Bitcoin (BTC) and Ether (ETH), the native cryptocurrency of the Ethereum blockchain platform, are the two most popular coins in the crypto landscape. With a market cap of about $440 billion, BTC, even with its 50% tumble year to date through July 27, trades at around $23,000 with a typical 24-hour trading volume in the tens of billions of dollars. ETH, on the other hand, has a market cap of about $200 billion. It’s trading at over $1,600, with a typical 24-hour trading volume also in the tens of billions of dollars.
The supply of coins in circulation influences these numbers as well. ETH has 121.7 million coins in circulation, while BTC has only 19.1 million. In general, reduced supply can push up prices.
For many investors, the question remains: Which is the better buy, Bitcoin or Ethereum? “In some senses, they’re similar in that they have this sort of currency feature to them,” says Bryan Routledge, associate professor of finance at the Tepper School of Business at Carnegie Mellon University. But the main difference between Bitcoin and Ethereum is the use case for each. Put simply, Bitcoin is mostly known as a store of value, and Ethereum supports smart contracts and secure financial transactions.
Investors who are interested in cryptocurrency and want to own either Bitcoin or Ethereum may benefit from brushing up on the basics, such as:
— What is Bitcoin?
— What is Ethereum?
— What are the differences between Bitcoin and Ethereum?
— Ethereum’s “merge” and what it means for investors.
— Bitcoin vs. Ethereum: The bottom line.
What Is Bitcoin?
Investors can think of Bitcoin “either as a store of value like gold or as a non-sovereign currency you can use for payment,” says Matt Hougan, chief investment officer at crypto ETF and index fund provider Bitwise Asset Management. This means that “when you buy Bitcoin, you’re buying a monetary asset,” he says.
In other words, Bitcoin is primarily an alternative form of money, according to Thomas Perfumo, crypto exchange Kraken’s head of business operations and strategy. It derives value from “an incredibly measured approach toward decentralization and security through proof-of-work mining,” he says.
Proof-of-work is an important concept for crypto investors to understand. “What’s important in a decentralized blockchain is that one person isn’t adding all the blocks,” explains Routledge. A solo act would lead back to a centralized finance system, such as a bank or a government. In decentralized finance, or DeFi, a variety of people add those different blocks, making the market competitive. “It’s like a lottery,” Routledge says. “Everybody proposes a block; we pick one at random. Roughly every 10 periods, we add a new block.” For Bitcoin, “proof-of-work runs this lottery,” he says.
This proof-of-work system is designed to make Bitcoin “a better tool for money,” says Mauricio Di Bartolomeo, chief strategy officer and co-founder of crypto lender Ledn Inc. For the system to work smoothly, the Bitcoin protocol has to be very stable, robust and predictable, because that’s what is expected of a monetary instrument, he says.
What Is Ethereum?
Ethereum, on the other hand, “aims to function as a ‘decentralized world computer,’ which allows for the implementation of decentralized applications and alternative forms of utility,” says Perfumo. Put simply, Ethereum is like iOS or Android, a platform that developers are using to build applications, says Merav Ozair, blockchain expert and fintech professor at Rutgers Business School.
What this means in the real world, Di Bartolomeo says, is that Ethereum isn’t “trying to be just money.” Instead, the protocol is trying to be the world’s cloud computer, he says. Developers can do a lot with the Ethereum platform, building self-executing contracts, DeFi protocols, and even stablecoins and non-fungible tokens, or NFTs.
Ethereum did so well during crypto’s last bull market cycle precisely because so many things built on the platform boomed: NFTs, DeFi and stablecoins, says Hougan. Ethereum could evolve into a decentralized operating system that anyone who understands the protocol can build on, Ozair adds.
Routledge draws a comparison between Ethereum and Apple Inc.’s (AAPL) invention of the iPhone. When the iPhone launched in 2007, no one could have predicted that it would lead to the disruption of the taxi industry. A mere two years after the first iPhone hit shelves, Uber Technologies Inc. (UBER) began changing the world of transportation with its ride-hailing app. Routledge sees Ethereum as having the same potential for disrupting industries as we know it: No one knows all the applications that could end up being built on the platform.
What Are the Differences Between Bitcoin and Ethereum?
The two cryptocurrencies’ utilities are defined by the problems they are trying to solve. Routledge says he likes to think of Bitcoin as digital gold. “It’s not intrinsically useful,” he says, “but it seems to have value” and it’s an alternative to the financial status quo. Ethereum, he says, is like owning a barrel of oil. He says that “it’s not just a hedge against gasoline prices; it’s also useful in that you can refine it.” In this way, Ethereum has an extra use case: the development of services on the Ethereum network.
One important thing to consider about Bitcoin’s current appeal, aside from being the world’s first cryptocurrency, “is that its formative years coincided with two historic economic crises,” says Adam Sze, head of digital assets at ETF provider Global X. “These crises highlighted two of the biggest issues with the traditional financial ecosystem: mistrust and inaccessibility.” Bitcoin solves these problems by being a decentralized network that allows participants to exchange value globally without a governing body or financial intermediary, says Sze. Not to mention that all that’s needed to participate is an internet connection.
Ethereum’s ‘Merge’ and What It Means for Investors
The “merge” is how Ethereum will transition from a proof-of-work platform to a proof-of-stake platform. The date for the end of the first phase of this transition has finally been set for September 2022.
Ethereum moving to proof-of-stake means that instead of using computing power to finalize the blockchain, developers must have a certain amount of Ether coin for their block to be approved. “Proof-of-work has been successful and got Bitcoin off the ground, but now that crypto is a billion-dollar industry, it needs to do better,” Routledge says.
Investors should remember that moving from one legacy system to another is a difficult transition, and Ozair expects a few hiccups along the way. “Hopefully, nothing that will cost people a lot of money,” she says, but the truth is that nobody can be sure about that.
Di Bartolomeo says the merge will happen in stages because it will be like trying to “fix the engine of an airplane in mid-flight.” Instead of discontinuing the first engine, Ethereum is starting up the second engine first, in order to maintain altitude, he says.
“The market is taking into account the fact that the merge will occur,” says Hougan. Three things will happen, he says: The merge will reduce the amount of new Ether produced every year by about 70% to 75%, it will cut Ethereum’s carbon emissions by 99% or more, and the crypto will become more appealing to investors who are sensitive to environmental, social and governance factors, or ESG. He believes the market might also “see institutional money flow into ETH as a result.” Hougan estimates that investors could earn a “yield as high as 8% to 12%” on ETH after the merge occurs.
Bitcoin vs. Ethereum: The Bottom Line
So, which is the better investment: Bitcoin or Ethereum? Ozair says she believes Bitcoin is always going to be valuable just because it was first. She says Ethereum has its problems, but it also has a lot of potential.
Hougan believes “Ethereum is the crypto asset of choice for the next 12 months.” But the merge isn’t going to be the last upgrade for Ethereum, he adds. “The expectation is that in the next few years, Ethereum will go through another series of upgrades that will give it the ability to increase transactions by about 1,000-fold,” he says.
From a practical standpoint, investors need to build themselves a well-diversified portfolio, Routledge says. He adds that now or in the future, that portfolio might very well have a place for both Bitcoin and Ethereum.
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Update 07/28/22: This story was previously published at an earlier date and has been updated with new information.