4. NFTs are much easier to wrap your head around than DeFi for the general public. This is likely to bring new users to ETH with a pretty big addressable market.

Now “cheaper” is relative and as ETH climbs people will invariably turn to the next cheap thing. So I don’t think (1) is a sustainable factor.

(2) is the same. Once the transition to proof of stake is done (whenever that happens) the buying pressure will be much lower.

Which means we are left with DeFi and NFTs for potentially sustainable trends that could push Ethereum above Bitcoin in the long run.

Obviously these two have very different dynamics. We’ll need to do some deep dive in the data to see how robust those trends are and figure out how likely they are to survive a bear market.

But let’s finish by taking a step back to put things in context:

  • Bitcoin is up 6x since the halving. It topped at 29.5x last cycle.

  • Ethereum is up 21x since the halving. It topped at 120x last cycle.

If Bitcoin managed to pull a 29.5x again its market cap would be twice the size of Apple or half the size of the physical gold market.

If Ethereum managed to pull a 120x again its market cap would be equal to the market capitalization of Apple.

So regardless of what drives these two you’d be making an asymmetric bet by investing right now. What are you waiting for?

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