Bitcoin Lags Behind Ethereum In Recovery As The Merge Looms

ETH 2.0 hype leaves Bitcoin behind, but it also boosts Ethereum Classic.

After dovish FOMC minutes dropped on Jul. 27, the market moderately rallied. However, it seems that rally winds favor some Ethereum over Bitcoin. Over the last month, ETH outperformed BTC by +37%.

Ethereum is heavy with anticipation, each Merge news scrutinized and added as a “sell the news” driver. Although the Federal Reserve followed through with a consecutive 75 bps interest rate hike, Powell’s framing at the press conference made all the difference for the market.

“We’re at 2.25 to 2.5 and that’s right in the range of what we think is neutral.”

The market interpreted that as Fed’s recognition that raising interest rates pushes the economy into recession, suggesting lower rate hikes in the future. It also put the 100 bps hike off the table for now. In the following days, the crypto market surged.

Why Ethereum Outperformed Bitcoin?

Even before the Fed-related news, Ethereum onboarded the hype train as it transitions from proof-of-work to proof-of-stake. After multi-year delays, The Merge is most likely to happen in the second half of September finally. However, because there will no longer be any Ethereum miners, as they are replaced with validators, Ethereum Classic (ETC) has been the top performer.

ETH/USD Chart.

Source: Trading View

As the original proof-of-work network from which the current Ethereum hard-forked, Ethereum Classic is now in the speculative cauldron, seen as a neglected safe haven. After all, much can go wrong when coding is concerned, hence why there were so many ETH 2.0 delays.

Tim Beiko, running core protocol meetings for Ethereum, announced a busy August. Before the real Merge happens, it must first be tested on the Goerli testnet, which simulates the active Ethereum mainnet. More importantly, for over 411k Ethereum validators, Beiko noted this is the last chance for validators to prepare before the mainnet PoS transition.

What Will The Merge Do?

Outside of cutting its energy footprint by an estimated ~99.95%, one should not expect ETH gas fees to be on the negligible level of Polygon, its scalability sidechain. For such an improvement to happen, Ethereum’s main chain would have to undergo scaling itself. This upgrade is called sharding, which is scheduled for late 2023, at the earliest.

What it does mean is that the present Beacon Chain, running proof-of-stake consensus, will become Ethereum 2.0. 411,639 Beacon Chain validators have already staked 13.17 million ETH ($21.8 billion), at an average balance of 33.71 ETH. This is to be expected given that the minimum staking needed is 32 ETH (only for those who propose blocks).

With miners gone, Ethereum is then on the road to processing up to 100,000 tps, a drastic upscaling from the present 15 tps. As noted, that level of performance will begin after The Surge upgrade phase, in which the new Ethereum will be sharded.

Akin to Polkadot’s or Polygon’s network architecture, sharding is breaking the network into smaller pieces – shards – so the traffic load is spread out. If it all goes well, there should be zero network downtime after the Merge.

Is Bitcoin/Ethereum Flippening Likely?

During Terra (LUNA)’s meltdown, we have seen how it directly impacted Bitcoin’s dominance. In May, as people sought safe haven that is not based on phantasmal algorithmic stablecoins, Bitcoin’s market share sharply rose to a yearly high of 48%.

Bitcoin's Dominance Over 5 Years.

Source: Trading View

Once the dust settled and crypto contagion ran out of steam, it dropped just as sharply to 42.18%. In late 2017 and H1 2021, we have seen the biggest reductions in Bitcoin dominance. This coincides with the launch of utility altcoins and PoS blockchains that recreate traditional financial services via dApps.

With NFT marketplaces and metaverse coins in the game, the crypto market is now more diluted than ever, with additional types of assets driving utility. Overall, it is notable that Ethereum recovered +66% from the year’s bottom, while Bitcoin only recovered by +22%. Some Bitcoin maximalists view this as temporary, even doubting if Ethereum is viable.

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However, it is more likely that both Bitcoin and Ethereum market shares will shrink. Those PoS blockchains that technologically outperform Ethereum but lack the first mover advantage, such as Avalanche, EOS, or Solana, will exert constant adoption pressure. As for Bitcoin, it should always be a safe haven against still experimental DeFi and $150 million bridge hikes.