The most interesting aspect of 2022’s bear market is that ethereum (ETH) outperformed bitcoin (BTC) across pretty much every timeframe.
Since writing this, ETH has increased more than 1% in the past 24 hours (6%), 7% in the past week (7%), -1.8% in the past month (-13%), -8.1% in the past 90 days (-34%), and 56.9% in the past year (-57.9% vs -61.5%). It is likely that ethereum will outpace bitcoin even further in the next few weeks, especially with the Merge coming up on September 13-15.
But does a short-term rally mean that ETH is going to overtake BTC for good, or even send it into a long-term decline? This largely depends on whether ethereum will truly become a deflationary cryptocurrency post-Merge, something which many observers dispute.
How the Ethereum Merge Will Reduce ETH Issuance
The latest update from Vitalik Buterin suggests that the Ethereum Merge will take place between September 13 and 15, with the Bellatrix upgrade — the last before the Merge — due later today. What this ultimately means is that Ethereum will become a proof-of-stake cryptocurrency, with validators confirming new blocks and transactions by staking ETH itself (rather than spending energy).
By extension, the shift to PoS also means that a significant percentage of ETH will be locked up in the new Beacon Chain’s smart contract. In fact, an impressive 13.398 million ETH is already locked up as of writing, with more likely to be staked once the Merge successfully takes place.
13.389 million ETH is currently 11.13% of the overall circulating ethereum supply (of 120.4 million ETH).
On top of this, the move to PoS also means an end to mining rewards, which will be replaced by smaller staking rewards. According to ethereum.org, this will result in a 90% drop in its new issuance rate, falling from around 13,000 ETH per day now to 1,600 ETH per day.
If that weren’t enough, last year’s London upgrade (and EIP 1559) has resulted in approximately 1,600 ETH being burned every day. In other words, net issuance will effectively be flat, all other things being equal.
Assuming that market demand increases for ETH following the Merge, this flat net issuance could in fact become deflationary, depending on how much demand grows. Ethereum would therefore be not only the biggest utility blockchain in the cryptocurrency ecosystem (in terms of total value locked in), but it would also become a Bitcoin-style store of value.
This combination, for some people at least, would make Bitcoin redundant, given that the latter is used almost exclusively as a store of value/speculative asset, with only minimal side-use as a means of payment.
Will Bitcoin Suffer a Terminal Decline?
With BTC’s dominance as a share of the cryptocurrency market’s total cap declining to 36.6% as of last count, some observers have already begun predicting that it will never return (or pass) its current all-time high of USD 69,044, set back in November of last year.
One of the main reasons for this argument is that Ethereum’s move to proof-of-stake will discredit proof-of-work, which Bitcoin still uses. That is, regulators may end up targeting PoW in some way, undermining Bitcoin’s value proposition.
This, however, is deeply speculative.
Much of the financial services industry has invested in Bitcoin in one way or another, mostly via the launch of bitcoin-related custody and brokerage services. Most recently, BlackRock — the biggest asset manager in the world — launched its own private bitcoin trust.
Because of this, it’s unlikely that regulators in most developed nations will come down on Bitcoin in any significant way.
In addition, a significant number of people dispute that Ethereum will become a truly deflationary cryptocurrency following the Merge. One of the best arguments in this vein is that ETH can become deflationary only with especially high gas fees, something which would drive away users (and likely lower gas fees).
At the same time, many Bitcoin supporters argue that Ethereum will become more centralized after the Merge, something which will make it less attractive in comparison to the proof-of-work Bitcoin.
Again, time will tell which of these assessments are most accurate. Suffice it to say, that ETH is currently outperforming BTC, and will likely continue doing so for the next few weeks, at the very least.
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