Why do we think ETH is good for the encryption market when it surpasses BTC?
If ETH surpasses BTC, will it benefit the whole encryption market? What's the problem with BTC being the boss? So far, isn't that good? If it's good for cryptocurrency, why hasn't it happened yet?
By Ryan Berckmans
Compiled by: Deep Tide TechFlow
The merger has ended, and Ethereum token economics has undergone tremendous changes, and the supply of ETH has decreased significantly.
Ethereum is generating more revenue and has greatly improved its position in the competition with BTC.
So, does this mean that the market value of ETH will eventually exceed that of BTC?
Of course, people like me who own ETH hope to have such changes, but in addition to our personal economic interests, is this good for the whole cryptocurrency? What's the problem with BTC being the boss? So far, isn't that good? If it's good for cryptocurrency, why hasn't it happened yet?
These issues are intertwined, and it may be better to study the details of BTC returns in depth.
Reliable is not equal to investable
BTC is the most reliable neutral asset. This is because the Bitcoin protocol is mature and will not change, and work has proved that its simplicity and mature record also substantially reduce risks.
Over the years, it has withstood dozens of failed attempts by some organizations to unilaterally modify the underlying code of Bitcoin and increase the size of its nodes. 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 maintain its value or accumulate its value in terms of purchasing power or legal currency.
On the contrary, the core design of Bitcoin is not programmable, which adds any value to the holder, and its mining cost structure will lead to serious value leakage.
This is why, for Bitcoin, reliability is not equal to investability.
With this background in mind, let's begin to understand the working principle of BTC from the historical returns.
What happened in 2016?
From 2013 to 2016, if you buy low and sell high, the return of BTC will be about 6 times.
However, if you buy BTC at the high point in 2013 and sell it in 2016, you won nothing.
After 2016, the situation is completely different. If you bought BTC in 2016 and held it today, you earned 20-40 times. How about buying BTC at a low point in 2016 and selling it at a new high in 2021? You earned 130 times.
Some people may protest, "Before 2016, there was a dark era of cryptocurrencies. At that time, it didn't matter. We just started."
Are you sure this explains everything?
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?
In fact, Bitcoin itself has not changed. After all, it is a feature of Bitcoin and part of its first-class reliability.
Of course, Lightning Network was launched after 2016, but it did little to help.
What else may have happened around 2016 to unleash the potential of Bitcoin? Or, what can BTC breed that we cannot see, and make it mature in 2016?
These explanations are unreliable. The idea that Bitcoin will evolve or release its potential in some way around 2016 cannot be explained by the narrative and figures we have seen in the past years.
BTC gets a ride on Web3
So, what happened?
In my opinion, the 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, which Bitcoin does not support.
In 2016, a small project called Ethereum began to achieve great success. It tried to make the public blockchain run as a computer.
So far, BTC has only surfed in the waves of practical and useful things created by the Ethereum community (and some other communities) in the recent bull market.
At this point, bitcoin theorists or cryptocurrency basket investors may reasonably argue: "Wait, if BTC is just a bystander, why should investors buy it? Today, BTC is about 38% dominant." "Are you kidding? Do you think the market value of $400 billion is just a mistake?"
Yes, this is exactly what I said, and I will try to prove it below.
This is why BTC is not sustainable as an investment, why it is possible for ETH to exceed BTC in market value, and why it is beneficial for cryptocurrency - because it will eliminate a non investable asset as the leader of our industry.
Bitcoin fits well with the definition of unsustainable investment.
If we carefully study the use of Bitcoin for proof of work, it is difficult to question the sustainability of Bitcoin in terms of value retention or accumulation.
The cost of Bitcoin is directly paid to the miners, without any value accumulation for BTC holders. This makes BTC have no income, especially considering the high cost of mining.
The annual inflation rate of BTC before halving in 2024 is about 2%. That sounds good. What's wrong with only 2% inflation?
The problem is that due to the economy of mining, inflation (issuance) in PoW is the most direct capital consumption for BTC valuation. In addition, the liquidity of spot price is thin, which means that the miners' selling of BTC will do great harm to the market value of BTC.
In the medium term, on average, miners must sell most of the BTC they earn because they need to spend up to $1 in hardware and energy costs to compete for $1 in BTC. This is a huge problem for BTC (it was also true for ETH before yesterday's merger), because the sale of X% of the supply will do far more harm to the market value than X%.
According to some estimates, selling a $1 BTC may result in a market value loss of $5 to $20.
The public secret in cryptocurrency is that you cannot sell a small part of the total supply at the spot price. The order book is thin and the liquidity is weak.
Therefore, 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 2% of the total supply each year, but their net inflow of legal coins each year is far more than 2%. Since BTC costs are very low and will be paid to the miners in full, there are two very important impacts that may be ignored by many BTC holders:
1. On average, someone must buy a lot of BTC every day to keep the price stable. In 2021, a net inflow of about 46 million francs will be required every day to maintain the parity of BTC. In other words, I have this huge investment for you. We only need 46 million dollars of other people's new capital every day to avoid losing our principal... "
2. When a BTC investor gets 50% return, or 5 times, or 40 times, these profits can only come from new entrants. No meaningful fee income is accrued to the holder, and no meaningful application is available on Bitcoin. In addition, because of the cost of mining, the price of BTC cannot maintain its own stability. Therefore, according to the definition, anyone who buys BTC at a new high cannot make money on a sustainable basis.
Who intentionally buys an unsustainable long-term investment? Who would recommend it? Last year, BTC reached a total cryptocurrency market value of $3 trillion with a dominant position of about 40%. How did we end up?
As far as I know, a few different types of buyers may be responsible for promoting capital into BTC. Everyone has their own reasons, and most people do not know the real risk of their investment. Here are some types of investors:
1. Category I: new entrants purchase BTC. For example, senior hedgers, long-term institutional investors, ultra-high net worth individuals and retail investors who turned to Web3. These new entrants appeared on Web3 -- statistically speaking, more during the bull market run -- they were all excited. They knew that cryptocurrency was novel and complex, and they were reasonably allocated to a basket of top-level cryptocurrency assets in proportion.
Proportional is an investment term. In this case, it means "I will buy according to today's market value." These new entrants are often the lambs of the future and the slaughtering targets of BTC as an unsustainable investment.
2. Category II: long-term investors purchase BTC. These people may be the cryptocurrency OG that entered early, or the cryptocurrency VC that has more relationships and capital. These people buy BTC because they really do not have and/or do not want to build confidence in the direction of development in this field, and they do not want people to think their views are wrong. What's worse, these people are often authoritative people who have played an important role in helping new entrants to invest in BTC.
3. Third, speculators buy BTC. They may sell them all in the next new high school. These are usually the smartest, shrewdest and/or most thirsty people among the crypto OG, VC and financial personnel who turned to Web3. However, they feel that for the sake of greater interests (often their interests), they must avoid disputes and should strive to promote Bitcoin.
They feel that if BTC crashes, it will mean huge losses for some of the largest and most powerful investors in cryptocurrencies, which may damage the entire space and their portfolios.
4. The fourth category is traders. They buy BTC and rotate profits to BTC as the de facto reserve currency of cryptocurrency. Traders just follow the trend. 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 a more risky game. To some extent, traders are the most rational and/or least disruptive of all BTC buyers.
5. The fifth category is BTC natives. These are the loyal fans of BTC, who believe that BTC is the most reliable currency 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/or the best cryptocurrency investment on a risk adjusted basis to date.
Among the five BTC buyers, only BTC natives hope to persist after the collapse of BTC's dominance. In general, Bitcoin buyers are playing one of the largest speculative games in modern finance. Among these people, only those speculators have some idea of the nature of the game.
Admittedly, this segmentation of BTC buyer categories is too simple, but I think it is useful. After reading this, BTC natives and skeptics may have doubled their confidence:
"Since you say that BTC is doomed to fail as an investment tool, why hasn't ETH done anything about BTC“
This is because: number, this is the reason.
Historically, ETH miners have been paid much more than Tecan miners. If the two chains exchange the cost structure, that is, if BTC miners earn money from ETH miners, and vice versa, or if the merger was completed two years ago, I think the market value of ETH has surpassed that of BTC.
Let's explore these numbers
Standing on the heavy shoulders of giants
If the miners' selling is important - indeed, as mentioned above - then in the past few years, it is also important that ETH miners' compensation is 2.5 to 4 times more than that of BTC miners (after normalization by market value):
Last year, BTC miners received US $16.6 billion, while ETH miners received US $18.4 billion.
On the contrary, if we exchanged the cost structure of Bitcoin and Ethereum last year, ETH miners would earn and sell about $6 billion, while BTC miners would earn and sell about $50 billion.
This is a key point, so let me say it 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 imagine to reverse the cost structure between the two chains, in 2021 alone, BTC miners will earn and sell about $44 billion more BTC than ETH miners sold.
To prove this: In 2021, Ethereum will have a very high operating cost compared with Bitcoin. If the situation reverses, Bitcoin will need an additional net legal currency 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, and all other conditions remain unchanged.
These extremely large numbers - especially ETH, compared with its market value, the selling pressure of miners is greater - is a key driving factor for surpassing what has not yet happened.
There is no eternal king
What happens next?
Ethereum turned to PoS from merger, eliminating the dumping of miners. We are now on the road to positive income, expanding together with L2, and Web3 is becoming universal.
Ethereum has become a positive and productive economy.
In the next few years, due to the above reasons, I think ETH has a 99% probability of surpassing BTC, and 1% is an unknown uncertainty. 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 credible neutrality will make our industry enter a post BTC era.
The fall of Rome
That day will be explosive and spectacular.
Of course, we may only have a brief transcendence. But to enlarge the time, this is a one-way transition for BTC to enter the cryptocurrency investment antiques.
Unfortunately, cryptocurrency and Web3 investors may lose heavily in the slow decline and violent collapse of BTC.
Today, the probability of surpassing is close to 50%.
With the gradual rise of ETH to BTC, we will encounter a breakthrough point, and then the surpassing ratio will jump from 70% to 100%, or 80% to 120%, or any final result, to bid farewell to the era of BTC.
What is the benefit of cryptocurrency: a new era of health
I guess that in the end, many years later, all of us, including most BTC owners today, will look back and see how naive it is to think that BTC can always be the first.
The fate of BTC will undergo earth shaking changes and eventually become a living fossil of the crypto world. Only after ETH becomes the first, the real healthy era of cryptocurrency will begin.
In an era of environmental friendliness, a streamlined cost structure, and making profits from valuable applications, Web3 will become ubiquitous all over the world, and Ethereum will become the global settlement layer - an era of fair competition for all mankind.