It’s no surprise that investors are interested in cryptocurrencies. Bitcoin (BTC), the first in the asset class, was the single best-performing mainstream investment in the last decade, and it’s not even close. Hundreds of other digital currencies have followed in its footsteps, with many putting up outsize returns of their own.
Bitcoin was first traded in 2009. Back then, you could buy one of the new digital tokens for less than 1 cent. Prices rose and rose — albeit with a great deal of volatility over the years — ultimately hitting an all-time high of almost $69,000 in November 2021.
The Ethereum network’s Ether (ETH) coin debuted in 2015 at less than $3, and by November 2021 had hit a record high of $4,891. At the time of this writing, both BTC and ETH were well below their peaks but far above where they were just a few years ago, trading for about $43,000 and about $3,300, respectively.
Putting that performance in perspective, Ethereum has gone up in price about 1,100 times in less than seven years. Contrast that with Apple Inc. (ticker: AAPL), the archetype of a fantastic stock and one of the best-performing equities ever. The last time it traded at one eleven-hundredth of its price was in 1998, 24 years ago. Most stocks will never advance that much.
Ethereum and Bitcoin are the two biggest cryptocurrencies by market capitalization, but similarities more or less end there. They’re totally different animals, developed for different reasons and with different internal dynamics.
But enough history. Investors want to know which is the better buy: Bitcoin or Ethereum? Here’s a quick rundown of some of the biggest considerations regarding the investment outlook for each cryptocurrency.
Bitcoin, which is represented by the BTC ticker, has been the most valuable cryptocurrency since its pseudonymous creator, known as Satoshi Nakamoto, pioneered the concept of cryptocurrencies in 2009.
Today, BTC’s market cap is about $800 billion, or about 40% of the roughly $2 trillion asset class. Ethereum, by comparison, accounts for less than 20% of the asset class and has a market cap of more than $380 billion. No other coin is even worth $100 billion today.
Aside from the unparalleled length of its trading history and brand name, one of Bitcoin’s most fundamentally appealing characteristics is its scarcity: Only 21 million BTC can ever exist. More than 18.9 million, or 90%, of them are already mined and in existence today.
Here are some key factors investors should know about BTC in the Ethereum-versus-Bitcoin investment debate:
Adoption and belief. There’s perhaps one thing that most differentiates Bitcoin from Ethereum and other up-and-coming cryptos. It’s both hard to quantify and at the same time an absolutely vital characteristic of any currency.
“People should see Bitcoin as a gold standard due to the belief system of millions that stand behind it,” says James Wo, founder and CEO of DFG, a global blockchain and cryptocurrency investment firm.
Although perhaps difficult to quantify, this belief in Bitcoin as an enduring digital asset can be clearly seen by the number of entities, corporations and even nations that have co-signed its permanence.
Bitcoin was the first cryptocurrency that CME Group Inc. (CME) offered futures contracts on, allowing investors to wager on prices at specific dates in the future. In October, ProShares Bitcoin Strategy ETF (BITO) launched, becoming the first Securities and Exchange Commission-approved crypto-based exchange-traded fund.
But it’s not just investors enjoying more and more access to BTC. Everyday consumers can earn Bitcoin with services like Lolli, the first Bitcoin rewards application allowing people to earn BTC while shopping online. Lolli has more than 1,000 vendors, including Nike Inc. (NKE), Best Buy Co. Inc. (BBY), Booking Holdings Inc.’s (BKNG) Priceline and Groupon Inc. (GRPN). Several Bitcoin-rewards credit cards, from the likes of Visa Inc. (V) and Mastercard Inc. (MA), also exist.
But while all those landmarks are impressive, perhaps the biggest endorsement of Bitcoin’s permanence is the fact that a handful of multibillion-dollar companies have started to buy and hold Bitcoin on their balance sheets.
Analytics company MicroStrategy Inc. (MSTR) is the biggest corporate BTC holder, but in 2021, even better-known companies like Block Inc. (SQ) — formerly known as Square — and Tesla Inc. (TSLA) bought Bitcoin to hold in lieu of cash.
No major companies have publicly bought Ethereum to maximize returns on cash, and with S&P 500 companies alone reportedly sitting on more than $2.7 trillion in cash, the growing acceptance of holding Bitcoin on balance sheets has potential to be a massive catalyst for BTC.
So, can this trend continue?
“I definitely think that trend has legs. If you look at the returns you would get from investing in Bitcoin, they’re just orders of magnitude higher than putting money in Treasurys” and other traditional stores of corporate cash, says Urvashi Barooah, principal at Redpoint Ventures.
Energy and regulatory issues. El Salvador, which made Bitcoin an official currency in the country and holds BTC on its balance sheet, is a clear exception on the international stage when it comes to Bitcoin. Most nations are cautious to embrace it for fear of how it could disrupt their own currencies and even undermine systems of taxation. As the most prominent token, Bitcoin has a target on its back here.
China, for instance, previously a major player in cryptocurrencies, banned mining and subsequently cryptocurrencies themselves — not just BTC — in 2021. The country is trying to advance a digital version of its own currency, the yuan.
One of the more pressing concerns regarding Bitcoin, especially in a more environmentally conscious age, is its prolific use of energy. Bitcoin is far and away the biggest energy hog among cryptocurrencies, consuming about 0.5% of all electricity consumed in the world — that’s more than a number of countries, and seven times more than Alphabet Inc.’s (GOOG, GOOGL) Google uses in global operations, according to The New York Times.
While Barooah notes that the shift away from Chinese Bitcoin mining has helped move the electricity sources of mining operations away “from coal to things like natural gas, which is obviously a lot better,” she says there’s still plenty of room for improvement.
“It does consume a lot of energy. There’s a lot of work left to be done,” Barooah says.
Before asking yourself “Should I buy Bitcoin or Ethereum?” you should understand the different motivations behind Bitcoin and Ethereum, the latter of which is colloquially referred to that way due to the eponymous network. The network’s native cryptocurrency is actually known as Ether.
Much more flexibility. Some experts say that the comparison between Ethereum and Bitcoin is like comparing electricity with gold.
“Bitcoin to me is more of a commodity, like gold, for example — it’s more of a medium of exchange, almost, than Ethereum, which is actually infrastructure for people to build apps on top of,” Barooah says.
In other words, there’s really no utility to Bitcoin other than being a store of value. The Ethereum network, on the other hand, brings virtually limitless possibilities. Other cryptocurrencies are issued on it; nonfungible tokens, or NFTs, trade freely on the platform; and the entire field of decentralized finance, or DeFi, was ushered in with Ethereum and its versatile ability to create smart contracts.
Extremely high gas fees. One area where ETH definitely loses out to BTC, for the time being at least, is transaction fees. While Ethereum-based transactions tend to be far faster than Bitcoin transactions, there’s a steep cost that comes with that convenience, known as gas fees.
These gas fees, which compensate participants for validating transactions, can be outrageous, especially for small transactions.
“The high network usage on Ethereum has caused inflated gas fees,” says Adrian Kolody, co-founder of Domination Finance, a non-custodial, decentralized exchange for trading crypto dominance, or market share. “This is a big deal when looking at Ethereum as a retail form of payment, given that someone isn’t going to want to pay $35 (in fees) for an item that costs $40.”
Slow but sure transition to ETH 2.0. This issue of gas fees is a major impediment to further adoption and usage of Ethereum, despite already being the most-used cryptocurrency network in the world. Networks like Solana and Avalanche are mimicking Ethereum’s utility with much lower fees.
Unlike Bitcoin and its energy issue, however, Ethereum has a plan to help address its most glaring weakness: it is destined to move from the costly and energy-intensive proof-of-work protocol to the proof-of-stake protocol.
This change, part of a bundle of updates known as ETH 2.0, has been anticipated for some time now. Kolody says the switch promises to make Ethereum “a viable real-life retail payment solution.”
“On top of this, it’s supposed to reduce energy consumption by over 99%,” Kolody says. “Unfortunately, it’s a long way out and nobody really knows when that will launch.” Some say 2022, and some expect the shift in 2023 or beyond.
In terms of the BTC-versus-ETH argument, however, Kolody is unwavering.
“In my opinion, ETH is the more solid investment long term,” Kolody says. “BTC is coming under more scrutiny for the lack of utility, and if ETH 2.0 delivers on its promises, it isn’t even going to be a contest anymore.”
Ethereum vs. Bitcoin: Bottom Line
The first-mover-advantage argument works both ways. While BTC is the first cryptocurrency, ETH is the first cryptocurrency to gain widespread adoption in the fast-growing and still emerging area of DeFi, where Ethereum is the default blockchain and clear market leader. It also has the highest market share in the fast-growing NFT space.
Still, Ethereum can’t afford to rest on its laurels, as Wo points out.
“In terms of competition, Bitcoin is still unmatched, while Ethereum has competitors that have gained traction and momentum thanks to their efficiency and easy-to-use systems,” Wo says.
Competition aside, when it comes to Bitcoin vs. Ethereum, it seems that the latter has the greatest long-term appreciation potential. If BTC is truly considered to be digital gold, investors should be reminded that gold routinely underperforms stocks. And unlike gold, Bitcoin has no utility aside from its acceptance as a store of value and vehicle for speculation.
ETH, on the other hand, is at the forefront of the still-nascent DeFi area, and is actively working toward addressing its own energy- and fee-based shortcomings. Plus, it’s starting from a much smaller base than BTC, giving it more growth potential, all things considered.
Both currencies remain must-own tokens for new crypto investors, but the more dynamic ETH comes away victorious in the head-to-head comparison for longer-term investors.
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