Why Ethereum perhaps could surpass Bitcoin

Ether is catching up on Bitcoin in big steps in terms of market capitalisation. The fact that this trend is likely to intensify also has to do with the changing monetary policy environment.

What has been observed for many months has been becoming even clearer for a few days: Ether clearly outshines his (still) big brother Bitcoin in terms of price performance. While the number one global cryptocurrencies has been listed roughly unchanged since the beginning of the week, Ether was able to increase almost 10 percent. The price discrepancy has been even clearer since the beginning of the year: +550 percent for Ether compared to +95 percent for Bitcoin. "Ether is preparing for its take off" the much-quoted crypto analyst Adrian Zduńczyk can be quoted these days.

A simple reason for Ether's massive outperformance against Bitcoin in 2021 is certainly due to the size and age of the respective cryptocurrencies. Despite its massive rally last year, Ether ($0.55 trillion) is still only half the size of Bitcoin ($1.1 trillion) in terms of market capitalisation. The larger an asset, the more it takes for price increases. Ether was launched in 2015, about six years later as Bitcoin. In addition, the token has only become known to a wider public about in the last 12 months.

For comparison: The young high-flyer token Solana did not start until 2019 and was able to increase an insane 11,000 percent in 2021 in the course of the general crypto hype. However, its market capitalisation is still only a “lame” $68 billion in comparison.

Ether - big winner of DeFi and NFT trend

But the reasons why Ether is increasingly surpassing Bitcoin - and will most likely continue to do so - are more diverse. The outperformance in 2021 is also largely due to the emergence of hype topics such as Decentralised Finance (DeFI) or Non-Fungible Token (NFT). The biggest difference between Ether and Bitcoin is that Ether is much more associated with the growth sectors of cryptocurrencies, including DeFi, NFT and the so-called Metaverse, said Stephane Ouellette, CEO of the crypto platform FRNT Financial to Bloomberg.

Background: The Ethereum network behind the Ether token is the dominant blockchain for thousands of decentralised applications. The growing popularity of decentralised financial services and crypto collector's items - another word for NFT - is thus fuelling the Ether rally. Specifically, NFT is unique, i.e. irreplaceable digital unique pieces. Examples would be memes or even the very first tweet from Twitter CEO Jack Dorsey, which was sold last March via the Ethereum platform for exactly 1630.58 Ether. This corresponded to about USD 2.9 million at the time.

Bitcoin is completely out of the agenda on all these topics, which are accompanied by a corresponding price fantasy. Reason: The use case of cryptocurrency number one is completely different. Unlike Ether, Bitcoin is primarily seen as a store of value - also called "Store of Value". So it is no coincidence that the oldest token in the world is repeatedly referred to as "digital gold".

Higher interest rates weigh on Bitcoin

Why Ether performs significantly better than Bitcoin these days, especially these days, also has to do with the monetary policy environment. Although Bitcoin is still clearly ahead in terms of market capitalisation. But if interest rates rise, the tide could turn in favour of Ether," write analysts from the US major bank JP Morgan in a recent market analysis. Bitcoin could therefore soon fall on its feet of the reputation as "digital gold".

JP Morgan warns: "The rise in bond yields and a possible normalisation of monetary policy are putting pressure on Bitcoin as a form of digital gold, just as higher real returns have put pressure on traditional gold." According to JP Morgan, if interest rates rise, you should rather invest in investments that have a stable value. Fed leader Jerome Powell had described inflation as a not temporary phenomenon on Tuesday. The Federal Reserve is therefore considering finishing tapering a few months earlier. This was seen as a sign that a normalisation of monetary policy could come faster than previously assumed.

Bitcoin with a long tradition

The Ethereum network with its use in the field of NFT, gaming and stable coins in the crypto market, on the other hand, is more attractive to a diversified portfolio than Bitcoin, according to JP Morgan analysts. The big bank believes that Ether's market capitalisation could exceed that of Bitcoin over the next five years.

However, it remains to be noted that even if Ethereum with its decentralised use provides quite justified price fantasies and should continue to provide, crypto-interested investors should not turn their backs on Bitcoin. No other token has such a long tradition and history - for crypto ratios - that has made Bitcoin a comparatively stable crypto investment. Although Bitcoin is likely to have less price potential than Ether in the short and long term, investors should be able to sleep at least a little more peacefully with the crypto oldie.