The Flippening: When will Ethereum overtake Bitcoin?

Ethereum’s market value passing up Bitcoin’s may not be a matter of if, but when. Dr. Kosrow Dehnad and Joe Duncan offer a predictive model.

There are competing factors that favor one cryptocurrency over the other. For example, the supply of Bitcoin is limited — which drives up BTC’s value. In the case of Ethereum, the blockchain’s smart contract capability can be the source of new innovation that could increase its use cases and the value of its native cryptocurrency Ether.

At this time, the market value of Ethereum is US$347.3 billion, or about 45% that of Bitcoin’s US$779.3 billion. To assess the probability and time frame for Ethereum’s market value exceeding that of Bitcoin’s — also referred to as “the flippening” — we examine the design of both protocols and factors that underlie historical market performance.

As we have mentioned in our book “Blockchain Investor Manual: The Complete Guide to Blockchain Fundamentals, Trading and Investing,” the main uses of money are medium of exchange, store of value and unit of account. Clearly there is some correlation between being a medium of exchange and store of value, since cryptocurrency is similar to fiat currency with the difference that they do not have the backing of governments. This means that the value of a cryptocurrency solely depends on the fact that people value it.

In the case of Bitcoin, since its supply is limited, some of its value comes from its scarcity, a property — similar to antiques and works of art — that can also act as an inflation hedge. But the current limitation of Bitcoin’s blockchain managing about seven transactions per second severely disadvantages it versus fiat processors like Visa, which can manage more than 60,000 transactions per second at peak times. Consequently, at the current state of technology, Bitcoin is too slow to be a true medium of exchange. Another factor is divisibility, which could become a major issue if the per coin price of Bitcoin becomes very large versus Ethereum, which has a circulating supply more than six times greater than Bitcoin and also goes out to 10 more decimal places. Given the fact the programming script of Bitcoin by design is not Turing-complete and does not support smart contracts, BTC’s main attraction as an asset is its scarcity.

Ethereum, on the other hand, is Turing-complete — which, while making its smart contracts vulnerable to hacking, makes it possible to innovate and create new products or services that people value. And these innovations that reside on the Ethereum blockchain will use some portion of Ether to transact as a medium of exchange — which increases the demand and value of Ethereum. A case in point is the non-fungible token (NFT) that is used for artwork where, for example, the artist Mike Winkelmann (a.k.a. “Beeple”) sold a work last year for US$69 million. According to Market Decipher and Statistica, the combined annual revenue in the art and collectibles markets is about US$436 billion. According to our calculations, the NFT use-case on Ethereum captures 10% of those combined markets, it could increase the market value of Ethereum by about 12.5%.

Innovation cycle

History supports the conclusion that the frequency of arrival of innovations on Ethereum and the expected market value of these innovations can be one of the main drivers of Ethereum’s relative market value. A brief summary of the breakout innovations so far starts with the initial coin offering (ICO) boom of 2017. According to Statistica, in 2017 ICO’s went from a first-quarter volume of US$10 million and rapidly increased throughout the year before peaking in the first quarter of 2018 at US$6.9 billion. Although not as dramatic a growth rate as the ICO boom of 2017, the next major innovation to breakout were decentralized finance (DeFi) applications like Uniswap and Aave. These applications and others enabled swapping and lending Ethereum-based tokens without the need for centralized exchanges like BitMEX and Binance. Quantified in total value committed (i.e. “locked”) within the applications, it more than doubled in 2019, according to DeFi Rate. Approximately two years later came the next breakout with the massive increase in price and volume of NFTs. According to CryptoBriefing.com, volume on the Ethereum-based and largest overall NFT marketplace OpenSea.io surpassed US$14 billion in 2021, or 646 times over the year prior. The NFT breakout was far more dramatic than DeFi and more closely aligned with the ICO boom of 2017.

In the chart below tracking Ethereum’s market value as a percentage of Bitcoin’s, we can see the relationship between the magnitude of the breakout innovation and its impact on Ethereum’s market value. For example, the dramatic rise of NFTs in 2021 was accompanied by an increase in Ethereum’s relative value from 18% at the beginning of the year to more than doubling by year-end to 44%.

Ethereum Market Value as a Percent of Bitcoin’s Market Value

Predicting the next breakout use-case application is challenging, even for Ethereum’s founder Vitalik Buterin, who has tweeted that NFTs were the biggest surprise use case for Ethereum. However, given the relative flexibility of Ethereum’s offering and observable 2-year innovation cycle, we can expect to see more such breakouts in the future.

Flippening forecast model

We use the frequency of such innovations and their average value to estimate the time when Ethereum market value will catch up with that of Bitcoin. In the following graph the x and y-axis are the frequency of arrival of new innovation and their percent impact on the value of Bitcoin. The z-axis is an estimate of the time that it will take for Ethereum to catch up with Bitcoin.

In an optimistic scenario where innovations arrive approximately every year with a 20% impact on the value of Ethereum, we estimate Ethereum will catch up with Bitcoin in slightly less than five years. On the other hand, if major innovations occur at a slower pace of approximately every three years and with a lower impact on Ethereum value at only 5%, then it will take about nine years for the market value of Ethereum to catch up with that of Bitcoin.