Is Ethereum Ready For Bitcoin And Solana?

With Bitcoin hitting new all-time highs and closing in on the psychologically important $100,000 mark, the main topic of discussion is Ether's underperformance compared to the rest of the market. According to CoinMarketCap, at the time of writing, ETH dominance has fallen to 12.6%, the lowest level since April 2021.

Flipping seems more distant than ever, with Ether down over 50% over Bitcoin since 2021, even below the 2016 cycle high.

According to Dan McArdle, Messery co-founder and chief technology officer, Bitcoin has dominated mind share in the past year, with significant inflows flowing into Bitcoin ETFs.

“Everyone can understand ‘digital gold' – the mindshare in TradFi is completely Bitcoin,” McArdle tells the magazine.

This trend seems to be headed for a reversal after it became clear that the 2024 US presidential candidate, Donald Trump, was the winner. However, these benefits are quickly returned after a few days. Ether ETFs have also been disappointing inflows into the space, although they have finally turned positive recently, with Ethereum scrambling to break even.

Although many Bitcoin fans are ready to declare the death of Ethereum, the fact is that sentiment can quickly change in the crypto market. One of the last times Ether seemed to die was in September 2019, and the crypto asset rose from a low of 0.01615 BTC to 0.08837 BTC over the next two years.

Ethereum is facing competition from the likes of Solana, Sui and others this cycle as a smart contract platform, but the improved regulatory outlook and a possible increase in institutional adoption have market observers suggesting that the ETH/BTC trading pair may or may not be close. Already hit, bottom.

How did we get here?

The peak of trading for Ether in Bitcoin was in June 2017, when the market cap hit 83 percent of Bitcoin. A few years later, in September 2022, Ethereum had a renewed boost against Bitcoin, as the proof-of-stake merger was completed and the “ultrasound money” meme related to Ethereum's monetary policy change was at its peak.

The hope for Ether holders is to lower consumption rates and implement payment burning, which equates to multiple Bitcoin halvings. Despite declining for months, Ether has continued its downward trend ever since.

Ethereum supporters argue that the fall in the price of Ether relative to Bitcoin can be described as part of the normal part of Bitcoin's four-year half-cycles, which see Bitcoin stand out before money flows into Ether and other altcoins. And Ether investors still did well, with the coin up roughly 2,000% in US dollars over the past five years. It gained 45% in the last month, ahead of Bitcoin's 38% and SOL's 34%.

But outside of true believers, holders of non-Bitcoin crypto assets tend to do so to outperform the world's largest cryptocurrency. And Ether has underperformed its main blockchain competitor, Solana SOL, over the past two years. McArdle and Galaxy Digital head of research Alex Thorne both acknowledge that apart from institutional interest in Bitcoin, the other main talking point this cycle is memecoins, which are mostly traded and traded on Solana.

Long-time crypto trader Jordan Fish (also known as Kobe) recently suggested that Ethereum may have made the mistake of trying to be a single solution to many crypto use cases.

Thorn has seen a decline in blockchain use cases that fueled Ethereum's growth in the previous cycle.

“The application segments that helped propel ETH in 2021 will be reduced or seen in 2024,” Thorne tells the magazine.

“Gaming, NFTs, decentralized social and even DeFi have shown strong interest from investors, while Bitcoin has seen high adoption and growing institutional interest.”

The pessimistic flows to date for spot Ether ETFs compared to spot Bitcoin ETFs support these observations from McArdle and Thorne – despite recent signs of life, Ether ETFs took in more inflows than Bitcoin ETFs on November 29.

Additionally, publicly traded companies and nations that have adopted Bitcoin as a treasury generally do not see interest in other crypto assets, other than Cosmos Health announcing that it is adopting ETH as a treasury along with BTC.

ETH does not have a corporate incentive like MicroStrategy.

Are Ethereum's Emerging Competitors a Serious Threat?

One of the emerging threats to Ethereum this cycle is Bitcoin DeFi, although it is still in its infancy. Recent technical developments suggest that Bitcoin could enter the space, particularly BitVM, which could improve the viability of Ethereum-esque use cases on secondary levels built on the underlying blockchain.

Different commit-related soft fork proposals, such as OP_CHECKTEMPLATEVERIFY (CTV) and OP_CAT, also further strengthen the security model and efficiency of layer-2 networks or ZK-rollups on Bitcoin, in addition to expanding technical capabilities at the base layer.

However, it should be noted that making changes to Bitcoin, even with a backwards compatible soft fork, can be a challenging task. Additionally, various proposals have been proposed to implement pledges on Bitcoin without the need for a soft fork such as ColliderScript.

That means Thorn does not see any serious competition for Ethereum at this time.

“Ethereum is the most decentralized, valuable and mature general-purpose blockchain,” Tor says.

“I don't see any other blockchain ecosystem, including Bitcoin and Solana, coming close to solving Ethereum as a mecca for decentralized applications.”

As for the potential for Bitcoin Layer-2 networks, McArdle sees a long-term growth cycle that cannot directly compete with the types of uses seen in Ethereum and Solana in 2025.

The data definitely shows that Ethereum is still king when it comes to liquidity and network effects around various DeFi applications. According to Defilama, more than half of the value locked in various blockchain applications is still available on Ethereum. This point is even more true when it includes the many secondary blockchain layers that are growing on top of Ethereum.

The elasticity and gas charge issues in the base layer still remain, but it will lead to an increase in Solana, especially for memecoin swaps. Although the Solana memecoin ecosystem built around Solana has been derided for its lack of utility and the vulgarity of Pamp.fun livestreams, McArdle believes the alternative layer-1 blockchain should be taken seriously.

“Ethereum's biggest competitor is Solana,” says McArdle. “And I don't think he's another flashy L1. Solana's core technical innovations are important and Solana's UX is much better than Ethereum L1 and is the reason why new retail participants are flocking to Solana.

McArdle added that he believes Ethereum's package-based approach will bear fruit over time, but the complex roadmap will take time to mature. In the meantime, issues related to fragmentation and aggregation will continue.

Tailwind for Ethereum in 2025

Despite the poor performance of ETH's price compared to BTC and SOL over the past two years, there are many technical, regulatory, institutional and other tailwinds for Ethereum in 2025. And because of this, ETH may have already gone down relative to its value in BTC.

“I'm not surprised,” says McArdle. “Given the new crypto-friendly SEC and Treasury Secretary, the potential for yield in ETFs and the overall integration of ETH-based DeFi with TradFi may bring some new demand for ETH, especially institutional interest.”

In addition to the increased opportunity to collect rewards (currently 3.2% APY) coming to ETH ETFs next year, McArdle said BlackRock and others will rapidly expand their tokenization efforts on Ethereum. “Both can drive new interest and thinking for ETH,” he added.

Bloomberg research analyst James Seifert attributes the lack of adoption to a lack of ETH ETFs, but he doesn't see that change as a safe bet next year. “I think if the SEC allows holdings for Ethereum ETFs, that could help ETH ETF issuers, but there's no guarantee it will happen in 2025,” Seifert says. “If so, it may not be until the end of 2025.”

Seifert says that it is likely that the increase in the price of ETH is driving interest in ETFs, not the other way around. “It's kind of like a chicken or egg problem,” he added.

Given the volatile technical landscape for Ethereum, Thorn predicts that base-layer revenue and onchain activity will continue to lag behind other blockchains. Beyond a certain point, the growth of L2s becomes positive for income.

“Continued growth and adoption of bundles generating more blob transactions and payments will be how Ethereum sustains and grows in value for the long term.”

L2 networks like Coinbase's supported base are where most of Ethereum's activity has changed this cycle. Base has implemented various improvements to its user interface, such as the ability to pay gas bills with any ERC-20 token, which will help the chain compete with Solana.

The payments are only drafts, but the payments themselves are still converted to ETH. The move highlights that L2s no longer need to use ETH to pay fees, and some argue that this could pave the way for some L2s to pay fees in native tokens.

Regulatory changes can give Ethereum a boost

The changing crypto regulatory landscape in the US may be the most important place to watch, as it affects tokens like Ethereum and those launched on top of them even more so than Bitcoin.

“A change in the regulatory environment that includes the SEC's relaxation of the security and/or accessibility definition of DeFi will support Ethereum and other altcoin ecosystems in a unique way compared to Bitcoin,” says Thorne.

“A material easing of the regulatory approach to tokens and DeFi could cause the ETH/BTC ratio to decline. Although mainstream Bitcoin initiatives such as BTC create growing corporate or nation-state adoption, that change could be slowed or even prevented.”

It's not yet clear what Trump's election victory will mean for crypto policy at the national level, says Sarah Brennan, general counsel at Delphi Ventures.

“There's a lot of uncertainty right now because we're both waiting to see if the outgoing administration tries to do some last-minute damage and Trump's final picks at the agency level as well as who will serve as interim chairman,” Brennan said.

As of this writing, reports are surfacing that Trump is preparing to appoint libertarian pro-crypto ex-commissioner Paul S. Atkins as SEC chairman, giving the industry and Ethereum a boost.

But Brennan cautions that Gensler could push for more enforcement action before he leaves office on Jan. 20, or that the Biden administration could end brokering rules for DeFi applications before he leaves office. Still, Brennan added, “I'm cautiously optimistic that we're entering a new phase where we can have a constructive conversation at the agency level.”

The fact that many in the Trump administration have significant influence over Bitcoin's top executives, according to Brennan, could tilt the crypto regulator into the world's largest crypto asset. But with Trump's DeFi project building on top of Ethereum and Ripple CEO Brad Garlinghouse being floated as a candidate for the country's first crypto czar, early signs seem to be broadly in favor of different tokens.

In addition to being harsher for Ethereum, the improved regulatory environment adversary will level the playing field and level the playing field for other projects, including Solana. In fact, four Solana ETF filings have already been sent to the SEC this year in anticipation of a possible swing in sentiment for crypto under the Trump administration. “One interesting thing is that the new SEC means that. [Ethereum’s] According to McArdle, the regulatory mechanism will disappear relatively soon.

“So far, only BTC and ETH have been able to penetrate TradFi due to the SEC's stance on Solana and others. But now the door may be open. Can Ethereum take advantage of its current institutional leverage and ‘Lindy Effect' before other assets gain traction and trust in TradFi? let's see!”

Kyle Thorpe

Kyle Thorpe has been covering Bitcoin and crypto since 2014. In particular, he has covered Bitcoin's blockchain war for Bitcoin Magazine and Forbes. Over the years, his work has been published in Fortune, Vice, Investopedia and many other media outlets