Bitcoin (BTC) and Ethereum (Ethereum) are the two cryptocurrencies with the largest market capitalization, which makes them simultaneously the two most popular projects in the blockchain space. This is why many newcomers to the industry are wondering whether they should speculate or invest in Bitcoin or Ethereum in the long term.
However, their growth schedules are far from the only thing that should be taken into account when making such decisions. In this guide, we will look at the main differences between Ethereum and Bitcoin, their role as investment instruments, as well as the values of each of them.
Bitcoin vs Ethereum: the main differences
Although both projects are based on blockchain and their currencies are used as cryptocurrencies, they are fundamentally different.
Bitcoin was originally created by the mysterious pseudonym Satoshi Nakamoto as an ambitious alternative to issued and centrally managed fiat currencies. The main advantage is that it is not supported by any central bank or other financial institution, but by a decentralized network of computers and nodes that verify secure, transparent and immutable blockchain rules. These things allow you to safely use bitcoins, verify ownership and store them, while avoiding common mistakes when it comes to network attacks, devaluation and double spending. In addition, bitcoin introduces a system of final settlement, payment and storage of valuables to the Internet, ensuring confidentiality, since users will have to use payment methods that it can instantly identify and track; so far, this degree of privacy has only been observed with cash.
Read more: The difference between Bitcoin and traditional currencies
On the other hand, Ethereum goes further than offering a blockchain-based currency option. The idea of Ethereum was born when Vitalik Buterin, one of its founders, realized the possibilities of bitcoin if it were programmable.
Today, Ethereum allows you to create and operate smart contracts and decentralized applications (dApps) without any interference from third parties. The foundations on which trust in bitcoin is based are also used to give great confidence to the Ethereum network, as well as competing blockchain platforms.
While ether, the original currency of Ethereum, can also be used as a means of saving and a payment method, its main use is the operation of the network. It is used to pay gas fees, deploy smart contracts, as a betting option, mint non-exchangeable tokens (non-fungible tokens) and much more.
In other words, the main differences between Bitcoin and Ethereum, as projects, can be summarized in the following paragraphs:
- Store of Value: Bitcoins are intended primarily to be a store of value, while ether is not.
- Programmability: Bitcoin is not a programmable platform; it can only do what it was designed for, while Ethereum can host countless projects as well as other blockchains.
- Blocking time: Interestingly, Bitcoin, which is supposed to serve as an alternative to traditional payment systems, works much slower than Ethereum for security purposes.
- Market capitalization: at the time of writing (October 2021), the market capitalization of bitcoin is 1 trillion US dollars, while the value of ether is 407 billion US dollars — this means that the value of bitcoin is more than twice the value of ether.
- While this list of differences is far from exhaustive, it provides an overview of the two high-level projects and their respective goals.
Why Ethereum and Bitcoin are such Different Investments
Despite the above differences between the two projects, many ordinary people tend to use ether as an alternative to bitcoin. This can add confusion to an already complex space, which means that newcomers tend to misunderstand the relationship between Bitcoin and Ethereum.
Bitcoin is often referred to as digital gold. This is a rare asset, since there can be a maximum of 21 million bitcoins in circulation (at the time of writing, there were about 18.8 million bitcoins in circulation). This makes them deflationary, which contributes to an increase in their value over time. Another factor constraining its nature is the fact that some people who are often first-time users will inevitably lose their private keys, permanently locking them out of their bitcoin assets. On the other hand, a deflationary currency could theoretically become too valuable to be used. However, bitcoin also solves this problem: it is infinitely divisible, so people will use smaller units like Satoshi to get around this.
Find out more: Will Bitcoin Ever be Stable?
On the other hand, the state of use of ether within its ecosystem — that is, beyond its use as a means of saving, as in the case of bitcoins — means that the currency is not considered as a digital commodity in the same sense. However, in order to improve usability and simplify the process of paying fees on the network, the new Ethereum update started burning coins that were used to pay fees. This will reduce the inflation rate in Ethereum (currently about 4%), which may eventually lead to its deflation. However, Ethereum does not have a hard limit on its coins like bitcoin, which means that it is not restrictive in its design.
This means that while the restrictive nature of bitcoin is an integral part of its design, which is supposed to make it more valuable, the value of ether lies not in this, but in its usability and applicability. Ether used as a means of saving and payment method is secondary to the actual use case. When deciding which investments to make, it is important to be able to distinguish between these two types of investments by their specific application.
Is Ethereum more valuable than Bitcoin?
This question arises quite often, even with reverse coins. However, this is not surprising, since the two currencies are often presented as competitors: in terms of price and market capitalization, ETH is the largest competitor to BTC in its market dominance. On the other hand, our management has so far shown that these two concepts are not necessarily comparable in all aspects, so the equations drawn up are often incorrect.
Therefore, the value of each of them depends on what the investor considers valuable. In the broadest sense, bitcoin has a much higher market value than morality, making it more than twice as expensive as morality.
Another common topic of conversation is intrinsic value. This is an indicator of the value of an asset, obtained not from its current price, but with the help of complex financial models and calculations. Among many other applications, it aims to determine the value of an asset and whether it is overvalued or undervalued, which in turn can provide some useful guidance regarding the future of the asset.
However, there is an important caveat here: coins, as a rule, have no intrinsic value, and this also applies to bitcoin and ether. It is not backed by any physical assets (nor fiat currencies, which are instead backed by the state and derive their value 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.
And finally, we are talking about what each of the assets is and what the priorities of a potential investor are. This is what we will look at in the next section.
Bitcoin vs. Ethereum: what is better to buy
When deciding between investing in ethics or bitcoin, the first thing you need to decide is which of the investments suits you and your personal beliefs.
Would you prefer a product that you can use either as a payment system, as a means of saving, or as a speculative investment — or even all three at once? In this case, it is best for you to buy bitcoin through a reliable online broker. This allows you to spend your bitcoin wherever you want (and where it is accepted), send it to other wallets, or just store it.
However, if your main goal is to take advantage of the volatility of cryptocurrencies, you will not be asked to buy bitcoin directly. Currently, depending on your region, many brokers offer different types of bitcoin derivatives. Sometimes called synthetic products, they allow you to bet on the price of bitcoin without holding the asset directly, which can slow you down when you need to make split-second decisions. Recently, the US Securities and Exchange Commission (SEC) recently approved the first exchange-traded bitcoin futures fund (ETF), which means that investors from countries now have the opportunity to access the price of bitcoin without having to buy and securely store the most popular cryptocurrency themselves.
On the other hand, bitcoin derivatives — like any other crypto derivatives — cannot be spent or sent down the chain. This means that if you want to use cryptography to pay for something privately and securely, you will still need to keep the physical asset.
More detailed: How to invest in Bitcoin?
The choice of buying ether depends on a similar decision. Would you prefer to choose a currency that has an application use case within a growing ecosystem that serves as the basis for decentralized finance (Defi)? This is especially noteworthy if you are interested in participating in the vast and extensive Ethereum ecosystem in any way.