Bitcoin’s price rallied over 150% last year, while ether’s gained “only” 90%. But this year, the No. 1 and No. 2 crypto have been running neck and neck – with each of them up about 50% so far. There are still ten months left to go until the new year, but I’m ready to bet on the winner. Here are three reasons why I see ether coming out ahead of bitcoin.
Reason 1: Ether’s scarcity.
We all know bitcoin is scarce. There will only ever be 21 million coins and over 93% of them have already been produced by miners. But ether isn’t exactly abundant, either. What’s more, its supply is actually dropping, and its demand is on the rise.
In September 2022, Ethereum completed a major technical upgrade called “the merge”. Before it happened, miners processed transactions and secured the Ethereum blockchain in exchange for newly minted ethers (in much the same way that bitcoin mining works). But after the merge, mining was replaced by staking – and now stakers put up their own ether as a kind of collateral to verify transactions on the Ethereum network. In return, they earn interest in ether – a.k.a., a staking yield.
The total supply of ether has actually gone down since the merge. And here’s how that works. First thing to know is that stakers create fewer new ethers, compared to miners. That’s because staking is a lot cheaper to do, so stakers don’t need to earn as many ethers to turn a profit. Second thing is that Ethereum “burns” a portion of ether transaction fees to make those fees more stable for its users. When ether gets burned, it’s taken out of the coin supply forever. More ether’s been burned than created since the merge, so ether’s supply (purple, chart below) has shrunk overall.
Total supply of ether before and after the merge. Source: CryptoQuant.
And here’s the kicker: fees are burned with each transaction. So the more the Ethereum network is used, the more fees are burned, and the scarcer ether gets. Ethereum is used for all kinds of things, like NFTs, blockchain games, and DeFi financial services (see our Ethereum guide). And those applications all need ether to fuel them. Plus, investors are buying more ether and staking it to get a staking yield (purple, chart below). Not only does that lock up more of the coin supply, but it’s driving more demand for ether.
Total number of ethers staked over time. Source: CryptoQuant.
Reason 2: Ethereum ETFs.
Ethereum ETFs could be trading on the US stock market as soon as May of this year. And those ETFs would have to buy enough ether to match investor demand one-for-one for their shares. There’s already been a surge in bitcoin demand with “The Nine”, the spot Bitcoin ETFs approved in January. And a similar thing could happen if and when Ethereum ETFs hit the street. Just keep in mind that there could be an initial “sell the news” price drop first – much like the one that whacked bitcoin earlier this year: the crypto heavyweight champ fell 20% before resuming its ascent.
The world’s biggest ETF providers (including BlackRock and Fidelity) have filed for Ethereum ETFs with the US Securities and Exchange Commission (SEC). Some analysts, including Geoffrey Kendrick of Standard Chartered, expect these ETFs to get the green light by the May approval deadline (see table below). They figure the Bitcoin ETF approvals already set the precedent, and the SEC hasn’t explicitly declared ether a security yet. That means they could declare it a commodity, like bitcoin. What’s more, investors can already trade Ethereum “futures” ETFs on the Chicago Mercantile Exchange (CME), which could make it harder for the SEC to reject or even delay the spot ETF applications.
Spot Ethereum ETF approval deadlines. Sources: Bloomberg Intelligence, SEC.gov.
And, sure, it’s hard to predict what the SEC will do here. But if it gives the go-ahead to BlackRock and the gang, it could unleash waves of new demand for ether. Think about it this way: ether’s market size is about a third of bitcoin’s. So investor demand for Ethereum ETF shares could (in theory) have an even bigger impact on the crypto’s price.
Reason 3: Ether’s value.
Crypto bull runs have (so far) followed similar cycles. First, bitcoin leads the charge as investors tentatively opt for the “safest” crypto investment. Then, after making good money from bitcoin, they start to rotate profits into “riskier” investments with smaller market sizes, like ether.
You can see this potentially playing out in the chart below. It suggests that the ETHBTC trading pair (that is, ether priced in bitcoin) could be finding a low – meaning ether might perform relatively better than bitcoin this year. Notice how the price appears to be bouncing off the blue support box, and trying to break above the yellow downward trendline. Crypto traders like me worship technical analysis. And no doubt, they’ll be eyeing this chart with a keen interest as they plot their next moves. Keep in mind that this says nothing about the dollar value of either asset – only that one is doing relatively better than the other.
Ether priced in bitcoin, with each green or red bar representing a week of price movement. Chart drawn with TradingView.
But if you’re more into fundamentals than technicals, this next chart is for you. You can compare the values of different blockchains pound-for-pound using the fully-diluted-market-cap-to-fees (FDMC/F) ratio. Think of it like a price-to-earnings ratio for crypto (if earnings are fees). Now, Ethereum raked in $2.7 billion worth of fees over the past year, according to data from TokenTerminal, while Bitcoin collected only $1.1 billion. If you divide the market size of each asset by its fees, Ethereum has a much lower FDMC/F ratio. So, according to the ratio, ether could offer better value.
Comparing the values of Ethereum and Bitcoin pound-for-pound using the fully-diluted-market-cap-to-fees ratio. Sources: TokenTerminal, CoinMarketCap.
What’s the opportunity here?
Ethereum has another big upgrade set for March 13th: Dencun. Post-Dencun, Ethereum could be slightly faster and cheaper, which might help it fend off fresher rivals like Solana and Avalanche. But let’s not jump into this blindfolded: ether is already up over 250% since its bear market low in June of 2022. And it could easily drop 10% to 30% from here on a whim. But if you can stomach the volatility, I think ether could be a decent bet for the long run. Just be sure to size your position based on your risk tolerance.
The simplest way to get exposure to Ethereum is to buy ether (ETH) on a crypto exchange like Coinbase. Another option is to split your Ethereum exposure among ether and a few other tokens that tend to swim in its slipstream. For example, you could put half your “Ethereum allocation” into ether itself, then split the rest among coins of “Layer 2” blockchains that plug into Ethereum. Polygon (MATIC), Optimism (OP), and Arbitrum (ARB) are among the more established Ethereum Layer 2s. Just keep in mind that these have much smaller market sizes than Ethereum itself, and tend to be more volatile (rocking both to the upside and the downside).
If you’re after dividends on your ether, you could also consider staking it to earn a yearly yield of around 5% (paid in ether). To get started, check out our staking guide.
