Bitcoin (BTC) and Ethereum (ETH) are the two cryptocurrencies with the largest market capitalization, which also makes them the two most popular projects in the blockchain space. For this reason, many newcomers to the industry wonder whether they should speculate or invest in BTC or ETH for the long term.However, their respective growth charts are far from the only thing that should be considered when making such a decision. In this guide, we will explain the main differences between ETH and BTC, their role as investment instruments, as well as their respective values.
Bitcoin vs. Ethereum: The main differences
Although both projects are based on the blockchain and their coins are used as cryptocurrencies, they are fundamentally different.Bitcoin was originally created by a mysterious pseudonymous person named Satoshi Nakamoto as an aspiring alternative to centrally issued and managed fiat currencies. Its main selling point is that it is not backed by a central bank or other financial institution, but by a decentralized network of computers and nodes that verify the rules of a secure, transparent, and immutable blockchain. These things make it possible for bitcoins to be used safely, ownership verified, and held, while avoiding the usual pitfalls when it comes to network attacks, currency debasement, and double-spending. In addition, Bitcoin introduces a native, privacy-friendly final settlement, payment, and store of value system to the internet, where users would otherwise have to use payment options that can instantly identify and censor them; such a level of privacy has previously only been available when using cash.On the other hand, Ethereum goes beyond offering a currency option based on the blockchain. The idea for Ethereum was born when Vitalik Buterin , one of the co-founders, realized the possibilities of Bitcoin if it were programmable.Today, Ethereum enables the use of smart contracts and decentralized applications (Dapps) that can be built and run without third-party interference. The foundations that made Bitcoin trustworthy are also used to provide high levels of credibility to the Ethereum network and competing blockchain platforms.While Ether, Ethereum’s native currency, can also be used as a store of value and a means of payment, it is primarily used to operate the network. It is used to pay gas fees, deploy smart contracts, as a staking option, mint non-fungible tokens ( NFTs ), and more.In other words, the main differences between Bitcoin and Ethereum as projects can be summarized in the following points:
- Store of value : Bitcoins are primarily designed as a store of value, whereas Ether is not.
- Programmability : Bitcoin is not a programmable platform; it can only do what it was designed for, while Ethereum can host a variety of projects as well as other blockchains.
- Block time : Interestingly, Bitcoin – which is intended to serve as an alternative to traditional payment systems – is significantly slower than Ethereum for security reasons.
- Market Cap : At the time of writing (October 2021), Bitcoin has a market cap of $1 billion while Ether is worth $407 billion, meaning Bitcoin’s value is more than double that of Ether.
While this list of differences is far from exhaustive, it provides a good overview of the two projects and their respective goals.
Why Ethereum and Bitcoin are very different investments
Despite the differences between the two projects mentioned above, many laypeople tend to view Ether as a replacement for Bitcoin. This can cause confusion in an already complex space, meaning newcomers tend to misunderstand the relationship between Bitcoin and Ethereum.Bitcoin is often referred to as digital gold. It is a scarce asset because there can only be a maximum of 21 million bitcoins in circulation at any one time (at the time of writing, there were about 18.8 million BTC in circulation). This makes it deflationary, which causes its value to increase over time. Another factor in Bitcoin’s deflationary nature is the fact that some people, often early adopters, will inevitably lose their private keys, locking them out of their BTC holdings forever. On the other hand, a deflationary currency could theoretically become too valuable to use. However, Bitcoin offers a solution to this too: it is infinitely divisible, so people will simply use smaller units like satoshis to get around this.On the other hand, Ether’s intended use within its own ecosystem – i.e. outside of its use as a store of value like Bitcoin – means that the coin is not treated like a digital commodity in the same sense. To improve usability and simplify the process of paying fees on the network, a new upgrade to Ethereum has started burning the coins used to pay fees. This will reduce Ethereum’s inflation level (which is currently around 4%) and may even lead to deflation over time. However, Ethereum does not have a hard cap on its coins like Bitcoin, meaning it is not inherently deflationary.This means that while Bitcoin’s deflationary nature is an essential part of its design, intended to make it more valuable, Ether’s value lies not here, but in its usability and applicability. Ether’s use as a store of value and a means of payment is secondary to its primary purpose. When deciding whether to invest, it is important to be able to distinguish the two by their specific applications.
Is Ethereum more valuable than Bitcoin?
This question is often asked, even when the coins are interchanged. However, this is not surprising, as the two coins are often portrayed as rivals: in terms of price and market capitalization, ETH is BTC’s biggest competitor, dominating the market. On the other hand, our guide so far has shown that the two are not necessarily comparable in all aspects, so the equations that are so often made are rather false.So the value of the two depends on what the investor considers valuable. Overall, BTC has a significantly higher market capitalization than ETH, making it worth more than twice as much as ETH.Another commonly cited argument is intrinsic value, which is a measure of an asset’s worth that is derived not from its current price but from complex financial models and calculations. Among many other uses, it is used to determine the value of an asset and whether it is over- or undervalued, which in turn can provide useful guidance about the asset’s future value.However, there is an important caveat here: currencies usually have no intrinsic value, and this is true for Bitcoin and Ether too. They are not backed by physical assets (nor are fiat currencies, which are instead backed by the state and whose value derives from people’s trust in their government). Therefore, self-proclaimed analysts who evaluate cryptocurrencies based on their supposed “intrinsic value” (or lack thereof) should not be taken seriously.Ultimately, it all comes down to what each asset represents and what a potential investor’s priorities are, which we’ll cover in the next section.
Bitcoin vs. Ethereum: Which is the better buy?
When deciding to invest in ETH or BTC, you first need to determine which of the two assets suits you and your personal beliefs more.Do you prefer a commodity that you can use either as a means of payment, as a store of value or as a speculative investment – or even all three at once? In this case, the best way to buy Bitcoin is through a trusted online broker. This way, you can spend your BTC wherever you want (and where it is accepted), send it to other wallets or just hold it.However, if your main goal is to profit from cryptocurrency volatility, you don’t need to buy BTC directly. Today, many brokers offer different types of BTC derivatives depending on your region. Sometimes called synthetic products, these products allow you to bet on the price of Bitcoin without directly holding the asset, which could slow you down when you need to make split-second decisions. Recently, the US Securities and Exchange Commission (SEC) approved the first Bitcoin futures exchange-traded fund (ETF), meaning that investors from the US now have the opportunity to bet on the price of Bitcoin without having to buy and securely store the most popular cryptocurrency themselves.On the other hand, Bitcoin derivatives – like all other crypto derivatives – cannot be spent or sent on-chain. This means that if you want the ability to use cryptocurrencies to pay for something privately and securely, you still need to hold the actual asset.The decision to buy Ether is based on a similar decision. Would you rather choose a coin that has an applied use case within a growing ecosystem that serves as the foundation for decentralized finance ( DeFi )? This is especially important to consider if you are interested in participating in any way in Ethereum’s massive, sprawling ecosystem.Ether offers the same opportunities as Bitcoin when it comes to trading derivatives. However, there are currently no ETH ETFs approved for trading in the US, although a number of asset managers have applied to do so. In other countries, it is possible to trade various types of derivatives – just be sure to check which ones are supported in your region and where they stand legally. Some regions prohibit some types of derivatives, so you should always do your own research first.
Why is Ethereum rising faster than Bitcoin?
For a while, in August and September 2021, both Bitcoin and Ether prices were rising, but Ether seemed to be rising much faster than Bitcoin relative to size. This trend has since slowed down (as of October 2021). However, it must be said that the price of Bitcoin and Ether is very rarely correlated and that the appreciation of one does not imply its superiority or any other kind of relationship compared to the other.At the time of this development, Ethereum was undergoing a series of updates that would put it on a major path to a different consensus. The new business model would make Ethereum cheaper, faster, more scalable, and overall friendlier to newcomers with less technical knowledge than before.
Learn more: What is Ethereum 2.0?
Migrating such a large platform from one approach to another, especially under the pressure of keeping it fully decentralized and secure at all times, is no easy task. The rise of Ethereum 2.0 sets a precedent for the entire crypto community, showing that change – albeit slow and laborious – is possible even in the world of rigid, immutable blockchains. The crypto community is largely aware of this, and this has created incredible hype that has quickly spread beyond the industry’s borders. Ethereum has also attracted a lot of institutional interest, which may have contributed to its rapid price rise.Still, it’s difficult to know all the exact reasons for an asset’s price movement at any given time, especially for large market cap assets like Ether or even Bitcoin. These price movements always depend on countless factors, most of which happen behind the scenes and outside of the public eye. That’s why it’s important to always do your own research, weigh the risks and pros and cons of investing, and track your investments diligently. Finally, the most important advice is to never invest more than you can afford to lose.
Final Thoughts
The purpose of this guide was to highlight the different ways in which Bitcoin and Ether can be good investments for you, depending on your personal preferences in terms of size, applicability, volatility, and other factors. With that in mind, neither currency is the better investment on its own, but after this guide, you should be able to decide which is the better investment for you.If you’re still unsure, you can find more information about each coin on our dedicated coin pages for BTC and ETH. You’ll also find answers to many common (and some not so common) questions about cryptocurrencies in our advice section . Happy trading!