- Ren Yu Kong is a DeFi portfolio manager at digital asset hedge fund BKCoin Capital.
- He says that ether has an advantage over bitcoin due to its staking returns.
- Ether is up 39% in the last month before its network upgrade, according to Messari.
Ahead of the much-anticipated Ethereum upgrade, the smart contract network cryptocurrency has continued to recover from 2022 lows, jumping 39% in the past month, according to mesari.
Those gains have come despite concerns of contagion from the fallout from major industry players, such as cryptocurrency hedge fund Three Arrows Capital, and an apparent appetite for risk from investors, as attempts to The Federal Reserve’s fight against inflation have increased borrowing costs.
The nascent space has regained some of its former base, reaching a market cap of over $1 trillion once again after months of consecutive losses. And ethereum has outperformed rival bitcoin, the oldest cryptocurrency, which is up just 14% over the same period.
Some industry insiders predict that ethereum will overtake bitcoin’s market capitalization, though their timeframes differ. Ren Yu Kong, DeFi portfolio manager for digital asset hedge fund BKCoin Capital, says this “change” could take place within the next five years.
“Earlier this year, if you asked any investment professional, the de facto answer was definitely dollar cost averaging in BTC,” the 25-year-old told Insider. “If you really wanted to take a little bit more risk, you could allocate a little bit to ETH. I think that has definitely changed now.”
However, Ethereum is currently half the market capitalization of bitcoin. However, the market capitalization of Bitcoin stands at $457 billion, while the total value of the ecosystem is $1.2 trillion. Bitcoin, trading roughly 1,200% higher than Ether, has a 40.27% market dominance. By comparison, ether has a market cap of $229 billion and is currently trading at $1,874.34.
The ‘strong narrative shift’ before The Merge
Over the past six months, Kong says there has been a “strong narrative shift in favor of ETH” leading up to its upgrade, The Merge.
Tentatively scheduled for mid-September, the upgrade will transition the Ethereum network from the energy-intensive proof-of-work (PoW) model to the proof-of-stake (PoS) model. According to the Ethereal FoundationMerge will reduce your network’s power usage by 99% and “set the stage for future scaling upgrades, including sharding.”
Kong laid out for Insider three reasons that support his call that Ethereum will eventually exchange Bitcoin.
The first is that if the network is able to successfully reduce its energy use, according to Kong, this could also cause an avalanche of institutional capital pouring into the Ethereum ecosystem.
“It’s not hard to imagine a world where institutional allocations to Ethereum increase massively relative to Bitcoin, especially once we transition to a proof-of-stake system,” he said, adding that the smart contract network will be ” much more environmentally friendly.
Harry Kalodner, CTO and co-founder of Ethereum scaling solutions provider Offchain Labs, says migrating the network to PoS “will create an additional strong differentiator between the two chains.”
“Overall, Ethereum has shown much more willingness to iterate and innovate on its core technology, while Bitcoin has ossified,” Kalodner told Insider in a statement.
Second, Ethereum’s network has “real” utility compared to bitcoin’sKong says.
The smart contract network is the foundation of DeFi, or decentralized finance, where developers can build and deploy decentralized applications. (However, performing functions on the Ethereum network, such as minting NFTs or non-fungible tokens, can incur hefty gas fees.) Bitcoin, on the other hand, is commonly thought of as a peer-to-peer transaction system and store of value.
“In recent months, investment professionals have increasingly agreed that ETH appears to be the safest game because, at the end of the day, it has utility and Bitcoin does not. In current market conditions, if anything has utility and real value, it’s a much better proposition,” Kong said.
Third, he points out that ethereum also has an advantage over bitcoin due to its returns. Strong use cases for the network also include staking, or a way to earn passive income by validating transactions on a blockchain. With Ethereum-compatible staking solutions like Rocket Pool and Lido, investors in a token can generate returns without having to sell.
“Ethereum has real value in terms of staking performance, and as scalability improves, it could establish itself as the foundation layer that secures a large number of the world’s digital transactions,” Kong said.
A bold scenario where change happens in 12 months
Some executives are even more bullish on the upgrade, predicting that Ether could overtake Bitcoin in market cap over the next year. In a recent note to clients, Sean Farrell, vice president of digital assets at Fundstrat, said the firm is “on alert” as Bitcoin continues to underperform.
In the derivatives markets, ether options volumes outperformed their bitcoin counterpart for the first time ever, according to the Aug. 12 note, when comparing 30-day moving averages. Farrell says this indicates a “comparatively higher level of attention being paid to the ETH market among traders.”
“While we still believe there are inherent technical risks built into the Merger that we will continue to assess prior to the big event, we believe that from both a narrative and fundamental perspective, Ethereum now has a good chance of outperforming Bitcoin in market cap in the coming years. 12 months,” he added.