DeepDive Investing

2018: The Flippening is Coming

By Leslie Ankney

The Flippening — The moment another cryptocurrency slays Bitcoin as the coin with the most money invested in it. Ethereum’s been the long-term second runner and is poised to take over the market cap in 2018. This isn’t a race for bragging rights, it’s a sign of the developments to come.

Bitcoin’s Lead Coming to an End

The Flippening is the moment Ethereum (or any other cryptocurrency, for that matter) overtakes Bitcoin as the highest market cap coin. Bitcoin’s held its spot with relatively no competition since it’s start in 2009. In February 2017, Bitcoin was at 86% before dropping to today’s 53.4%.

Flippening, So What?

The Flippening is a signal of change, that Bitcoin is no longer the guiding beacon of cryptocurrency. Seeing Ethereum, a decentralized application platform as well as a currency, surpass the world’s first and best-known cryptocurrency signals the market’s evolving. This is not big news because it would seem like a coup for Ethereum-followers and investors, as the market is big enough for a field of different cryptocurrencies. It’s a signal to the blockchain community that decentralized applications are here to stay and it will likely shift the direction of developers as applications will become a larger area of investment and growth.

A Tipping Point

With Ethereum taking over the largest market cap, Bitcoin values could quickly plummet. Right now, many crypto investors see all other cryptocurrencies value as pegged to Bitcoin. A day in the red for Bitcoin signals the plummet of everything else, while its green days signal a boost to almost the entire market. Many of us have seen value in Bitcoin as a sign of faith in the whole cryptocurrency market. Even Vitalik Buterin, one of the founders of Ethereum, wrote for Bitcoin Magazine and started as a strong advocate before founding his own project.

Bitcoin is the first and most known cryptocurrency. It’s decentralized design based on blockchain technology has inspired every cryptocurrency since it, but the scalability issue and lack of unity between its developers and miners are currently keeping it from evolving to be a working digital currency. There’s a chance for change, and many of us hope Bitcoin will pull through, but so far division has stood in the way of updates.

Currently, most of Bitcoin’s worth today comes from two camps – those who believe in it as a store of value and the newbies throwing money towards it as a speculative venture. As Ethereum rises in market cap, new investors with no loyalties to Bitcoin or any other cryptocurrency, for that matter, are likely to jump on board with ETH.

When Satoshi Nakamoto published the white paper for Bitcoin in 2008, its very title “A Peer-to-Peer Electronic Cash System” revealed his hope for a cryptocurrency that could be used like cash. With the same price in transaction fees to buy a mocha or a mansion, it’s no longer a coin for regular people, and many see it becoming a dead end. The shift to treating it as a store of value, like gold, has kept its value high for now, but the Flippening will put that faith into question for many investors.

SegWit, Bitcoin’s off-chain multi-directional payment system isn’t panning out so far, and it will take a highly functioning Lightning Network to transform Bitcoin’s current utility limitations. In the meantime, Ethereum has a strong team of core developers and grants through the Ethereum Foundation that are funding even more efforts toward the scalability issue through sharding, Raiden, and other potential solutions.

Why does Ethereum seem particularly ready to take over the market cap in 2018?

Use Cases to Boot

Ethereum has more use cases and greater utility than just a currency. Trading Ether as a currency is just one of its many uses. Ethereum is experiencing a booming development of decentralized applications (Dapps) and new businesses built its blockchain. These Dapps have the power to remove the middleman from hundreds of industries.

Ethereum is already past theoretical uses with hundreds of functioning uses running in the real world right now beyond just being currency. It’s running ERC-20 tokens on the network and handling a massive influx of transactions without problems. Cryptokitties may seem like a cutesy joke, but it proves the network can process a surge of transactions while running multiple ERC-20 tokens and smart contracts. Cryptokitties created a surge in transaction prices on Ethereum, but they are still moderate compared to Bitcoin’s high fees. Voting, property sales, and sending information over secure networks are all happening with Ethereum.

An Innovation Forward Platform

If anything, Ethereum seems to be the only cryptocurrency evolving to offer the desirable features of others. For example, Ethereum’s Metropolis upgrade adds zk-SNARKS, first pioneered by ZCash. Zk-SNARKS adds a privacy feature so users can choose to send Ether anonymously if desired. As other cryptocurrencies bring new technologies, Ethereum works with them and incorporates features that help it become a better platform. Competition has been good for Ethereum, and it’s healthy for cryptocurrency as a whole.

Transactions and Waiting Around

Currently, Ethereum processes about three times the amount of transactions as Bitcoin. While some of this is due to the surging interest in ICOs (people have to buy ERC-20 tokens with Ether) it’s still a significant amount. While there is “bottlenecking” on both Bitcoin and Ethereum, the difference is significant. A quick peek yesterday reveals 8,592 Bitcoin transactions awaiting confirmation on Blockchain.info compared to 1,928 pending Ethereum transactions on Etherscan.io. 

Both Steem and Ripple are giving Ethereum a challenge in number of transactions, but they perform completely different roles. When it comes to reach and potential, Steem, Ripple, and Ethereum are on very different paths. Steem’s focus is on rewarding “smart media tokens” to publishers and creatives. Ripple is focused on settlement between banks. Ethereum handles smart contracts, dapps, ERC-20 tokens, and financial transactions. Clearly, there’s a lot more going on as far as use cases with Ethereum.

Mining – Ethereum is Faster and More Profitable

Many miners check out coinwarz.com for a rough estimate when deciding what to mine. According to the site, you’d have to spend $6.24 in energy to make a 78 cent profit on Bitcoin. To mine Ether, you’d spend $1.44 in electricity costs for a $6.79 profit. Environmental reasons aside, Ethereum is much more profitable to mine. Now, the initial equipment costs are higher to mine ETH over BTC, but for serious miners, it quickly pays off.

When asked why he chose to mine Ethereum over Bitcoin, one miner from Texas had an easy response, "It's more flexible! GPU mining has more options in terms of what you can mine so when ETH goes to a Proof of Stake (PoS) model, you can still stay viable by mining other coins like ETC or ZEC.” Ethereum takes 15 seconds to confirm versus 10 minutes if you are lucky with Bitcoin. It’s easy to see why miners would prefer Ethereum, at least until it goes Proof of Stake or until Bitcoin successfully implements the Lightning Network.

 Proof of Stake is an Incentive to HODL Your Ether

Right now, Ethereum is currently using Proof of Work to confirm transactions over the blockchain. Bitcoin also runs on a PoW model and is unlikely to switch, though a successful implementation of Lightning will help it process transactions faster than it is now.

Once Ethereum turns to a Proof of Stake model, mining rigs will no longer be profitable, but holding mass stores of Ethereum as an investment will. PoW adds even more incentive to invest in Ether, and hold onto it long-term. For all of Bitcoin’s claims as a store of value, getting PAID to keep Ether as a store of value makes it even more desirable.

Team Ethereum is Organized

Vitalik Buterin, the leading voice of Ethereum, has both the vision and the team behind him to keep Ethereum growing. There’s consensus and support for decisions and a large team of developers working on the project. While smaller projects might have it easier when it comes to  implementing a new strategy, team Ethereum has many talented people working on its projects.

Meanwhile, Bitcoin has chosen to go the opposite route, with no clear organization, only a small team of developers, and a person at the top who disappeared. Whether or not Satoshi was a real person, a lack of leadership and agreement in its community of miners has left Bitcoin stagnant.

Unity When it comes to Forks

Ethereum’s had only one contentious fork with Ethereum Classic. The war between Bitcoin and Bitcoin Cash remains heated and for lack of better words, and the entire buildup to the proposed SegWit2x fork this last August was ugly. Generally a fork represents the jump in tech from one platform to another, so the new tech replaces its old namesake, disagreement is the root cause to the flood of additional forks on Bitcoin. Since the first Bitcoin fork in 2017 to Bitcoin Cash, and Bitcoin Gold, there’s been a flood of additional forks. The latest, the Bitcoin Diamond fork formed by two Bitcoin miners frustrated by Bitcoin’s inability to scale reeks of scandal.

Lower Fees vs BTC

Last December 2017, Bitcoin transaction fees were $55 per transaction. Buying a cup of coffee or a haircut with this kind of fee doesn’t make sense. If Lightning can keep the long lines of transactions down for Bitcoin, that will help lower fees. Ultimately, though, it will take a bigger innovation to make the Peer to Peer model Satoshi envisioned a reality. Even when Cryptokitties bogged the Ethereum blockchain this January 2018, fees peaked at $4.15 with confirmation times around 15 seconds. Both currencies need a more scalable model, but Ethereum is currently in the lead, with an average transaction fee of 18 cents today.

Concerns about Centralization with Ethereum 

Some would argue Ethereum is too centralized. Its team, with Vitalik Buterin as a prominent figurehead, is centralized in their decision-making and direction. Buterin has talked of stepping aside at some point, but there’s nothing to guarantee this. There’s also the centralized power concern that comes with smart contracts. Once deployed, smart contracts enforce code that can’t be changed, and this could lead to security problems in the wrong hands of governments or third-parties.

Signals for the Flippening

 

Both Market Cap leaders Bitcoin and Ethereum need to make substantial changes to fix scalability and increase security. Ethereum’s move to a Proof of Stake model, it’s organized leadership, and its use cases  are strong indicators the Flippening is on its way. Should Ethereum take the lead as the cryptocurrency with the most investment behind it, there’s likelihood for more than just some triumphant hurrahs and sharding memes, it will signal more Dapp development and bring more scrutiny to this massive project.

Leslie Ankney is a cryptocurrency investor, writer, and digital nomad. Follow her adventures on Twitter and Instagram at @CryptoLeslie