In the world of cryptocurrencies, Bitcoin (CRYPTO:BTC) and Ethereum (CRYPTO:ETH)tower above all others. The two digital tokens account for more than $1.3 trillion in market value today, or roughly half of the total value of all cryptocurrencies in the world.
As the original cryptocurrency, Bitcoin has a first-mover’s advantage and is the world’s largest crypto token with a market cap of about $900 billion, twice as large as Ethereum’s. However, you might be surprised to learn that Ethereum has crushed Bitcoin in 2021.
Image source: Getty Images.
As you can see from the chart below, Ethereum’s price has increased more than 400%, while Bitcoin is up roughly 70%.
Bitcoin Price data by YCharts
There are a number of reasons why Ethereum dominated Bitcoin in 2021, including the emergence of non-fungible tokens (NFTs), and those trends only seem set to accelerate in 2022. Keep reading to see three reasons why Ethereum will outperform Bitcoin again in 2022.
1. Ethereum has greater utility
Bitcoin’s original promise was as a digital currency that would not be controlled by a central government or other institution. While Bitcoin has gained widespread adoption as an investment, its progress as an alternative currency has been slower. Today, about 15,000 businesses in the world accept Bitcoin. That may sound like a lot, but that’s only about 1 out of every 10,000 of the hundreds of millions of business in the world.
Ethereum isn’t as widely accepted by real-world businesses as Bitcoin, but it’s the leader in the space where cryptocurrencies are gaining hold — in the metaverse, with NFTs, and with other real-world applications.
In fact, Ethereum has become the de facto medium for buying and selling NFTs because its blockchain enables smart contracts, while Bitcoin’s does not. Ethereum was designed to support smart contracts, which automatically execute transactions without the help of an intermediary. That has applications beyond just non-fungible tokens, including in real estate transactions, for concert tickets, and other such purchases where the item in question needs to be authenticated.
As Ethereum is showing, the future of cryptocurrency isn’t about displacing the dollar, but serving needs that fiat currency can’t meet on its own.
2. Ethereum is attracting more developers
In the tech world, developer interest is often a leading indicator of where technology is going. The technology or platform with the most developers tends to win over the long run, as attracting developers leads to a virtuous cycle of attracting more, which leads to more improvements to that platform. It’s a massive network effect that builds a wide economic moat.
In crypto, Ethereum is the pacesetter when it comes to developers working on its platform. According to a report from venture firm Electric Capital, Ethereum had an average of nearly 2,300 developers as of the third quarter of 2020, while Bitcoin had less than 400. The report also found that more than 300 new developers were joining Ethereum each month.
With a significantly larger base of developers, Ethereum will be much more nimble and better able to adapt to new use cases than Bitcoin. Its developers are currently working on the Eth2 upgrade, which will make Ethereum more sustainable, secure, and scalable, supporting thousands of transactions per second. While Bitcoin has a similar project in the Lightning Network, Ethereum’s lead in developers will make it faster and more likely to succeed in upgrading and advancing its architecture.
3. The future of crypto is going toward Ethereum
Throughout 2021, momentum has been building for NFTs, Decentralized Autonomous Organizations (DAOs), Decentralized Finance (DeFi), and the metaverse. Those cryptocurrency applications all favor Ethereum over Bitcoin, and they’re likely to gain steam in 2022 as well.
One virtual world, Decentraland, has seen its user base skyrocket tenfold in the last few months, reaching 300,000 monthly active users. Many of the crypto tokens used in the most popular virtual world like Decentraland’s MANA and Sandbox’s SAND are built on the Ethereum blockchain, showing how Ethereum has already established itself as a foundational platform in the metaverse. It’s essential to the next iteration of the blockchain.
By comparison, Bitcoin seems frozen in a particular time and place. It has benefited enormously from its first-mover’s advantage, name recognition, and cult-like following, but according to Bitcoin bulls, the best argument for its value seems to be that it’s a form of “digital gold” since its supply is artificially capped. That argument seems specious, given that Bitcoin, like most cryptos, has been highly volatile, and tends to move in the same direction as the stock market, making it a poor hedge on risky assets, gold’s intended purpose. Ethereum, on the other hand, is much more flexible and adaptable to the direction of the crypto universe.
2021 showed that cryptocurrencies have applications far beyond Bitcoin, and that trend will continue in 2022. As interest and adoption in areas like NFTs, DeFi, and the metaverse continue to grow, Ethereum will benefit as well, making it a good bet that it will outperform Bitcoin once again in 2022.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.