Rome is about to fall: why the merged Ethereum will surpass Bitcoin
Yesterday, Ethereum successfully completed the Merge.?
Since then, the token economy of Ethereum has changed completely.
ETH produced by Ethereum is much less.
The decrease in ETH supply has had a significant impact.
Ethereum generates more revenue and is profitable, which greatly improves its competitive position with the old brand asset Bitcoin.
Does this mean that the Flippening (i.e. the market value of Ethereum surpasses Bitcoin) is coming?
Is this good for cryptocurrencies?
Why is the Flippening good for cryptocurrencies?
The Flippening means that the market value of ETH will eventually exceed that of Bitcoin.
Of course, "ETH people" like me certainly hope that the Flippening can happen. After all, we all hold ETH.
However, despite our personal interests, is the Flippening good for cryptocurrencies?
Is there any problem with Bitcoin's first market value?
So far, isn't everything good?
If the Flippening may be beneficial to cryptocurrency, why hasn't it happened yet?
These problems are intertwined. Perhaps it is best to start with the details of BTC returns.
Reliable does not mean investable
BTC is the most reliable neutral asset. This is because the Bitcoin protocol is mature and will not change, and PoW substantially reduces the risk due to its simplicity and mature record.
Over the years, organized groups have unilaterally tried to modify the underlying code of Bitcoin and increase the size of its nodes for at least ten times, and BTC has withstood the test. No matter what the original intention of Nakamoto Cong is, the reliability of BTC has become its core internal value proposition.
However, the reliability of Bitcoin does not mean that the asset will retain its value or be denominated in purchasing power or legal tender. On the contrary, the core design of Bitcoin is not programmable, which has any value accumulation for the holder, and its mining cost structure leads to significant value leakage.
This is why, for Bitcoin, reliability is not equal to investability.
With that background in mind, let's learn how BTC works. First, let's look at the historical returns.
What happened in 2016?
From 2013 to 2016, if you buy low and sell high, the return rate of BTC is about 6 times. However, if you buy BTC at the high point in 2013 and sell it in 2016, you will get nothing.
After 2016, the situation is completely different. If you bought BTC in 2016 and hold it today, you have earned 20-40 times.
How about buying BTC at the low point in 2016 and selling it at ATH (the highest price) in 2021? You earned 130 times. It's quite good.
"But, brother," someone may protest, "2016 is the dark age of cryptocurrency. That doesn't count. We have just begun."
Are you sure that's all?
What happened around 2016 that led BTC to perform better in the following years?
What changes have taken place in Bitcoin before or around 2016, creating huge returns?
Bitcoin itself has not changed. After all, not changing is the characteristic of Bitcoin and its absolute reliable source. Of course, Lightning Network was launched after 2016, but it is hardly popular.
What else might happen around 2016 to unlock the potential of Bitcoin? Maybe the world sleeps on Bitcoin and wakes up for some reason?
Or maybe something of BTC is brewing out of our sight, and this milestone will be completed around 2016?
None of these explanations are reliable. The idea that Bitcoin will develop or release its potential in some way around 2016 cannot be explained by the narrative and figures we have seen in the past few years.
Bitcoin gets a ride on Web3
So what happened?
In my opinion, the simplest fact most consistent with historical narrative and data is that since 2016, every major catalyst in the cryptocurrency market has been driven by the commitment or implementation of Web3 applications, while Bitcoin does not support Web3 applications.
In 2016, a small project called Ethereum began to achieve great success. It strives to make the public chain a computer rather than an abacus.
The fact is that so far, at this stage of development, BTC has just taken advantage of the east wind to surf in the huge waves of really useful things created by the Ethereum community (and some other communities).
At this point, Bitcoin fanatics or holders may argue, "Wait, if it is so unimportant, why would investors buy BTC? The market value ratio of BTC is about 38%. Are you kidding? Do you think the market value of $400 billion is just a mistake?"
Yes, that is exactly what I want to say, and it will be proved below.
This is why BTC is not sustainable as an investment, why the Flippening is guaranteed, and why the Flippening is beneficial to cryptocurrency - because it will eliminate an investable asset as our industry leader.
Bitcoin fully meets the definition of unsustainable investment. If we carefully study Bitcoin's use of PoW, it is difficult to demonstrate that Bitcoin is sustainable in terms of value preservation or appreciation.
The transaction cost of Bitcoin is directly paid to the miners, which has no value to BTC holders.
This makes BTC permanently unprofitable, especially considering the expensive cost structure of mining.
?Please note that the total cost of Bitcoin may be too low to support a sustainable security budget, which may make the supply ceiling of 21 million a security issue, but this is another story.
BTC's annual inflation rate is 2% before halving in 2024.
That sounds good, doesn't it? What's wrong with inflation of only 2%?
The problem is that due to mining economics, the inflation (issuance) in PoW is the direct capital consumption of BTC valuation.
This, coupled with the lack of liquidity of spot prices, means that the miners' selling of BTC will do great harm to BTC's market value. Let's analyze
On average, in the medium term, miners must sell most of the BTC they earn, because to compete for $1 BTC, they need to spend the same $1 hardware plus energy costs.
This is a huge problem for BTC (and for ETH before yesterday's merger!), Because selling X% of the supply will hurt the market value much more than X%.
According to statistics, selling $1 BTC may damage the market value by $5 to $20.
The public secret in the crypto market is that you cannot sell a small part of the total supply at the spot price. The order book is very thin. Liquidity is weak. HODL, dude. Therefore, even if not everyone can sell at today's price, by definition, miners are consuming scarce resources by constantly selling.
That is to say, BTC miners may only sell about 2% of the total supply each year, but their net inflow of French dollars each year exceeds 2%. Moreover, because BTC's cost is always very low and will be paid to the miners in any case (leading to selling), these facts have had two very important impacts, which are also ignored by many BTC holders:
Some people have to buy a lot of BTC every day to keep the price flat. In 2021, a net inflow of about 46 million French dollars will be required every day to keep the BTC price flat. In other words, "I have a good investment introduction. We only need 46 million dollars of new capital every day to avoid losing our principal..."
When BTC investors get 50% or 5 times or 40 times of returns, these profits can only come from new entrants. The holder does not generate meaningful fee income, nor does it have meaningful Bitcoin applications. Because of the mining costs, the price of BTC cannot remain stable. Therefore, according to the definition, anyone who buys BTC at ATH cannot make money on a sustainable basis. An average return of 0% is impossible.
Who intentionally buys unsustainable long-term investments? Who would recommend it? Last year, BTC accounted for about 40% of the total market value of US $3 trillion cryptocurrency. How did it do that?
In short - cryptocurrency boomers like me seem to like this reference - no one is fired for buying IBM.
As far as I know, a few different types of buyers may have promoted capital to enter BTC. Everyone has their own reasons, but most people do not know the real risk of their investment.
First, new entrants buy BTC. These people may be experienced traders from traditional hedge funds to web3, old institutional investors, ultra-high net worth individuals and ordinary retail investors. These new entrants appeared on web3 - from the data point of view, they were basically in the bull market - and they were very excited. They knew that cryptocurrency was novel and complex. They saw that we were on a long-term journey to the moon, and they would probably allocate their funds to a basket of top-level cryptocurrency assets in proportion. "Proportional" is an investment term. In this case, it means "I don't understand anything. I will buy according to the current market value ratio." These entrants are often the lambs of the future and the targets of BTC as an unsustainable investment.
Second, long-term configurators purchase BTC. These people may be cryptocurrency OGs who have enjoyed early investment returns, or cryptocurrency VCs who have more relationships and capital. For example, they are willing to cultivate independent investment theories. These people buy BTC because they do not have or do not want to build confidence in the development direction of this field, and they want to avoid getting into trouble in the theory that they think is risky. What's worse, these long-term asset allocators are often authorities, and they have played an important role in helping promote new entrants to BTC.
Third, greedy wolves buy BTC. But they may also sell all at the next ATH. These people are often the smartest, shrewdest and most desirous cryptocurrency OG, VC and financial people who turn to Web3. They usually know that BTC is not the best performing investment. However, they feel that for the greater benefit (that is, often their benefit), we must avoid damaging the good status quo and strive to promote Bitcoin. They felt that if BTC collapsed, it would mean a huge loss for the largest cryptocurrency investor, which might damage the entire industry and their investment portfolio. Therefore, they tend to procrastinate. Some people may question their existence or think they are just traders. But I have seen some stubborn people who fit these characteristics very well.
Fourth, traders buy BTC and convert profits into BTC as the de facto reserve currency of cryptocurrency. Traders just follow the crowd - literally. They know that in this era, BTC performs better in bad times and worse in good times. The time span of traders is very short. They just take BTC as a base camp to play games with greater risk. To some extent, traders are the most rational and least destructive of all BTC buyers.
Fifth, BTC's "true love" buys BTC. These are hardcore Bitcoin enthusiasts who really believe that BTC is the most reliable money in the world history. They not only believe that BTC has first-class reliability, but also believe that this reliability will inevitably translate into excellent long-term investment and the best cryptocurrency investment based on risk adjustment so far.
Here's the thing - among the five BTC buyers, only true fans can persist after BTC loses its dominant position. In general, Bitcoin buyers are experiencing the largest reflexive game in modern finance. Among these people, only referential wolves (the third type) have some idea of the nature of the game.
Of course, it is too simple to classify BTC buyers in this way, but I think it is useful.
After reading this, BTC diehard fans and the Flippening skeptics may have been full of confidence.
"That's funny. The water is wet, and the sun rose this morning. The smooth minded ETH bull said that we were all wrong, and BTC was doomed to fail as an investment tool.
So why hasn't the Flippening happened yet? "
Let me explain: numbers are the reason.
Historically, the income of ETH miners is much higher than that of Tet coin miners. If the cost structures of the two chains are interchangeable, that is, if the income of BTC miners is the same as that of ETH miners (or vice versa), or if the merger is ready two years ago, I think the Flippening may have occurred.
Let's explore these figures
Standing on the heavy shoulders of giants
If the miners' selling is important - and indeed, as has been said above - then in the past few years, it is also important that the income of ETH miners is 2.5 to 4 times higher than that of BTC miners (after normalization by market value).
Last year, BTC miners earned $16.6 billion, while ETH miners earned $18.4 billion.
If we exchange the cost structure of Bitcoin and Ethereum last year, ETH miners will earn and sell about $6 billion, while BTC miners will earn and sell about $50 billion.
This is a key point, so let me emphasize again: last year, ETH earned and sold by Ethereum miners was 1.8 billion dollars more than BTC sold by Tet coin miners. If we swap the cost structure between the two chains, in 2021 alone, BTC miners will earn and sell about $44 billion more BTC than ETH miners sell (50 billion minus $6 billion).
To prove this, in 2021, the operating cost of Ethereum will be so high compared with Bitcoin that if the cost is swapped, and other conditions remain unchanged, Bitcoin will require an additional net inflow of about 45.8 billion dollars (that is, a new buyer of BTC), so that the market values of the two chains remain the same as today's reality.
From $1.8 billion of Bitcoin to $44 billion of Ethereum, we got $45.8 billion.
These very large numbers - in particular, compared with its market value, ETH is facing greater selling pressure from miners - are the key driving factors leading to the fact that the Flippening has not yet occurred.
The non-existent emperor
What happens next?
Ethereum has eliminated the risk of selling by miners and shifted from merger to PoS.
We are now on the road to profitability. Through the expansion of Layer2, Web3 is also being popularized globally.
Ethereum has become a positive and productive economy.
In the next few years, due to the above reasons, I think that ETH may exceed BTC's market value by 99%. 1% is an unknown uncertainty - tail risk: for example, aliens appear and force us to use BTC as the only global currency.
The profitability of ETH, the low cost of validation, the huge growth of dapp, and the good atmosphere brought by the benevolent and credible neutrality will enable our industry to enter a post BTC era through the Flippening.
The fall of Rome
The day of The Flippening will be explosive and spectacular.
Of course, in a short time, the Flippening may be released after the occurrence. However, in the medium term, this is a one-way transition for BTC to become an antique of cryptocurrency investment.
Unfortunately, many well intentioned cryptocurrency and Web3 investors are likely to lose heavily in the slow decline and violent collapse of BTC.
In short, Ethereum is currently in the initial cost structure of PoS, and there are also expansion challenges (L2 ecology has not yet begun to fully bloom). Therefore, Bitcoin's ability to maintain its current market share of about 40% depends on these reasons, which is highly reflexive.
Today, the Flippening ratio is slightly below 50%.
As the market value of ETH to BTC rises slowly, we will encounter a breakthrough point. Prediction will become common sense. Then, the Flippening ratio will jump from 70% to 100%, or 80% to 120% in one day. Say goodbye to the era of BTC.
Why the Flippening is good for cryptocurrencies: a new era of health
I guess that in the end, many years later, all of us, including most of today's BTC holders, look back on the past and see how foolish it is to think that BTC can keep the first place.
BTC is naturally an unsustainable investment, and because there is no application layer and important revenue prospects, it will always be the case.
BTC mining will never be environmentally friendly, even if a large part of mining comes from green energy.
BTC takes up capital, attention, especially currency premium, which can be transferred to Ethereum and other ecosystems to improve the world more directly and actively.
The Flippening is expected, because BTC not only cannot accumulate value, but also discloses value. The Flippening is a good thing for cryptocurrencies, because it is unstable and unhealthy to have a non investable and diluted asset as the industry leader, and we need a stable and healthy investment environment for Web3.
My view of the Flippening has not changed in the past two years.
1/ ETH/BTC flippening explained at a mechanical level.
Compared to ethereum' s proof of stake, bitcoin' s proof of work is too expensive. Here' s why.
— ryanb. eth??? (@ryanberckmans) October 30, 2020
BTC's destiny is to become a respectable pet stone through the Flippening.
It is the most original digital collection. Maybe then I will buy some and put them in the display cabinet.
After the Flippening, the real healthy era of cryptocurrency will begin.
In an environment-friendly era, with a streamlined cost structure, we can make profits from valuable applications. Web3 has developed into a global phenomenon, and Ethereum has become a global settlement layer - a fair competitive environment for all mankind.
Original author: Ryan Berckmans, article from Bankless, compiled by DeFi
Source: DeFi Way