Could Ethereum become even bigger than Bitcoin? (2024)

With the crypto market rallying, you might be wondering whether bitcoin is still the best long-term investment –or whether ether will give you more bang for your buck. And, look, bitcoin’s great: its market dominance to this point cannot be disputed. But I’ve got three reasons why ether could be poised not only to deliver better growth, but to even someday overtake the OG crypto in market share…

What might put Ethereum over the top?

1. Ether has been growing faster than bitcoin.

Since January 2018, ether holders have compounded their investment by 16.3% per year, while bitcoin has only grown at 9.2% per year, according to backtests I ran on Portfolio Visualizer. Keep in mind that January 2018 was near the end of a major crypto bull run, and bitcoin didn’t crash as hard as ether that year: bitcoin dropped 71.8%; ether dropped 81.8%.

Here’s how much money you’d have if you’d invested $1,000 in ether, bitcoin, or an S&P 500 ETF at the start of 2018:

But what about the risk-adjusted returns? Well, ether did have more volatility than bitcoin overall, meaning you’d have seen your money chop around a bit more. But the Sharpe ratio – a measure of average yearly return over risk – was higher for ether (0.63) than for bitcoin (0.43). In other words, you’d have gotten more bang for your risk buck holding ether over bitcoin. Ether also had a higher Sharpe ratio than the S&P 500 (0.49).

And sure, ether has sometimes been bested by bitcoin, but its losses haven’t been as sharp as its gains. The chart below shows the value of ether, priced in bitcoin since the beginning of 2020:

And while past performance doesn’t guarantee future results, ether has shown it can perform better than bitcoin during crypto uptrends. So as the market grows, it stands to reason that ether could eventually overtake bitcoin in market size.

2. Ethereum has more uses than Bitcoin.

Bitcoin (the blockchain, with a capital “B”) is a payments network that allows you to ping bitcoin (the digital currency, with a small “b”) to anyone in the world. You can read more about how Bitcoin works over here.

Ethereum is a payments network too, and it’s the No. 1 smart contract blockchain. I wrote about how Ethereum smart contracts work over here, but the TL;DR is that they allow developers to build all kinds of decentralized applications (dapps) on Ethereum. That makes it ideal for lots of use cases, including: DeFi, NFTs, blockchain gaming, decentralized data storage, and decentralized autonomous organizations (DAOs).

Technically, it is possible to build dapps on Bitcoin using other blockchains that plug into it, but it’s a complicated process. Unlike Ethereum, Bitcoin wasn’t built for running dapps from the get-go.

So, it’s not surprising that the number of Ethereum wallets sending or receiving crypto each week (blue line) has been catching up with Bitcoin wallets (gray line):

3. Ethereum’s switch to proof-of-stake gives ether an edge.

In September, Ethereum transitioned from a proof-of-work (PoW) blockchain to a proof-of-stake (PoS) one, in an event called the “merge”. So now, unlike Bitcoin, Ethereum no longer depends on miners to secure its network, but uses validators instead. And that could be good for the price of ether for two reasons.

First, validators don’t have to cough up for expensive mining equipment and electricity to run their business – so they don’t need to churn out as many new coins to turn a profit. And that’s turning ether into a scarcer commodity: since the merge, new ether issuance has dropped from a pace of over 3% a year to practically zero %, compared to bitcoin issuance at around 1.7%. What’s more, miners are notorious for selling their coins when they need the money to pay their hefty bills. But validators don’t have that problem: instead, they lock up their ether to earn rewards, which means they can’t sell it. So overall, there’s likely to be fewer new ethers minted and less downward pressure on the price.

Second, the switch to PoS could make ether more appealing to big institutional investors. If there are two things that excite the big money, it’s ESG (environmental, social, and governance) and yield. And Ethereum’s recent upgrade boosts its score on both counts. Validators use a tiny fraction of the electricity that miners do, and Coinbase is now allowing US-based asset managers to stake ether to earn passive income. Again, when you’re staking ether, you ain't selling it.

So what’s holding ether back?

There's more regulatory uncertainty with Ethereum, which could still put institutional investors off buying ether until things get clarified. Since it switched to PoS, there’ve been increasing calls from the US Securities and Exchange Commission (SEC) that ether should be classified as a security. As you’d expect, the regulators’ reasons are complex. But the long and the short of it is: they see staking as more like investing than mining.

And as for bitcoin, the SEC has been extremely clear: it is not a security – it’s a commodity, and falls under the watch of the Commodities Futures Trading Commission (CFTC). So investors have clarity on that front at least. Also since institutional investors are only just starting to get comfortable with bitcoin, they’re likely to continue favoring it for now.

What’s the opportunity here?

Ether might be catching up to bitcoin in market share, and may even overtake it one day. But if there’s one thing I’ve learned in my crypto investing career, it’s this: bitcoin is still the king. And every once and a while – often when least expected – it unleashes its full might by rallying way ahead of the rest of the market. And let’s not forget: bitcoin usually holds up better in a selloff than any of its rivals. So buy ether, sure, just don’t turn your back on bitcoin.