Over the past two months, Bitcoin (BTC -2.71%) and Ethereum (ETH -1.61%) have each shed more than 30% of their market values. Investor fears about inflation, the Fed's possible rate hikes, and the ongoing pandemic have sparked a sell-off in risky assets, a category that crypto undoubtedly belongs in.
Despite the recent losses, among cryptocurrency investors, the question of whether or not to go all-in on Bitcoin or Ethereum is a serious one. Both have their merits, and both have key attributes that make them unique. Ethereum's 409% surge in 2021 certainly helps to attract heavy attention to the platform.
Can Ethereum overtake Bitcoin in 2022? Keep reading to find out.
Image source: Getty Images.
Ethereum would need to rise significantly
As of the afternoon of Jan. 18, Bitcoin's market cap was $789 billion, while Ethereum's was $371 billion. This means that the latter would need to soar 113% in value in the next 11 months to claim the top spot (assuming that the former's value would stay flat). You might think that this scenario is out of the question, but there are some positive developments working for Ethereum in 2022.
Because it is a programmable blockchain, a functionality that Bitcoin lacks, Ethereum has drawn interest from the developer community. These developers are building decentralized applications (dApps), including decentralized finance services and non-fungible token marketplaces, in growing numbers. There are nearly 3,000 different dApps on Ethereum right now, a figure that increases with each passing month.
With more dApps comes the promise of more utility. And this real-world usability boost will support demand for Ethereum's native token, Ether. In turn, a rising market value brings in more developers, who then build more applications. Because of this situation, Ethereum benefits from a powerful flywheel effect.
Providing a catalyst in 2022 is Ethereum's pending migration to a proof-of-stake consensus mechanism. The upgrade, called ETH2 or Ethereum 2.0, will include features that make Ethereum more scalable, secure, and environmentally friendly. Furthermore, the network's throughput potential should skyrocket from 30 transactions per second (TPS) today to 100,000 TPS when the upgrade is completed.
Currently, Ethereum, like Bitcoin, employs a proof-of-work protocol where miners solve complex math problems in order to earn the right to add a block of transactions to the blockchain. This is extremely energy-intensive, limiting the networks' scalability and increasing transaction fees. If the release of ETH2, already delayed from 2019 to the second quarter of this year, is implemented without any major hiccups, it could drive Ether's value to new heights.
It's not likely to happen in 2022
Not only would Ethereum's market cap need to more than double in 2022, but this also implies that Bitcoin ends the year not having appreciated in value at all. Bitcoin is certainly volatile, but over the past 5 years, it has returned an incredible 4,700%. And as more institutions line up to purchase Bitcoin, viewing it as a legitimate digital store of value, the odds of it continuing to gain value are high. As a result, I don't see Ethereum moving into first place anytime soon.
Additionally, Ethereum is facing stiff competition in the world of smart-contract blockchains with the emergence of Cardano and Solana. Both cryptocurrencies are developing solutions to address Ethereum's weaknesses, particularly when it comes to transaction speed and cost. Cardano and Solana have some strong momentum on their side, as both have gained substantially more than Ethereum in the past 12 months.
While Ethereum overtaking Bitcoin as the world's top cryptocurrency isn't likely this year, it still makes for a worthwhile crypto investment as part of a well-diversified portfolio.
