Cryptocurrencies: ethereum will challenge the hegemony of bitcoin

At the end of 2021 a new cryptocurrency emerged that seemed to step straight out of a science fiction novel. Worldcoin offered free digital tokens to anyone willing to have their eyeball scanned. More than 100,000 people signed up. The demand suggests 2022 could be the year alternative coins challenge bitcoin’s supremacy.

In today’s column we make a series of predictions for the year ahead.

For now, bitcoin remains the biggest and best-known cryptocurrency. It has a market capitalisation of $887bn, according to CoinGecko. This is about twice the size of the second-largest, ether. Amid the usual volatility, prices hit new heights in 2021 amid hopes of greater mainstream acceptance. In April, cryptocurrency exchange Coinbase listed in the US. In October, the first US exchange traded bitcoin fund was launched. Bitcoin’s price jumped above $67,500 in November before falling back below $50,000 this month.

Uneven price progression will continue. Company interest in alternative currencies is not yet consistent. Tesla declared that holding bitcoin as an alternative to cash proved its liquidity. It then sold down its holding and decided bitcoin could no longer be used to buy its electric vehicles.

The future of all digital tokens still rests with regulators. The US Securities and Exchange Commission permitted a bitcoin ETF to proceed because it holds futures contracts traded on a regulated exchange rather than bitcoins directly. The world’s biggest crypto exchange, Binance, remains unregulated and unlisted. It has clashed with regulators in Singapore. China announced in September that crypto transactions were illegal. The head of the SEC, Gary Gensler, has warned that investors could get hurt without more oversight.

Yet while watchdogs prevaricate, the institutions that fret that blockchain and cryptocurrencies could eliminate their expensive third-party services will continue to stake a claim in the sector. Governments will continue to promote their own, central bank-run digital currencies.

Both should drive more interest in bitcoin’s rival ether. Ether is used to purchase non-fungible tokens — now a $15bn market — and is at the heart of decentralised finance. The latter’s technology does not rely on typical financial intermediaries such as banks.

In 2022, the ethereum network on which ether is used will be upgraded and is expected to convert to proof of stake verification. This change requires far less energy than bitcoin’s proof of work verification.

The shift should appeal to eco-conscious crypto fans, encouraging them to switch. The long-term bet to gain crypto adherents favours ether, not bitcoin.