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For years, Bitcoin was considered to have the most asymmetrical risk-reward relationship of our lifetime. Bitcoin had unique characteristics that made it the best store of value the world had ever seen. Its hard-to-replicate network effects made it unlikely that any other cryptocurrency would displace it.
A few months ago, that view began to change. Two developments on the Ethereum network caught investors' attention: 1) Ethereum found a real use case and 2) Ethereum's deflationary changes to the protocol's monetary policy. These changes - among others - could have massive implications for Ethereum's monetary properties, making it even a better store of value than Bitcoin.
1) Ethereum's true intended use.
As a blockchain, Ethereum, and by extension the internal cryptocurrency Ether, has a distinct advantage over Bitcoin. Decentralized financial products - also known as DeFi - can be offered via the Ethereum blockchain. The Bitcoin blockchain, on the other hand, only supports cryptocurrency, which is an alternative to classic currencies. Bitcoin is the concept, so to speak, and Ethereum is the practical application.
The Ethereum platform has a much more real added value compared to Bitcoin. Not only is it an interesting network for developers (94 of the top 100 crypto projects are based on Ethereum) or an alternative to fiat currencies, but it could play a significant role in the global financial system in the near future. This is because smart contracts on Ethereum enable the execution of trustworthy transactions and agreements between different parties. These digital contracts are quite comparable to traditional contracts - for example, a sales contract or the conclusion of an insurance policy. Even lending and borrowing, trading fixed-income securities or high-yield bonds is possible.
2) Ethereum's deflationary changes to the protocol's monetary policy.
A real game-changer is coming to the protocol: the move to Ethereum 2.0. The Ethereum network will move from Proof-Of-Work (PoW) consensus to Proof-Of-Stake (PoS) consensus in the future, probably in 2022, which is expected to bring significant benefits to the scalability of the network. The increasing number of users have often pushed the Ethereum network to its limit recently.
After the switch, the Ethereum network will be able to run smart contracts via the PoS method in the future, eliminating energy- and time-consuming mining altogether. This could reduce the power consumption of the associated blockchain by up to 99 percent. At a time when sustainability is an investment criterion, Bitcoin's energy balance thus inevitably falls behind.
An important step towards PoS took place on August 5, 2021, with the so-called London Hard Fork upgrade making the Ethereum blockchain more deflationary in the long term. The new fee structure will burn Ether on every transaction. This should have a positive impact on the Ether price in the long run.
Institutional investors increasingly prefer Ether
Institutional investors have also recognized the advantages of Ether over Bitcoin, and this is also evident in crypto funds. While Ether funds showed consistent inflows even during the price setback, Bitcoin funds saw outflows.
This dynamic raises the legitimate question of when the so-called "flippening" will take place. This refers to the time when Ether will replace Bitcoin as the world's largest cryptocurrency.