While Bitcoin has already doubled its previous all-time high, Ethereum has yet to surpass its record from three years ago.
The relationship between Ethereum and Bitcoin is rather intricate. In the early days, there seemed to have been this notion that Bitcoin and Ethereum are in competition with one another. However, such a notion comes from a place of confusion about the key ways in which Bitcoin and Ethereum differ.
We have addressed this in a previous post, but the main point is that Bitcoin has developed into an instrument to hedge against economic turmoil, a store of value and in the future it might function as a reserve currency in the crypto space as well as a means of payment. Ethereum, however, is a smart contract platform that enables developers to build projects and launch tokens, and Ethereum is simply a utility tokens that keeps the machine running.
It’s often been said that if Bitcoin is digital gold, then Ethereum is digital oil.
Why is Ethereum not following Bitcoin to new highs?
As the crypto markets continue to mature and projects start to carve out their own niche and valuation logic, we can expect to see market dynamics change as well. Assets do not develop in a vacuum, but in relation to one another.
If we look at the past year, we can see that while Bitcoin and Ethereum are still positively correlated, that correlation has gone down, which is obviously reflected in recent price action.
One of the possible reasons why Bitcoin has thrived in comparison to Ethereum is that Bitcoin has begun to benefit from institutional support, with major corporations like Square, MicroStrategy and others buying into Bitcoin.
Ethereum can also claim some of that institutional support. For example, crypto asset manager Grayscale that caters to institutional investors also offers exposure to Ethereum and now holds around $3.62 billion USD . Its holdings in Bitcoin, however, exceed $22 billion USD.
But while for Bitcoin we might look at discussions around inflation and the extent to which Bitcoin is being sought for hedging, with Ethereum the conversation should be around decentralized finance (DeFi) and other use cases where Ethereum plays a pivotal role.
For example, if we look at DeFi – all built on top of Ethereum – we can see that from a little over $600 million USD at the start of last year, now more than $24 billion USD worth of crypto is locked up in contracts and liquidity pools.
Looking at these figures, many YouTubers and other influencers are claiming that Ethereum is destined to overtake Bitcoin (known as the flippening), and while no one knows what may happen in the future, we believe it’s more useful to take a measured approach without getting carried away too far into speculative territory. It is always best to assess things on their own merit, in a befitting context.
So just as with oil and gold, we would not simply place them alongside one another, but rather look into industry specific metrics.
When it comes to Ethereum, serious investors will not only rely on technical analysis but will place such analysis against the backdrop of fundamental analysis as well, which in the case of Ethereum means considering upgrades and roadmaps.
As we learn from a previous article on Ethereum, the plan has always to roll out more features and capabilities and this year, 2021, is also expected to see steps taken towards Ethereum’s big upgrade to 2.0 – or Serenity.
Specifically, ETH 2.0 refers to a set of interconnected upgrades that will make Ethereum more scalable, more secure, and more sustainable. These upgrades are being built by multiple teams from across the Ethereum ecosystem.
- Scalability: Ethereum needs to support 1000s of transactions per second, to make applications faster and cheaper to use.
- Security: Ethereum needs to be more secure. As the adoption of Ethereum grows, the protocol needs to become more secure against all forms of attack.
- Sustainability: Ethereum needs to be better for the environment. The technology today requires too much computing power and energy.
Investors need to pay close attention to how these upgrades play out and how the response is of the community.
In addition, since Ethereum is a smart contract platform, it should be assessed against other platforms/tokens such as RSK, ARDR, MATIC, TLOS, EOS, ALGO, XTZ, AVA, ADA, and ATOM. But perhaps, more significantly, investors need to pay close attention to the dynamic between Polkadot (DOT) and Ethereum. Over the coming months, we’re going to have to see if these two protocols will complement each other or vie with one another.
Ethereum is now on the brink of breaking its long standing record at $1432 USD. Will it go above and beyond?
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