Bitcoin vs. Ethereum: Investment options & comparative analysis
The world of digital currencies is vast, and two cryptocurrencies have emerged and remained the most representative and important due to their value and technology: Bitcoin and Ethereum. But what distinguishes these crypto assets, and which is best for your investment portfolio? We will compare the two below.
Investors continue to monitor the value of the two most popular cryptocurrencies on the market, Bitcoin and Ethereum, as betting on one or the other will require high-risk investments and expose you to the volatility of both.
When deciding on one cryptocurrency over another, the amount of money available and the type of investment will be important considerations. However, experts predict a bright future for both.
Bitcoin prices have reached new highs, and the listing of the first exchange-traded fund trading bitcoin futures demonstrates that cryptocurrencies are gradually gaining traction. Classic investors are increasingly thinking about incorporating them into their portfolios, but why should you consider this rather expensive duo when there are other assets for passive or even day traders.
What is Bitcoin and Ethereum?
Bitcoin
Bitcoin (BTC) is the world's most important cryptocurrency or digital currency. Satoshi Nakamoto, whose true identity remains unknown, founded it in January 2009. Despite not being the first attempt to create a digital currency, it was the most successful at the time, leading to the recognition of Bitcoin as not only the most important but also the ancestor of all cryptocurrencies.
Over 30 million people use Bitcoin worldwide, according to estimates. Its primary use cases vary depending on whether those who adopt it do so as an investment or savings instrument, as an inflation hedge, or to conduct daily transactions such as purchases and payments, as we do with traditional fiat currency.
Bitcoin emerged from traditional financial systems in a decentralized manner, i.e., without the involvement of a central authority such as each country's central bank.
This type of currency employs blockchain technology, which, via distributed ledgers records asset transactions in a digital system that functions as a public registry, is unmodifiable, and has all transactions recorded historically carried out.
Ethereum
Ethereum, unlike Bitcoin, did not start out as a cryptocurrency. It is an open source platform that enables the creation and development of decentralised applications (abbreviated as dApps) and smart contracts based on its technology while also serving as a store of value.
Vitalik Buterin and his collaborators founded the Ethereum network in 2015. This network, like Bitcoin, relies on blockchain technology.
With all dApps powered by tokens, Ether (abbreviated as ETH) serves as the cryptocurrency for Ethereum.
However, people often use the term Ethereum to refer to both the platform and the currency. We classify this currency as an alternative cryptocurrency or altcoin.
Why invest in bitcoin/ethereum over other assets?
Investors understand the importance of properly structuring a portfolio to include different assets in the appropriate proportions, corresponding to an acceptable level of risk.
Shares of McDonald's Corporation (MCD) or PepsiCo, Inc. (PEP), for example, are unlikely to grow at 30–40% per year, as many technology companies do. However, they pay decent dividends and lose relatively little in difficult times. As a result, conservative investors view them favourably.
But more ambitious investors, like day trading professionals, need asset classes with far greater liquidity and volatility. This is where cryptos, spearheaded by industry leaders Ethereum and Bitcoin, come in.
Currently, the major digital assets, including Bitcoin, are trading in green. The global cryptocurrency market's capitalization continues to rise, now standing at $2.65 trillion, which represents a 122.97% increase over the previous year.
True, Bitcoin has largely remained stable, but the Federal Reserve Open Market Committee (FOMC) meeting influences interest rates and volatility via market capitalization. Thus, Bitcoin's (BTC) market capitalization is 1.3 trillion dollars, confirming its 49.12% dominance.
On the other hand, stablecoins have a market capitalization of $150 billion, accounting for 5.66% of the total cryptocurrency market capitalization.
To put this in perspective, the cryptocurrency market is roughly $33 billion larger than Amazon and $42 billion larger than Alphabet. (Google's Parent company)
Based on this data, we can conclude that since its recent low of $978 billion on September 11, 2023, the total capitalization of the cryptocurrency market has doubled.
Standalone analysis: Why you should invest in Bitcoin
Some of the benefits and important information to consider when making an investment in Bitcoin are the following:
1. High dominance index
Bitcoin's profitability set a precedent and served as the model for nearly all cryptocurrencies created in recent years. Over the years, BTC has maintained its popularity and growth, making it the benchmark of all cryptocurrencies.
As of late April 2024, the Bitcoin dominance index is 53.41%. When the Bitcoin dominance index is high, it indicates that investors may be more inclined to invest in Bitcoin rather than altcoins. This typically happens during times of uncertainty or increased volatility.
Forbes compares Bitcoin to digital gold because it continues to be the world's largest cryptocurrency, with a market capitalization or market cap of about $2.44 trillion as of April 2024.
2. Bitcoin Spot ETF
The US Securities and Exchange Commission has approved Bitcoin Spot ETF applications from major asset managers.
An ETF (exchange-traded fund) is an investment fund that typically tracks an index (in this case, Bitcoin). The launch of gold ETFs used to have a positive impact on gold prices, but in the case of Bitcoin, the effect may be less pronounced because investors now have access to Bitcoin on various crypto exchanges and fintech platforms, whereas access to gold transactions for the ETF was limited prior to its launch.
However, the approval of applications for Bitcoin exchange-traded funds is likely to increase institutional investor interest in this and other well-known cryptocurrencies (such as Ethereum). According to Bitwise estimates, the potential inflow of funds into Bitcoin exchange-traded funds over the next five years could be $70-100 billion.
3. Bitcoin halving
The bitcoin halving took place on April 20th, 2024. This means that the difficulty of mining a block doubled while the reward for the mined block decreased.
We can assume that halving the supply of cryptocurrency will double its value. For more than a century, the mechanism behind halving has provided economic stimulus.
Bitcoin's price increased from about $12 to $1000 after halving on November 28, 2012, from around $650 to $2500 after July 9, 2016, and from $8600 to $56,700 after May 11, 2020.
We can assume that after halving, Bitcoin’s price will increase faster than other cryptocurrencies, thereby increasing its dominance.
In fact, our experts predict that before 2024 runs out Bitcoin will attain a new all-time high of $82,000.
4. Conservation of value
Since its inception, a finite number of bitcoins, approximately 21 million BTC, have been known to exist. Because of its limited supply, this cryptocurrency asset is expected to hold its value over time.
Standalone analysis: Why you should invest in Ethereum
For its part, some relevant Ethereum information to consider when making an investment are as follows:
1. Very well-established
The Ethereum blockchain has established itself as one of the largest and most open decentralised development platforms for other applications, as well as a store of value.
2. Allows for smart contracts
Smart contracts stored on the Ethereum blockchain automate transactions between two parties without the need for an external authority.
For example, in a merchant-to-customer sale, the smart contract accepts payment from the customer while also transferring ownership or performing delivery on the merchant's end.
3. Upgrade to Ethereum 2.0
In September 2022, Ethereum switched from a Proof of Work (PoW) algorithm, similar to Bitcoin's, to a Proof of Stake (PoS).
This change was made to improve the operation of the Ethereum network and facilitate the development of future dApps.
The PoS protocol selects nodes at random to validate a transaction and open new blocks in the chain, resulting in transactions that consume less energy and are faster than PoW.
Ethereum developers are currently working on proto-Danksharding (an intermediate step before implementing the Danksharding protocol), which will allow the network to work with blobs rather than roll-ups, making it more scalable.
With this change, adding new information to chain blocks will be less expensive because blobs, unlike roll-ups, do not retain data indefinitely.
4. Easily interchangeable
ETH has emerged as a useful cryptocurrency for purchasing goods and services, paying transaction fees on the Ethereum network, and acquiring art and collectibles such as NFTs (non-fungible tokens) and games via peer-to-peer transactions.
Factors to consider when investing in Bitcoin or Ethereum
When comparing Bitcoin vs. Ethereum investment-wise, we must consider the following factors:
- Long-term trading
- Leadership
- Differences
- Internal affairs.
- Price Action Volatility
1. Long-term trading
Cryptocurrencies, in addition to being speculative investments, can also serve as excellent long-term vehicles. Although Bitcoin has appreciated significantly, recently surpassing $70,000, Ethereum also has reasons to see its value rise over time.
However, it is important to note that there may be changes along the way. But, in the long run, both have demonstrated the ability to recover lost levels and strive for more.
2. Leadership
In terms of leadership, Bitcoin is without a doubt the best option. There are no projects that could overshadow his reign.
3. Differences
Bitcoin's creation aimed to establish a decentralised payment system based on security and mining.
On the other hand, Ethereum is a decentralised platform that runs smart contracts with well-defined specifications, free of disruption, censorship, fraud, or third-party intervention.
This is an important consideration when deciding where to invest.
4. Internal affairs
Cryptocurrencies function similarly to other organisations, with the Bitcoin halving being one of the most pressing internal issues. Although it may temporarily affect its price, the reduction in miners' rewards, aimed at controlling the circulating supply to 21 million BTC, typically leads to an upward trajectory.
Other recent developments include the launch of ETFs. Although it is not a unique fact about cryptocurrencies, it is a way of bringing them closer to large groups of traditional investors and the general public who do not fully trust the mechanisms behind them.
5. Price action volatility
Finally, in the Bitcoin vs. Ethereum round, price volatility is an important factor to consider when investing. It is pointless to invest in an asset with no interesting movements. In this case, both cryptocurrencies align with this trend.
What are the associated risks of investing in Bitcoin or Ether?
The primary risks associated with Bitcoin and Ethereum are theft, volatility, and transaction fees.
Theft is a major concern because Bitcoin and Ethereum wallets lack theft protection.
You won't be able to recover any funds if someone hacks your wallet.
Additionally, platforms that store cryptocurrency may be vulnerable to cyberattacks.
Cryptocurrencies such as bitcoin and ether are extremely volatile. Prices can fluctuate quickly, making it difficult to predict when and how they will occur.
This may make long-term investments in virtual currencies difficult. Finally, transfer fees for Bitcoin or Ethereum wallets can be extremely high.
Bitcoin is a speculative cryptocurrency that, if not accepted, may lose value in the future. Users can easily track user information if they don't use a VPN, as their transactions are not anonymous. Furthermore, the mining process requires a significant amount of energy.
For Ethereum, in addition to speculation, it faces the risk of not being as popular as Bitcoin, given that blockchain technology is not well established and that this is the primary incentive for the cryptocurrency. Its volatility is higher than that of Bitcoin, implying increased risk-taking.
Bitcoin is also well-known for its use on the Dark Web, money laundering, and illegal purchases. Because of the anonymity it provides as a payment method, bitcoin has become the preferred choice for people looking to purchase drugs, illegal weapons, or launder money.
To put it into perspective, criminals laundered $8.6 billion in bitcoin in 2021, a 30% increase from the previous year. This is one of the primary reasons why governments want to regulate them.
Comparative: Which is the overall better investment between Bitcoin and Ethereum?
1. Acceptance
While Bitcoin is more widely accepted and considered an international digital currency, Ether is only accepted for transactions by digital applications (Dapps from DeFi) running on the Ethereum network
2. Transaction fees
Transaction fees for Bitcoin are generally higher than for Ethereum because the Bitcoin network is so popular. Ethereum, on the other hand, provides users with lower fees due to its purpose-built Ethereum blockchain.
3. Functionality
Ethereum offers greater flexibility and functionality through its smart system, as well as the ability to execute smart contracts on its blockchain.
However, unlike Bitcoin, Ethereum has some limitations. Smart contracts, for example, can be difficult to understand and frequently require additional fees to create and implement on the Ethereum blockchain. Furthermore, Ethereum is not as well accepted or adopted as Bitcoin.
4. Decentralisation level
Bitcoin is currently the most decentralised cryptocurrency. This is because its network contains more nodes, developers, computing power, and miners. Developers in Ethereum create a form of centralization because their actions guide the blockchain's development.
5. Regulation
Many countries consider Bitcoin transactions illegal. However, this does not mean that Bitcoin transactions are not permissible; rather, the laws governing cryptocurrency may vary based on your location. For example, the federal government allows the use and trading of bitcoins in the United States, but it is illegal in China.
Ethereum transactions are regulated less strictly than Bitcoin transactions. In most cases, no special license is required to transact in Ethereum, and transaction fees are typically lower than those charged to Bitcoin users. However, some states have enacted stricter regulations for Ethereum users to protect their investments from theft and fraud.
6. The purpose of the coin
With the intention of acting as a means of exchange and a store of value immune to recessions and stock market fluctuations, the creators created Bitcoin as an alternative to traditional currencies.
Ethereum, for its part, was designed as a platform to facilitate the creation of virtual contracts and applications, with the entire operation requiring the use of Ether, the platform's own cryptocurrency.
7. Price
Bitcoin has always been worth more than Ethereum. This is due to a variety of reasons, including the limited issuance of BTC and its higher level of acceptance and usage.
However, Ethereum's lower-cost, infinite coin issuance system has allowed it to maintain the world's second-largest market capitalization.
8. Mining (proof-of-work vs. proof-of-stake)
Bitcoin and the original Ethereum use a work algorithm based on the proof of work (PoW) protocol. This works on the assumption that all nodes in the chain must "agree" with the stored information, which protects it from certain types of cyberattacks. At the same time, it serves as a competition among the "miners" to find the solution to the block before the others.
As previously stated, Ethereum 2.0 uses a proof-of-stake (PoS) algorithm. This process uses less computational energy, making it more sustainable in the long run.
9. Transaction speed and data
Both the Bitcoin and Ethereum networks suffer from scalability issues. Ethereum transactions typically take 10 to 20 seconds to complete, which is significantly faster than Bitcoin transactions, which can take 10 to 20 minutes.
By May 2023, the Ethereum network was processing 29 transactions per second, and its developers intend to optimise it until it can handle 100,000 transactions per second.
For comparison, Visa processes around 1,700 transactions per second, while claiming to be capable of going up to at 24,000.
With the number of people using both blockchains increasing over time, Bitcoin and Ethereum have almost reached their capacity limits and need solutions that will help them accommodate more users.
Certain solutions can partially alleviate this problem: the SegWit update for Bitcoin or the Pectra update for the second. For the moment, the saturation of these networks results in an increase in transaction fees.
On the one hand, in Ethereum, transactions can include executable code, whereas in Bitcoin, the data attached to transactions only contains information about them.
10. Coin issuance
As previously stated, there is a finite supply of BTC, which is approximately 21 million coins. On the contrary, the production of ethyl is limitless. With Ethereum 2.0, ETH production is approximately 122 million tokens per year.
Verdict
Due to its payment capabilities and the willingness of exchanges to accept it, Bitcoin has gained more popularity.
If investment capital is limited, Etherum presents more opportunities for long-term growth, making it an excellent choice for investment.
Both options are assets that will bring benefits, although the ideal is to bet between 3% and 10% of the portfolio reserved for diversified risk investments.
If capital is not a problem, BTC is more attractive for long-term investments, while ETH becomes more sensitive to price swings.
Normally, when the bull market is strong, ETH performs better than BTC, although if the trend is reversed, the BTC price will remain more stable.
Still Analysts believe that ETH has the potential to be a safer cryptocurrency in the long term. Both BTC and ETH are on the rise, but historically, ETH has weathered the crisis better, allowing us to believe in a brighter future.
The case against Bitcoin
As we have seen, cryptocurrencies face numerous challenges, and Bitcoin, with the largest market share (40%) and no intention of changing consensus algorithms such as PoS, predicts a complicated future for itself.
Each and every one of the challenges faced in the crypto space applies to Bitcoin; in fact, many of the regulations that have been or are being approved are encouraged by Bitcoin because, as the most dominant cryptocurrency in the market, it also causes the most damage.
The biggest threats to Bitcoin as a safe investment option are environmental impact, fraudulent use to evade taxes or finance illegal activities, and limited utility in the real world.
Regarding its ecological footprint and mining, we can point out that Bitcoin's annual energy consumption is comparable to that of the entire country of Norway and its annual ecological footprint to that of Greece.
Bitcoin does not have or has not announced, any changes to its consensus algorithm to reduce energy consumption, so it may face significant challenges if legislation advances its goals for reducing CO2 emissions.
Finally, we highlight Bitcoin's limited utility because it has yet to establish itself as a substitute currency for fiat currencies, and its value as a financial asset is based solely on the trust of its users.
For all of these reasons, Bitcoin does not stand out among sustainable or profitable cryptocurrencies, the latter of which are as scarce as unicorns.
The case for Ethereum
While Bitcoin remains the most well-known and valuable cryptocurrency, altcoins such as Ethereum are rapidly gaining traction. In fact, some experts, like Goldman Sachs, believe that ETH may eventually overtake BTC in terms of market capitalization. This is due in part to its distinguishing features, which include the ability to run smart contracts and a focus on energy efficiency.
Despite some experts' expectations, Bitcoin currently has a significantly larger market capitalization than Ethereum. However, ETH remains the most popular development platform for smart contract applications, which may have a significant impact on its long-term value.
In short, Ethereum is a worthwhile investment. It not only has strong support and is a dependable project, but it also has significant growth potential. Furthermore, its commitment to energy efficiency, as well as its active developer community, make it an appealing investment opportunity.
In the coming future, ETH will see greater gains, albeit at a higher risk.
My expectation of better performance for ethereum stems from the asset's relationship with Bitcoin. According to calculations, for every percentage point change in BTC in 2022, ETH fluctuated 22% more, whether positively or negatively.
Historically, ETH has a higher delta than BTC in terms of prices, so if it falls, it falls more than BTC, and if it rises, it rises more than BTC.
Since 2015, ETH's return on investment (ROI) has followed the same trend as BTC, but with higher margins, demonstrating the impact of the delta on the behavior of these assets; the exception was in 2019.
Conclusion
Bitcoin and Ethereum are two intriguing technologies that provide distinct advantages. Both are supported by blockchain technology, which enables digital transactions.
However, Ethereum is more flexible and enables the creation of decentralised applications (dApps), while Bitcoin primarily serves fund transfers. The costs and fees associated with these technologies vary depending on the type of transaction, which has a significant impact on their viability.
Furthermore, using these technologies carries risks, such as a data breach or an attack by a malicious third party.
The regulation of digital currencies varies by country, but it is evolving rapidly to ensure that this industry thrives.
Bitcoin and Ethereum are the best cryptocurrency options available.
Both cryptocurrencies use blockchain technology to record network transactions, are highly secure due to their cryptography design, and exhibit significant volatility based on demand, but they differ in several ways.
BTC employs a blockchain that prioritises value and security, while ETH bases its development of applications and smart contracts on more advanced models.
The BTC limit is 21 million, while the ETH limit is 120 million, both subject to future increases. Similarly, despite BTC's high level of adoption, ETH is establishing itself as one of the most popular and rapidly growing blockchain platforms.
Both Ethereum and Bitcoin are digital currencies that use blockchain technology. Both have altered the definition of international transactions and provided a secure platform for businesses and individuals to conduct business.
Despite their similarities, there are significant differences in their purpose, price, number of coins issued, and preferred mining method.
Purchasing BTC and ETH, like any other investment, requires knowledge and understanding of their technologies and key characteristics.
Like any investment, these carry risks, but if executed with a suitable strategy under the guidance of platforms like Clacified, they can also yield significant benefits.