The Merge that Could Cause a Flip: Could Ethereum’s Proof-of-Stake Transition Enable it to Finally Overtake Bitcoin?

The cryptocurrency market has entered a period of severe uncertainty in the wake of a disappointing end to a 2021 that promised to deliver so much. Last year was expected to play host to a blistering Bitcoin rally that would drive up coin values across the market. Whilst the first four months of the year delivered parabolic price action, each BTC rally ended in a collapse that would ultimately wipe 50% of the value of the asset off the market. 

Although Ethereum has spent the entirety of its existence in the orbit of the dominant BTC, the coin’s recovery from the summer’s market crash was far more comprehensive than Bitcoin, and the asset rallied to an all-time high value of $4,878.26 on November 10th. Despite a subsequent market downturn in the months that followed, investors have remained optimistic that the asset’s upcoming mainnet ‘merge’ will herald a new era of sustainability for ETH which may see it finally overtake the wildly popular BTC.

As the chart above shows, despite a shortening of the gap between BTC market capitalization and that of ETH, Bitcoin’s 42.16% market dominance is still more than twice the size of Ethereum’s 18.48%. However, the chart also shows that the gap between the two cryptocurrencies stood at less than 7% in mid-2017 – illustrating that a flip is more than possible. 

Many market commentators believe that Ethereum’s upcoming merge could provide the asset with its best chance in recent years of finally toppling Bitcoin’s dominance, but will it be enough to overpower the world’s favorite digital currency? 

Analyzing ‘The Merge’

At present, Ethereum is gearing up for its long-anticipated migration from a proof-of-work model which is commonly used by Bitcoin, to proof-of-stake, which is a far more efficient and sustainable way for cryptocurrencies to function. Rather than relying on significant mining computational power to verify transactions on ethereum’s blockchain, coin holders will instead ‘stake’ their coins to confirm transactions. 

“Enthusiasm has started to mount again as ethereum prepares for its long-awaited merge with Beacon chain, completing the protocol's transition to an energy-efficient proof-of-stake consensus mechanism,” said Will Hamilton, head of trading and research at Trovio Capital Management.

According to Web3 and Ambronite co-founder, Mikko Ikola, the energy consumption per transaction for ETH decreases by around 99% with the transition to a proof-of-stake model – making the cryptocurrency’s impact on the environment just a tiny fraction of that of Bitcoin. 

Such a move is expected to help Ethereum’s blockchain to host more NFT and DeFi projects in the future without having to incur significant fees, or leaving a damaging impact on the environment. 

Could Ethereum Surpass its Previous ATH in 2022?

Will the long anticipated ‘merge’ which is set to take place in the coming months cause an ETH price rally? Well, the answer is likely to become apparent in the immediate aftermath of Ethereum’s mainnet upgrade. 

At present, ETH can only handle around 15 transactions per second – an unsustainable number on a blockchain that’s become congested with NFT platforms and decentralized applications (dApps). The merge will not only help the platform to use 99% less power, but, most significantly, it will pave the way for Ethereum to process up to 100,000 transactions per second. 

As the world’s oldest cryptocurrency, Bitcoin couldn’t possibly keep up with such swift processing speeds. 

Due to the slow state of Ethereum, developers had created rival networks in Cardano and Solana, which were billed as scalable alternatives to ETH with far quicker speeds. If the merge can recapture Ethereum’s status as the world’s most popular blockchain, then the sheer volume of investor activity is likely to cause a significant price rally. 

Despite widespread optimism for the future of Ethereum, the asset is currently 36.5% adrift from its ETH/USD all-time high of $4,878, and even further from a target of $5,000 and beyond. For ETH to recapture its ATH in the immediate aftermath of the merge, the asset will likely close the market capitalization gap between itself and BTC in the process. 

However, given the sheer size of its dominance, Ethereum would likely need an upturn in BTC performance to help it on its way towards recapturing its all-time highs in the short term. Despite this, it’s highly likely that ETH will surpass its ATH in the future – even if it may be more of a case of years rather than months. 

Will ETH Overtake BTC?

At no point in its 13-year existence has Bitcoin ever been overtaken in terms of market capitalization. Though at the current stage in time, only Ethereum is in a position to steal BTC’s dominance. 

Despite Ethereum’s positive movements in the cryptocurrency landscape, Maxim Manturov, head of investment advice at Freedom Finance Europe, notes that Bitcoin’s adoption could be bolstered by new investment options – helping to keep the coin’s market capitalization higher despite a lack of agility in comparison to its younger counterparts. 

“You no longer need a crypto wallet in order to trade cryptocurrencies. In 2021, large funds have started rolling out ETFs with direct or indirect links to crypto assets. Some of the largest and most popular Crypto ETFs include ProShares Bitcoin Strategy ETF, Grayscale Bitcoin Trust (GBTC), Amplify Transformational Data Sharing ETF (BLOK) and Grayscale Ethereum Trust (ETHE),” Manturov noted. 

With this in mind, Bitcoin’s reputation as digital gold, and a store of wealth may continue to attract a sufficient number of investors to assure its dominance in the short term. However, Ethereum’s positive movements towards accommodating a greater array of dApps and NFT platforms is likely to ensure a prosperous future for the second-largest cryptocurrency on the market. Today may belong to Bitcoin, but there’s every chance the future will be Ethereum’s.