Crypto Quill

Ethereum, the second-largest cryptocurrency by market capitalization, has been gaining momentum against Bitcoin, the leading digital asset, in the past few days. Ethereum’s native token, Ether (ETH), has risen by more than 20% versus Bitcoin (BTC) since Feb. 12, reaching a six-month high of 0.0587 BTC on Feb.

The surge in ETH/BTC comes amid growing expectations that the U.S. Securities and Exchange Commission (SEC) will approve a spot Ether exchange-traded fund (ETF) by May of this year. An ETF would allow investors to gain exposure to Ether without having to buy or store the cryptocurrency directly, potentially boosting its demand and liquidity.

Ethereum Leads in Innovation and Use Cases

One of the main reasons why Ethereum is outshining Bitcoin is its superior innovation and versatility. Ethereum is a programmable blockchain platform that enables developers to create various decentralized applications (DApps) for different purposes, such as finance, gaming, art, identity, and more.

According to the State of the DApps website, there are over 7,300 DApps built on Ethereum, compared to only 21 on Bitcoin. Ethereum also hosts most of the decentralized finance (DeFi) platforms, which offer various financial services such as lending, borrowing, trading, and investing, without intermediaries. The total value locked in DeFi protocols on Ethereum is currently over $37 billion.

Ethereum also supports non-fungible tokens (NFTs), which are unique digital assets that represent ownership of various items, such as art, music, collectibles, and even tweets. NFTs have exploded in popularity in recent months, with some selling for millions of dollars. The largest NFT marketplace, OpenSea, runs on Ethereum and has recorded over $95 million in trading volume in February

Ethereum Offers More Yield and Utility

Another factor that makes Ethereum attractive to investors is its ability to generate yield and utility. Ethereum users can earn income by staking their ETH tokens in the network’s proof-of-stake consensus mechanism, which secures and validates transactions. Stakers can earn up to 8.6% annualized returns, depending on the amount of ETH staked and the network’s inflation rate.

Ethereum users can also earn fees by providing liquidity and services to various DApps and platforms on the network. For example, users can lend their ETH and other tokens on platforms like Aave and Compound and earn interest. They can also trade their tokens on decentralized exchanges like Uniswap and SushiSwap and collect a portion of the trading fees.

In contrast, Bitcoin offers no such yield or utility to its holders. Bitcoin users can only benefit from the price appreciation of the asset, which depends largely on supply and demand. Bitcoin’s supply is limited to 21 million coins, which creates scarcity and drives up its value. However, Bitcoin’s demand is influenced by various factors, such as institutional adoption, regulatory developments, media attention, and investor sentiment.

Ethereum’s utility, on the other hand, is reflected by the amount of ETH that is locked in smart contracts, which are self-executing agreements that power DApps and platforms on the network. According to Glassnode, nearly 35% of the circulating supply of ETH is held in smart contracts, providing services, liquidity, and economic security throughout the ecosystem. This makes ETH a more capital-efficient asset than Bitcoin, which often leaves the Bitcoin blockchain to find yield within the Ethereum network.

Ethereum Has Stronger Network Effects and Financials

Ethereum also boasts stronger network effects and financials than Bitcoin, which could further boost its value proposition. Network effects refer to the phenomenon where the value of a network increases as more users join and interact with it. Ethereum has larger network effects than Bitcoin due to the amount of value locked in its ecosystem and the number of active users and developers.

According to Etherscan, Ethereum has over 111 million non-zero wallets, which are a proxy for the number of users on the network. Bitcoin, on the other hand, has only about 36 million non-zero wallets, according to Bitinfocharts. Ethereum also has a vibrant and growing developer community, with over 2,300 monthly active developers, compared to only 400 for Bitcoin, according to Electric Capital.

Ethereum’s financials are also more impressive than Bitcoin’s, especially in terms of revenue and profitability. Ethereum generated $2.4 billion in user fees in 2020, compared to $796 million for Bitcoin, according to Coin Metrics. User fees are the payments that users make to the network for processing their transactions. They represent the revenue of the network and the income of the validators or miners.

On the expense side, Ethereum paid out only $1.39 billion in token incentives to its validators in 2020, compared to $9.7 billion for Bitcoin’s miners, according to Messari. Token incentives are the rewards that the network issues to the validators or miners for securing and validating transactions. They represent the cost of the network and the inflation of the supply.

Therefore, Ethereum’s net income (user fees minus token incentives) was $1.01 billion in 2020, while Bitcoin’s net income was negative $8.9 billion. This means that Ethereum was more profitable and efficient than Bitcoin, and also had a lower inflation rate. Ethereum’s annual inflation rate is currently around 4.3%, while Bitcoin’s is around 1.8%. However, Ethereum’s inflation rate is expected to drop significantly after the merge, which will reduce the token incentives and introduce a deflationary mechanism that will burn some of the user fees.

Ethereum has a strong case for outperforming Bitcoin in the long term, based on its innovation, use cases, yield, utility, network effects, and financials. Ethereum is more than just a cryptocurrency; it is a platform that enables various applications and services that can drive greater utility and value for the network and its users. Ethereum is also poised to undergo a major upgrade that will improve its scalability, security, and sustainability, and potentially increase its demand and price.

However, Ethereum is not without its challenges and risks. Ethereum faces competition from other blockchain platforms that offer similar or better features, such as Cardano, Polkadot, Binance Smart Chain, and Solana. Ethereum also faces technical and regulatory uncertainties that could hamper its development and adoption. Ethereum’s complexity and constant changes could also make it more prone to bugs, hacks, and exploits.

Therefore, investors should do their own research and due diligence before investing in Ethereum or any other cryptocurrency. Cryptocurrencies are highly volatile and speculative assets that can experience extreme price swings and fluctuations. Investors should only invest what they can afford to lose and be prepared for the potential risks and rewards.