Bitcoin and Ethereum are two of the most popular cryptocurrencies in the global crypto market. Deciding whether to buy Bitcoin or Ethereum can therefore be difficult, especially if you are a new investor.
Let's take a look at the main features of Bitcoin and Ethereum below.
Bitcoin is a peer-to-peer digital money system that allows anyone in the world to store, send and receive money digitally without the involvement of third parties such as banks or payment service providers.
Bitcoin is decentralized, meaning it is not under the control of governments, central banks, or financial institutions. Transactions are verified by a network of nodes and recorded in a public, decentralized ledger, the blockchain.
So-called miners process transactions and secure the blockchain by adding new blocks consisting only of valid transactions to the Bitcoin blockchain. As a reward for ensuring the continuity and security of the network, miners are rewarded with transaction fees and newly mined Bitcoin.
What makes Bitcoin special is that there is only a limited number of 21 million Bitcoin. In addition, new coins come into circulation more slowly over time, which makes Bitcoin a disinflationary currency.
Alternative Currency - You can buy goods online or offline with Bitcoin without the involvement of an intermediary like Paypal or Visa. You can also exchange your cryptocurrencies for traditional currencies like USD. Therefore, Bitcoin can act as a currency just like the Euro.
International Money Transfers - The Bitcoin network allows you to send and receive money from anywhere in the world without the need for a bank account. No matter who you are or what you look like, you can send and receive Bitcoin with a cell phone.
Store of value - You can also use Bitcoin as a store of value and as a protection against inflation. In this case, you simply store your Bitcoin until you need it in the future.
Investment Vehicle - Although this is not a traditional use for Bitcoin, many investors:in choose to buy Bitcoin and hold it for an extended period of time in hopes that the value will increase over time.
The acceptance of Bitcoin is constantly growing. More and more companies accept Bitcoin as a means of payment, and more and more people use Bitcoin to buy goods and services.
In the investment space, Bitcoin adoption among small and large investors has skyrocketed in recent years. Over 100 million people own Bitcoin and most of them hold the digital currency as an investment.
Compared to many other assets, Bitcoin has shown a very strong price development over the years. On January 1, 2009, one Bitcoin cost less than $0.01. At the time of writing, one Bitcoin costs around $20,000. That's an increase of 190 million percent!
Bitcoin reached its all-time high in November 2021, when one Bitcoin was worth $69,420. As you can see in the chart above, there have been drastic price movements over the years - both positive and negative.
Ethereum is a blockchain platform for so-called smart contracts and decentralized applications. It was founded in 2015 by Vitalik Buterin and has gained momentum since then.
Ethereum was created to provide a platform where you can create so-called decentralized applications (dApps) by using smart contracts. dApps are similar to the apps you use on your smartphone. The main differences are that they are created on a blockchain, access is through a crypto wallet, and there is no central authority controlling the app. Instead, the community (ideally) determines the evolution of the dApp, which operates autonomously on the blockchain.
The Ethereum network is powered by its cryptocurrency, Ether. Ether is needed to pay transaction fees in the creation of smart contracts and in token transfers.
Token transfers - Ethereum enables transactions between users without intermediaries or third parties. This is particularly useful when dealing with international payments or transactions that require reliance on a central authority.
Token creation - It is used to form other cryptocurrencies and tokens.
Ethereum offers users the ability to create and manage decentralized applications through the decentralized Ethereum Virtual Machine (EVM).
Decentralized Applications (dApps) - EVM enables the execution of smart contracts, applications that (should) run exactly as programmed, without failures, censorship, fraud, or third-party interference.
Decentralized Financial Markets (DeFi) - DeFi is short for Decentralized Finance or decentralized financial markets. The idea of DeFi is to replicate traditional financial services on the blockchain and offer purely digital financial products that can be accessed by anyone with an internet connection and a crypto wallet.
Non-Fungible Tokens (NFTs) - Non-Fungible Tokens are unique digital tokens that represent ownership of a physical or digital asset or item. Examples of NFTs include digital art, crypto collectibles, memberships, video game items, and more.
Ethereum adoption has been growing steadily since the blockchain's launch in 2015, as more and more people and organizations recognize its potential.
Ethereum aims to become the world's computer - with people and organizations around the world using it to run their applications without relying on big tech companies like Google or Microsoft.
There are currently more than 2,000 dApps on Ethereum and more are being added every week. Most of the dApps are decentralized financial products (DeFi), online video games (GameFi), and NFT marketplaces.
Although the innovation of these applications is quite remarkable, dApps have had little impact in the real world. Most Ethereum dApps today are all about making money in the crypto market at high risk.
Ethereum was launched in 2015 with a price of less than $1. It surpassed $1 in January 2016 and doubled to $2 by February 2015. This upward trend continued throughout 2017, but Ethereum's volatility also increased. For example, between April and June 2015, Ethereum rose from $40 to $362. By the end of the year, it was around $772 per ETH token.
In 2021, the NFT market exploded, and due to its smart contract capabilities, Ethereum was the platform of choice for anyone looking to mint, buy, or sell NFTs. This caused the price of Ether to skyrocket, reaching its all-time high of around $4,800 in November 2021. This represents a price increase of more than 900,000 percent since its launch.
The price development of Ethereum is characterized by strong fluctuations between sharp price increases and drastic price drops. It cannot be ruled out that a similar development will occur in the future. In addition, the price of Ether is strongly dependent on the price of Bitcoin, as the crypto market generally follows the Bitcoin price.
Bitcoin is the original cryptocurrency and still the largest by market capitalization. Ethereum has gained ground on Bitcoin in recent years, but has never managed to threaten Bitcoin's status as the largest cryptocurrency. Currently, Bitcoin accounts for 39% ($360 billion) of the cryptocurrency market, while Ethereum accounts for about 18% ($172 billion).
Let's take a look at the main features of the two cryptocurrencies.
Another difference lies in the way the two networks reach consensus. Bitcoin uses a proof-of-work consensus mechanism, while Ethereum has recently used a proof-of-stake system. This means that Ethereum is more energy efficient, as it does not require as much energy to mine new blocks to maintain the network. However, proof-of-stake increases the risk of centralization, which could lead to Ethereum being controlled by banks and/or states in the future. In the case of Bitcoin, however, this is unlikely.
One of the main differences between Bitcoin and Ethereum is their respective purpose. Bitcoin was designed as a peer-to-peer electronic cash system, while Ethereum was developed as a platform for smart contracts and decentralized applications.
Finally, there are differences in the scalability of each cryptocurrency. Both Bitcoin and Ethereum have their share of scaling issues. Fortunately, the developers of both blockchains have been working on solutions to the scaling issues, albeit with different approaches, as the two technologies are different.
In the case of Bitcoin, there is a strong focus on so-called layer-2 solutions, such as the Lightning network, which allows Bitcoin transactions to be sent instantly and with minimal fees.
Layer-2 solutions also exist for Ethereum, but they rely on proof-of-stake and so-called sharding to increase the number of transactions per second in the future.
Whether Bitcoin or Ether is the right investment for your portfolio largely depends on you, your risk-return profile, and your investment goals.
However, looking at the fundamentals of Bitcoin and Ethereum, it is easier to argue that Bitcoin is probably the better investment.
Bitcoin has a limited overall supply and a declining rate at which new coins enter circulation, making it a disinflationary currency. As adoption increases - as we have seen over the past 13 years - the price of Bitcoin is likely to continue to rise as increasing demand meets limited supply.
As a result, Bitcoin has established itself as digital gold, serving as both a long-term hedge against inflation and a store of value.
Bitcoin is also favored by institutional investors, corporations, and high-net-worth individuals, which has helped the cryptocurrency reach a new all-time high in 2021.
Ethereum also saw an impressive rise in the price of its Ether token in 2021, but the network's cryptocurrency was not created as a digital currency or an investment asset.
Ether was created to pay transaction fees on the Ethereum network. The idea behind Ether is that it powers decentralized applications on the network.
The supply of Ether does not have a fixed cap, and monetary policy has changed over the years, suggesting that it may change again in the future to favor Ethereum's largest stakeholders, but not necessarily all token holders.
Although Ethereum has some innovation to offer in the blockchain space, it must be acknowledged that not all that glitters on the smart contract blockchain is gold.
An example of this would be the Market for Decentralized Finance, built primarily on Ethereum. In theory, it sounds like a great innovation if every person with an internet connection can access internet-based financial products and services. However, the reality is that the DeFi market is regularly plagued by scams, rip-offs, and massive hacking attacks, which has resulted in the loss of billions.
The NFT market, which experienced massive hype in 2021, saw a similar pattern: scams, rip-offs, and hacks plagued this new emerging sector. Moreover, the value of most NFTs has fallen by over 90% since their peaks, highlighting the Wild West nature of this "innovation" on Ethereum.
For an example of how much hype and how little value is regularly created on Ethereum, check out celebrity NFT purchases. For example, famous YouTuber Logan Paul bought an NFT for $623,000, which is reportedly worth only $10 today.
Add to that Ethereum's recently implemented switch to proof-of-stake, which greatly increases the risk of centralization by a few wealthy individuals and organizations that could control the network.
In the case of Bitcoin, taking control of the network would be very costly due to the high resource intensity of proof-of-work-based Bitcoin mining.
Arguably the most concerning thing about Ethereum is the fact that more than half of its transactions are now OFAC-compliant. This means that the risk of Ethereum transactions being censored is incredibly high, as more than half of network validators may decide not to process transactions that the Office of Foreign Assets Control (OFAC) does not consider compliant with its rules.
This goes against the basic principle of Bitcoin. Bitcoin allows anyone in the world, regardless of who you are, what you look like, or who you love, to store and transfer money on the Internet without censorship. Bitcoin is censorship-resistant, rare digital money for everyone.
Investors who prefer Bitcoin over Ethereum usually base their decision on the fact that Bitcoin has a fixed, limited supply and a disinflationary monetary policy that is met with a steadily increasing demand for Bitcoin. Therefore, the Bitcoin price should continue to rise over time, assuming global Bitcoin usage continues to increase.
Ethereum does not share Bitcoin's monetary policy because Ether was never intended to be a digital currency or store of value. Instead, Ether is used to run dApps and pay for transactions on the network. Therefore, there is also no hard cap, which means that the probability of a continuous price increase is probably lower than with Bitcoin.
Ethereum likely has a future because it is supported by a variety of stakeholders, including banks and the public sector.
In the Ethereum ecosystem, there are hundreds of companies working on dApps, which gives the system more growth potential (even if many of these projects are more hype than actually creating value). Ethereum has also recently switched to a proof-of-stake consensus mechanism, making the platform more sustainable and energy-efficient, which has helped the blockchain gain greater public approval.
However, all this does not mean that the price of Ether will perform as well as Bitcoin in the long run.
Ethereum appears to be evolving into a centrally controlled blockchain infrastructure for banks and governments that only allows transactions that are deemed OK by the parties involved. In many ways, this means Ethereum is becoming a blockchain version of the current banking system. So the question is, do we really need this?
At Coinfinity, we believe that it still makes sense to invest in Bitcoin, even though the price of the digital currency has already risen so much.
We believe that we are still in the early stages of Bitcoin development and adoption, which means that the price of the cryptocurrency could reach much higher highs than it has so far. But of course, it's entirely up to you whether you want to invest in Bitcoin or not.