What’s happening behind the prices in a plausible flippening scenario?
Bitcoin is a great store of value, especially if you’re looking to store about US$10,000 to $12,000 of value per unit.
While it’s still kind of tough to picture Ethereum overtaking, or flipping, Bitcoin’s market cap, Ethereum’s DeFi-driven growth spurt has put enough pieces in motion to paint a cogent picture of how “the flippening” could play out in reality.
The main catalyst is the large amounts of Bitcoin wrapped on Ethereum. For succinctness, we’ll just refer to all Bitcoin on Ethereum (renBTC, wBTC etc) as “wrapped Bitcoin” from here on out.
Depending on how you look at it, wrapped Bitcoin is either a relatively a relatively successful money-type token on Ethereum, or Ethereum is now Bitcoin’s most successful sidechain.
The contest is not remotely close either. There is now about a billion dollars of Bitcoin in total on Ethereum according to DeFi pulse, in contrast with just $26 million on Liquid and $11 million on Lightning. And unfortunately for Bitcoin, every coin wrapped onto Ethereum is probably good news for ETH and bad news for BTC.
Follow the money
Using and moving wrapped Bitcoin incurs gas fees, paid in ETH. It also does away with the need to pay transaction fees with BTC. So right off, the likely overall effect of more wrapped Bitcoin is greater demand for ETH and less demand for BTC, and the balance keeps shifting as more BTC is wrapped.
In a future where most Bitcoin is wrapped on Ethereum and you don’t even need BTC for transaction fees, there’s little practical reason to own any Bitcoin at all, other than to try selling it at a profit, while there’s still a clear reason for Bitcoin users to keep ETH on hand for network fees and staking.
Along the way, a number Bitcoin owners will likely reconsider the merits of storing value relative to gaining value, as the gas in their wallets outperforms their money.
Other than the natural impact this could have on BTC-ETH prices, it also starts skewing Bitcoin’s economics and potentially undermining its network security, which then chips away at the remaining reasons (“sound money,” “world’s most secure network,” etc) to keep hanging on to it.
And who’s going to pay for it?
Bitcoin’s mining rewards are meant to become increasingly dependent on transaction fees over time, as each halving cuts the revenue earned from newly minted BTC.
But now that we’ve seen Bitcoin in action for a decade, we can see that this probably isn’t a viable solution in the long run, on account of how transaction fee markets shake out in the real world.
This isn’t – or wasn’t – really a problem though, because as long as Bitcoin prices don’t do anything too catastrophic there are still 30 or 40 years to go before block rewards are low enough for this to be an issue, assuming Bitcoin prices continue to rise.
More wrapped Bitcoin accelerates that timeline though. Although it varies widely from day to day, about 10% of a Bitcoin miner’s income comes from transaction fees these days.
If that transaction fee revenue continues shifting to Ethereum, miners start feeling it. Combine that with the probably detrimental impact of wrapped BTC on Bitcoin prices, and you get a glum forecast for the Bitcoin mining business and by extension network security in coming years. It certainly doesn’t help that Bitcoin miners still have to keep selling all their coins all the while, while Ethereum plans to be cheerfully burning a portion of its much larger transaction fees down the line.
Naturally there are still plenty of what-ifs and asterisks around everything, and it’s difficult to predict Bitcoin’s staying power as a collector’s item in the long run. But if we just observe today’s trends and the economic wheels in motion here, and extrapolate wildly from that, the idea of Ethereum flipping Bitcoin stops seeming hypothetical and starts looking like a safe common sense bet.
Disclosure: The author holds cryptocurrencies including ETH at the time of writing
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