Could Ethereum be a Better Choice than Bitcoin in 2022?
Cryptocurrency returns were spectacular in 2021, but they could be even better in 2022. The market capitalization of cryptocurrencies passed 2.2-trillion in 2021, with Bitcoin and Ether accounting for more than 60%. While Bitcoin experienced a robust 60% return during the first 11-months of 2021, the performance of Ether was more than 6-fold that of Bitcoin. Crypto trading volumes were also solid. PayPal, the online payment giant, not only accepts cryptocurrencies, but it announced in November that it would begin providing trading applications for crypto trading. Looking forward, Ether and Bitcoin will be attempting to lure customers. The question for investors is whether Ethereum is a better choice than Bitcoin in 2022.
The New Bitcoin Release
In November 2021, the first Bitcoin upgrade in 4-years to its software was released. This release is a big deal for the world’s most popular cryptocurrency. The new version of the software is called Taproot. This update will allow transactions to be even more efficient and will enable users to create smart contracts. This new capability in Bitcoin is currently available in Ethereum. An intelligent agreement between two or more parties will eliminate the need for a mediator to help produce the contract.
The most significant part of the Bitcoin release deals with digital signatures, like the fingerprint you might leave if you touched a bill and gave it to someone else. The old release of Bitcoin used Elliptic Curve Digital Signatures, which ensures that only the owner can spend the cryptocurrency. The Taproot update will add Schnorr signatures which make multi-signature transactions unreadable.
The change to the signature process will also change intelligent contracts. The Taproot will make smart contracts less expensive and also take up less space on the blockchain. As programmers add smart contracts to Bitcoin, it will make the cryptocurrency more of a player in this space.
The Most Recent Ethereum Upgrade
Ethereum also made an upgrade to its software in September 2021. Since that period, more than 800,000 Ether coins have been burned. More Ether coins were burned than created during this period, which helped buoy the coin price. Coin burning occurs as cryptocurrency miners and developers remove a specific portion of the cryptocurrency from circulation. Their goal is to control the price of the cryptocurrency. This scenario is similar to a cartel controlling the volume of oil that is on the market. The upgrade on the Ethereum blockchain has ultimately focused on changing the mining technique to a proof of stake algorithm from a proof of work algorithm.
The Rise of Non-Fungible Tokens
Since August, interest in non-fungible tokens (NFTs), which run on the Ethereum blockchain, has surged. The rise of NFTs is expected to support a continued increase in Ethereum transactions. NFT’s are everything from digital artwork to videos of Basketball players. The downside of making NFT’s on Ethereum are the transaction charges which are known as gas fees. The change from proof of work to proof of stake will ultimately reduce the costs related to programming on Ethereum.
The Historical Performance of Bitcoin and Ether
The performance of Ether has been awe-inspiring relative to Bitcoin. To measure the relative returns, you can divide Bitcoin by Ether, which provides a ratio between the two cryptocurrencies. If you plan to trade crypto, you should follow this ratio as it will give you insight into the return profile of one cryptocurrency relative to another. You can draw a ratio chart with any two cryptocurrency pairs.
The chart of the two cryptocurrencies shows you that since 2017 the ratio between Bitcoin and Ether has declined from 120 to 12.5. The decline has nearly been 10-fold, where Ether has outperformed the returns provided by Bitcoin. The ratio between Bitcoin and Ether is now at a critical juncture. A break down below the 12-level could lead to a continued rally in Ether relative to Bitcoin. On the other hand, the ratio is oversold. The fast stochastic, a momentum oscillator, is printing a reading less than 1, which is well below the oversold trigger level of 20, and foreshadows a correction in the ratio. Each time the ratio has become oversold, it has bounced slightly, but the trend shows that Ether should likely continue to outperform Bitcoin.