ETHEREUM IS ABOUT TO TAKE OVER

What's up, Graham? It's guys here. So, I think it's no surprise that overall 2021 has been a breakthrough year in so many ways. Like, we now have a brain implant that translates thought to text with 94% accuracy, a new lithium metal battery technology that promises 80% further range, bioengineered bugs developed to help break down plastics. Oh, and, uh, Bitcoin just recently hit sixty-nine thousand dollars—nice!

Although while investors everywhere celebrate the almighty number of meme greatness, there's another topic gaining some mainstream attention, and that all has to do with Ethereum, which so far this year has increased in price roughly a thousand percent, outpacing the return of Bitcoin by approximately three times. Now, what's interesting is that this isn't just a one-time occurrence either. Since 2016, Ethereum has consistently posted higher annualized returns than just about anything else, leading some people to believe that at the current rate, if this continues, Ethereum could lead the market through an ominous sounding event known as the "flipping," where it overtakes the market cap of Bitcoin, and everyone loses their minds.

So, given how analysts are now predicting both Bitcoin and Ethereum to continue their seemingly unstoppable momentum, let's talk about exactly what's going on, whether or not a reversal is actually possible, and the impact this could have throughout the entire market. Because I have to say, after gathering every piece of data that I could possibly find, the results were pretty surprising and left me reconsidering how I plan to invest in the future and where my money might be best allocated.

But before we start, I want to say a huge thank you to the sponsor of today's video, the like button. Did you know that every two seconds a like button goes without being smashed? Well, thankfully with your help, you could make a difference by giving the like button the tap it deserves. And, as a thank you for your selfless support in helping the almighty YouTube algorithm, for a limited time you'll get to see a picture of the creator that you just helped holding the like button that you just smashed. So, thank you guys so much! And now, with that said, let's begin.

Alright, so first we should really understand exactly what Ethereum is and how it's fundamentally different from other technologies, because I'm sure most people just see it as a less expensive Bitcoin or maybe a faster way to buy things, but both of those descriptions couldn't be further from the truth in terms of really understanding why Ethereum has such strong mainstream popularity. See, the concept of Ethereum was first described in 2013 by 19-year-old Vitalik Buterin, who created it as a way to facilitate programmable contracts using its own currency.

And yes, I realize that sounds incredibly confusing, so we'll break it down a little bit further. The creation of Ethereum all begins with replacing the intermediary between what we do and how our information is processed. Like, for example, while you're watching this video that I created for you, YouTube is the intermediary between us. Or if you want to send money between people, a third party like Venmo, PayPal, or a bank is the intermediary between you and that person. But by having an intermediary, you are trusting that company with your information, and they're the ones that control how and the speed at which your information is presented.

Ethereum, on the other hand, is based on the same blockchain network as Bitcoin, except it allows for an open-source platform where programmers could build applications that facilitate the change of money, content, property, or anything of value in the form of what's called the smart contract. This is a digital agreement that performs a specific task when certain conditions are met.

Like, if you hit the like button, the like button will turn blue. If you comment down below, I will respond. And where this gets interesting is that these smart contracts could be built for pretty much anything. Like, if I lend you a thousand dollars, the smart contract would make sure that I get paid back by a specific day and time directly from your wallet without any work on your end, directly from the Ethereum blockchain. It basically removes the middleman and allows transactions to happen in real time without any human involvement.

The thought is that this would create more trust between parties because there's no gray area. Like, you know the contract—the contract doesn't take sides; it just does what both parties agree on, and that's it. So in this case, Ethereum is the network the programs are created on, and Ether is the currency that powers it. Kind of like Ethereum is the car, but Ether is the gas that powers the car. The gas itself was really never meant to be an investment or store of value to begin with. Even now, it certainly can be, because oil is certainly skyrocketing through the roof.

But instead, Ethereum is about creating a completely decentralized peer-to-peer network on a level playing field, with Ether being the currency that powers it. Now initially, unlike Bitcoin, which is limited to a total number of 21 million coins—and that's it—until recently, Ethereum was potentially infinite with a mining limit of 18 million new coins every single year. However, in August of 2021, the Ethereum network underwent what's called the London hard fork, which is a fancy way of saying their program was updated to improve its efficiency and its price.

See, before this upgrade, Ethereum transactions were processed and prioritized by whoever was willing to pay the most—kind of like someone offering to pay a little bit more to cut the line and get VIP access. However, as Ethereum began to grow in popularity, so many people began using the VIP service and cutting the line that their transaction fees increased to a point where it no longer made sense to move smaller amounts because the cost was so high. But with this new upgrade, a base fee is implemented for every transaction, of which is automatically burned, thereby reducing the overall supply of Ethereum and creating a deflationary effect that winds up increasing its price as a result.

Over 800,000 Ethereum have been burned and taken out of circulation in the last three months, and this update is set to make way for the much-anticipated Ethereum 2.0 upgrade—but we'll talk about that momentarily. The important distinction here is that the Ethereum network is meant to lay the foundation from which other decentralized applications can be built on top of—similar to how the internet allows YouTube to play the videos that you're watching right now.

But in terms of its price—why analysts believe it could hit ten thousand five hundred dollars and whether or not the flipping has any actual merit—we should discuss its relation to Bitcoin, because I hope so far this isn't confusing, and it's all going to make a lot of sense very soon. I'm sure at this point, Bitcoin needs absolutely no introduction as the largest cryptocurrency by market cap and volume.

Alright, I guess that was kind of an introduction. But even though most people initially thought of Bitcoin as a new type of digital currency, it eventually evolved into a global store of value, paving the way as a new asset class that's potentially being used as a hedge against inflation and global turmoil. Companies like Tesla, PayPal, Square, MicroStrategy, and a variety of other businesses have begun placing a portion of their cash reserves in Bitcoin.

Even entire countries like El Salvador began using it throughout their economy. Despite the rapid volatility, more and more people are using it as a way to diversify their portfolio, and as it gains momentum, more and more people are beginning to take it very seriously. Even Tim Cook, the CEO of Apple, says that he owns cryptocurrency and he's been interested in it for a while. Well, billionaire Mark Cuban recommends that investors maintain a small allocation to Bitcoin, and if you want something shocking, JP Morgan, who previously called Bitcoin worthless, is now predicting a long-term price of 146 thousand dollars.

It's also no surprise that Millennials and Gen Z own more cryptocurrency than any other generation, and many of them are ditching traditional finance in favor of Bitcoin. The implication is that over time, Bitcoin has really solidified its dominance as the foundation of the entire cryptocurrency market, and ultimately, people invest as a way to protect their money with the expectation that more adoption is going to follow over time, and that will continue to drive up the price. That's already evident by the fact that the first-ever Bitcoin Futures ETF was introduced, along with a consistent push to bring a Bitcoin Index Fund to the market that would allow anyone to buy in with a few clicks of a button.

It's also said that with Bitcoin, volatility is the price you pay for performance. Well, as Bitcoin grows less risky, its adoption and its price increase, and the billionaire Bill Mayer says that Bitcoin's total supply is growing less than two percent a year. And it's obvious by the price that its demand is growing much, much faster than that.

Although, that then leads us to the question of questions: will Ethereum's momentum continue growing to the point where eventually it outpaces Bitcoin and flips its position as the largest cryptocurrency in the market? Well, on the surface, in terms of past performance, Ethereum is impressive. For example, there's a website called Cost AVG that calculates the return of cryptocurrency investments over time.

As you can see, had you spent 100 a month buying Bitcoin since 2017, your six thousand dollar investment would have turned into a 75 thousand dollar value—an ROI of 1155%. However, had you made that same investment into Ethereum during that same time frame, your six thousand dollar investment would have turned into, wait for it, two hundred and twenty-seven thousand dollars, with an ROI of almost thirty-seven hundred percent! Not to mention, throughout 2017, 2018, 2019, 2020, and now 2021, Ethereum has generated higher returns than Bitcoin, with no signs of slowing down.

Of course, obviously, all of this is only known in hindsight, and it would have been impossible to predict these types of returns five years ago. But throughout that time, Ethereum has outperformed Bitcoin's overall return by almost triple, meaning some people believe that if this continues to the same degree, Ethereum could catch up to the market cap of Bitcoin within about three years.

Now, of course, that statement is relying on quite a few ambitious assumptions and only calculates that the current rate of return is going to continue in equal proportion without any other changes along the way, which is unlikely to happen exactly as described. I want to make that evidently clear because nothing grows consistently in a linear fashion, and to expect this will always be the case is literally the epitome of using napkin math to predict future returns using past performance, which isn't necessarily the most reliable.

But still, Ethereum's performance is much higher than I initially expected, and given the deflationary changes within the London hard fork, Ethereum's price could continue to rise. Fund Strat Global even predicted a 10,500 dollar price target given its potential to one day be able to process transactions much like MasterCard or VISA. There's also been a very long-awaited release of the Ethereum 2.0 upgrade, which promises further efficiency, scalability, and quicker transaction speeds, although it's still unclear when that's going to happen, and they've been talking about this now for years.

Of course, in terms of the flipping and my thoughts about when this can happen, unfortunately, it's not all rainbows and sunshine, and we need to talk about the downsides because I promise you it's not going to be a smooth ride along the entire way. Like in 2017, the price of Ethereum crashed from a high of 1400 down to a low of 87 within a year. That's a 94% drop compared to Bitcoin's 83% drop during that same time. Scalability is also a potential concern with the increased popularity of using the Ethereum network, and even though the London hard fork solves some of those issues, Ethereum 2.0 is really seen as the long-term solution. Although who knows when that's going to happen?

The third, I know this might sound unpopular to say, but since Ethereum is a token built around functionality, there is nothing that says that something else won't come along and do a more efficient job and give Ethereum some competition. And fourth, from a retail point of view, Ethereum is seen as often quite confusing; its functionally still developing, and long term, we have no idea what might happen.

Now, I have a feeling that Ethereum will continue to evolve, adapt, and develop, but nothing is guaranteed. And just because it's the second-largest cryptocurrency by market cap, it doesn't mean that it will always be. And listen, I could also say similar concerns about Bitcoin; even though so far it's successfully used as a store of value, it's horribly used as a currency. And even though Kathy Wood predicts that Bitcoin will eventually hit a price of five hundred thousand dollars, the honest answer is nobody knows.

That's why I've chosen to limit my total cryptocurrency investment to eight percent throughout my entire portfolio—that's it. And if something were to happen and I lose all of it, well first of all, that would be horrible, but I would still be okay. I say this because even though experts sometimes make lofty price predictions, that does not mean you won't experience a 90% drop along the way to get there, and understand that anything could happen, and that's a risk you gotta factor in.

But in terms of the flipping, to me based on past performance, it's a legitimate topic that should be taken seriously. This also plays into the topic of Bitcoin dominance, which measures Bitcoin's market cap relative to the rest of the cryptocurrency industry, or in other words, how much of the entire market cap belongs to Bitcoin. The general thought is that if Bitcoin rises, so does the market price of every other cryptocurrency alongside with it, and the opposite happens if Bitcoin falls and everything else begins to sell off.

In this case, Bitcoin dominance has been steadily falling since 2017 after other options like Ethereum, Cardano, and a multitude of others began taking some of its plays. And throughout the last five years, Ethereum is slowly beginning to catch up, having previously reached two-thirds of the market cap of Bitcoin in 2018. Business Insider also just recently quoted a 24-year-old cryptocurrency hedge manager saying, "Bitcoin is a store of value; it's digital gold. So its market cap at most is going to be somewhere around gold, maybe larger because it has some properties that are better than gold. Ethereum is trying to power the rails of all global finance in the future, and that is a much bigger market if it does succeed."

Now, obviously, not everyone agrees, and even the billionaire cryptocurrency investor Mike Novogratz says what we don't know yet is Ethereum versus Solana, Ethereum versus Luna, Ethereum versus Polka dots—how the level one battle is going to turn out. Others worry that if a cryptocurrency surges past Bitcoin, it could unsettle the markets and cause the speculation that if it happens once, it could happen again.

As for my take on things, I think the flipping has merit, although Bitcoin and Ethereum are fundamentally different and should not be seen as competitors. Most likely, Bitcoin is going to remain as the mainstream Goliath that probably isn't going anywhere. But Ethereum, on the other hand, is a much more practical and functional use case well beyond just a currency. And as the entire DeFi space grows and develops, I would not be surprised if another technology begins taking away from some of Ethereum's market share, and that from my perspective would be the biggest risk to the flipping long term.

So given that, I wouldn't necessarily YOLO everything into Ethereum to bet on the flipping happening. For me, that amount is currently eight percent—then maybe as high as ten if I want to take on a little bit more risk, split evenly 50/50 between Bitcoin and Ethereum. But ultimately anything could happen, and even though I find this an incredibly interesting topic to research, at best, everything is a random guess, and you should not be taking advice from somebody on YouTube making videos in his garage.

So with that said, you guys, thank you so much for watching! Make sure to subscribe, hit the notification bell. Feel free to add me on Instagram and on my second channel, The Graham Stephan Show. I post there every single day I'm not posting here, so if you want to see a brand new video from me every single day, make sure to add yourself to that. Thank you so much for watching and it's a long time.