The Flippening: Will Ether Flip Bitcoin in the Next Year?

For years, supporters of Ethereum have yearned for “The Flippening,” the hypothetical (as of today) time when ether surpasses bitcoin's market valuation.

When else than during Ethereum's Merge？ It is one of the most important improvements in the history of cryptocurrencies since it replaces the energy-intensive, proof-of-work-based consensus with a proof-of-stake system.

In six days, Ethereum's Beacon Chain and its established mainnet are anticipated to merge.

But whether it's sufficient for ether to supplant bitcoin is a different matter. Given that both equities and cryptoassets have fallen by around 70% from their respective high in November, bullish sentiment would suggest that June is the bottom for both.

At slightly under $368 billion in market value, Bitcoin, which is currently trading at $19,000, accounts for 39% of the whole market for digital assets.

Ether trades for $1,600, and its nominal worth, at $196.4 billion, or little over one-fifth of the total market capitalization of all cryptocurrencies, is slightly more than half that of bitcoin.

Back of the napkin calculations reveal If ether reaches about $3,050, The Flippening would happen. However, this is only possible in the extremely unusual scenario that bitcoin's price doesn't change.

“The 'flippening' is merely a symbolic triumph for ETH maximalists, and may not be excessively meaningful for the industry as a whole,” Bobby Ong, co-founder of statistics service CoinGecko, told Blockworks.

According to Ong, ether is unlikely to surpass bitcoin in the next 12 months because both bitcoin (BTC) and ether (ETH) have been going in similar directions due to the macro environment, which is plagued by inflation.

Software iteration breeds bulls

Ether is aiming for another run at yearly highs against the price of bitcoin, demonstrating that markets value the Merge.

However, ether was considerably closer to eclipsing bitcoin five years ago, during the early stages of the previous bull-bear cycle. According to TradingView data, on June 12, 2017, the market value of ETH was nearly 84% that of BTC, with only $7.16 billion separating the two.

This value is now about 52% (anything above 100% indicates a flippening). The situation was even worse in January 2020, at the bottom of the previous bear market, with ETH worth only 11% of BTC ($15.4 billion to $146.7 billion).

Nonetheless, market valuations do not tell the whole story.

Comparing on-chain measures such as transaction count, protocol fees, and the number of active addresses among networks can also reveal information about their growth.

According to CoinGecko's Ong, Ethereum is ahead in terms of transaction count and protocol fees, as well as substantial dapp development. In terms of daily active addresses, it is also steadily catching up to Bitcoin.

However, the overall number of bitcoin users — active and inactive — far eclipsed ether's during the peak of the previous bull run.

According to a Crypto.com survey issued earlier this year, the number of Bitcoin users increased by 37.5% between July and December 2021, from 128 million to 176 million. On the other hand, only 23 million users had ether, a figure that increased by 1.4% during the same time period.

The transition to proof-of-stake on Ethereum may help improve those figures. Proponents claim that the Merge not only reduces Ethereum's energy consumption by more than 99% by switching from a GPU miner-based issuance model to one based on crypto-collateralized validator nodes (read: servers), but it also lays the groundwork for scaling the network's base layer more effectively.

According to the bull argument, this might help promote additional ecosystem growth and give an appealing investment opportunity to eco-conscious investors, including institutional investors.

“We anticipate fresh interest not only from construction projects on the platform, but also from investors.” Lachlan Feeney is the creator of Labrys, Australia's largest blockchain consultancy.

Nonetheless, large financial institutions continue to focus their exposures, for the most part, on bitcoin.

“This benefit cannot be overstated as institutional influence develops throughout the market,” said CoinGecko's Ong. “It remains to be seen whether ETH, or any other crypto, can threaten its market dominance in this arena.”

Cult of personality

In primary use cases, Bitcoin and Ethereum differ dramatically, differentiating their value propositions. The application scope of Bitcoin is limited: it is censorship-resistant money powered by peer-to-peer payments.

However, unlike Ethereum and a slew of layer-1 competitors, Bitcoin's architecture does not enable smart contracts by design. This effectively limits the use of bitcoin to micropayments and tips. (Do you recall the Lightning Network-powered Pollofeed？)

Even with Lightning, Bitcoin is less relevant to the larger Web3 crypto ecosystem.

This attracts Bitcoin to its “store of value” advertising pitch – consumers should hold their bitcoin rather than spend it like ether and other Ethereum-bound goods.

Some claim that the Bitcoin development community takes pleasure in its refusal to iterate as quickly as Ethereum, defying Silicon Valley's “move fast, break things” mantra.

The early resignation of Satoshi Nakamoto, the pseudonymous founder of Bitcoin, contrasts with Ethereum co-founder Vitalik Buterin's persistent gravitas among Ethereum crowds – another potential advantage to its value proposition.

“Vitalik really walked away from doing a lot of work on Ethereum around the end of the ICO boom,” Katie Talati, head of research at Arca, told Blockworks.

“And certainly, his opinion means a lot,” Talati added. He's not necessarily dictating the day-to-day, but I think having a guide helps.

Another aspect of Ethereum's proof-of-stake strategy is that it will eventually transform the token into a deflationary asset, which industry members believe will attract enormous demand.

Bitcoin's supply limit is well-known to be hardcoded at 21 million, whereas ether's floats. The protocol continuously changes the ETH issuance rate and quantity, with the network now burning transaction fees rather than paying them to validators.

More ether is sometimes burned inside a block than is issued, temporarily flipping the cryptocurrency from inflationary to deflationary – a phenomenon that is predicted to occur more frequently after the Merge.

Tell-tale signs of The Flippening unclear

Bitcoin issuance gradually declines, halving every four years – but its supply will never be formally reduced. At best, this imbues anti-inflationary qualities, which will be amplified after block rewards are reduced to zero next century.

Vivek Raman, BitOoda's head of proof-of-stake, argues that Bitcoin's flaws provide Ethereum an advantage in developing sustainable monetary policy, complete with significant network revenue to promote longevity.

“It's almost like a mathematical certainty,” Raman said of Ethereum flipping, estimating that it might happen a year after the upgrade. He claimed bitcoin's popularity stems from an early-mover advantage, which he attributed to Nakamoto's vision of a “pristine” digital asset.

According to Raman, Bitcoin's proof-of-work algorithm may eventually work against its value proposition, especially since mining incentives half every four years.

While decreasing issuance has not yet jeopardized the network's security paradigm, with enough miners on the network despite reduced payouts, they are nevertheless paid less over time. “This means that every four years, there's less and less incentive to mine,” Raman explained.

So, what are the warning indications of a potential Flippening？ One sign has been cited as rising open interest in ether futures: According to CoinGlass, there is currently $12.8 billion in BTC open interest vs $8.6 billion in ETH.

However, Raman believes that open interest is mostly a short-term indicator. In any case, increased open interest in ether futures may simply reflect interest in Ethereum's decentralized finance (DeFi) technologies.

“On top of Ethereum is decentralized finance.” So it has an economy running on it, and as a result, there is more leverage,“ Raman explained. ”If the system has more leverage, you'll see a lot more open interest from futures and options.“ But that's simply because there are more speculators and participants.”

Predicting the Flippening is a difficult task with no obvious clues and a suffocating macro backdrop.

It doesn't appear to be happening around the Merge — or even within the next year — but it's evident that the two networks, and their original digital assets, are about to split dramatically.

As a reminder, WikiBit is ready to help you search the qualifications and reputation of projects in a bid to protect you from hidden dangers in this risky industry!