It's no surprise that investors are interested in cryptocurrencies. They're among the best performing asset classes this year. And the crypto community has rallied around the emerging asset class, stirring hype that cryptocurrencies are the next big thing in finance.
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 — and as of Oct. 19, Bitcoin was near its all-time high of above $60,000.
Ethereum debuted in 2015 at less than $3 and soared to more than $1,400 by 2018. At the time of this writing, Ethereum traded at more than $3,800.
By comparison, General Electric Co. (ticker: GE) shares were just under $3 in 1995, adjusting for dividends and stock splits since then. Today, it goes for about $104.
Although they're the two biggest cryptocurrencies by market capitalization, similarities more or less end there. Bitcoin and Ethereum are 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.
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The de facto cryptocurrency leader, no other coin even comes close to Bitcoin, which trades under BTC. Bitcoin's market cap now exceeds $1 trillion. The total market cap for all cryptocurrencies is roughly $2.5 trillion, and the second-most valuable digital currency is Ethereum, with a market value in the neighborhood of $450 billion.
Here are some key things investors should know about BTC in the Bitcoin versus Ethereum investment debate:
1. It has the highest attention from large investors. The Winklevoss twins, the famous Harvard alumni who claim Mark Zuckerberg stole their idea for Facebook Inc. ( FB), famously tried to start a Bitcoin exchange-traded fund, but they were rebuffed by the U.S. Securities and Exchange Commission.
Crypto has been expanding as a widely accepted asset in the investing community. There has been a growing appetite for crypto investments from individual and institutional investors alike. This interest is only set to increase, as the SEC recently approved the first Bitcoin futures ETFs to go to market.
2. It has relative stability, simplicity and acceptance. A decentralized currency, beyond the grasp of the Federal Reserve or any other central bank and with a predefined maximum supply, is an attractive concept with which people worldwide can resonate. And in the case of Bitcoin, the market's high opinions of that concept have been thoroughly tested and validated over time.
"Bitcoin is a scarce digital currency and store of value. While still volatile, it tends to be one of the most stable cryptocurrencies, with the longest history, and has been the most consistent and best performing investment asset year after year for the last 10 years," says Steve Ehrlich, CEO and co-founder at Voyager Digital, a cryptoasset broker.
Alex Adelman, CEO and co-founder of Lolli, the first Bitcoin rewards application allowing people to earn bitcoin while shopping online, emphasizes the one-of-a-kind role the coin plays.
"We believe that Bitcoin is a revolutionary currency that's digitally scarce, that anyone in the world can participate in, which is unique to anything else," Adelman says.
3. There is limited supply. There will only ever be 21 million bitcoins. That known limit to global supply is a core reason some investors consider the cryptocurrency akin to digital gold. Unlike gold, however, newly discovered reserves aren't possible, and nearly 90% of bitcoins, or 18.6 million, have already been mined.
The rate of new BTC creation also gets slower over time through a process known as bitcoin halving, which cuts the pace of bitcoin creation in half every 210,000 block transactions. The last bitcoin halving was in May 2020; at the current pace, the next halving will be sometime in 2024.
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Before asking yourself " Should I buy Bitcoin or Ethereum?" you should understand the different motivations behind Bitcoin and Ethereum, or ETH.
1. Ethereum has a different goal than Bitcoin. The two leading cryptocurrencies have drastically different use cases and goals, with Ethereum operating as a decentralized network on top of which applications can be built. Many cryptocurrency tokens are actually issued over the Ethereum network.
"When people compare Bitcoin and Ethereum, it's a bit like comparing gold with electricity. They are both valuable but have very different uses," Adelman says. "Ethereum is infrastructure. It is a blockchain that is in the early days but has the potential to revolutionize finance and technology."
The ability to use the Ethereum platform to change the way mortgage transfers, securities trading and many other fields work has helped bring about its next characteristic.
2. There is more development. Naturally, because Ethereum's utility is limited only by the ingenuity of the world's developers, there's more activity surrounding the platform. Technically, the cryptocurrency used to facilitate Ethereum transactions is called "ether," but it's popularly referred to as ethereum.
Either way, the number of Ethereum-related repositories on the developer platform Github is 263, to Bitcoin's four.
Repositories are similar to project folders where developers collaborating through Github can access project information.
3. There's a fundamental change in how blocks are created. Instead of miners with the most computing power having the greatest advantage in successfully creating new tokens, those with the largest ownership stakes are now granted that right.
"Ethereum has been updated to mint new ETH through a process called proof of stake (PoS)," says Daniel Polotsky, CEO and founder of CoinFlip, a Bitcoin ATM operator. "With PoS, users are required to put up collateral, or a 'stake' in the form of ETH to become a validator on the network. So the more ETH that is staked, the higher the value because there are fewer ETH in circulation," Polotsky explains.
"In addition, proof of stake removes the costs associated with mining such as electricity and hardware costs, meaning that fewer ETH will be sold by miners. Instead, these ETH will be staked, driving up the value even further," Polotsky says.
The growth of decentralized finance, or DeFi, is another bullish catalyst for Ethereum. The concept is that traditional financial intermediaries like brokerages and exchanges are eliminated. This idea has enjoyed newfound mainstream relevance as some brokerages such as Robinhood prohibited investors from buying stocks like GameStop Corp. ( GME) and AMC Entertainment Holdings Inc. ( AMC) earlier during the meme stock frenzy in early 2021.
[Read: How Blockchain Can Transform the Financial Services Industry.]
Should You Buy Bitcoin or Ethereum?
The ultimate debate between Bitcoin and Ethereum as investments comes down to an investor's risk profile. Both have bull catalysts in the foreseeable future as the world becomes more digital and cryptocurrency's acceptance grows. Bitcoin is the more mainstream and more stable of the two, although the bullish sentiment among experts in the field appears to have only grown over the last year for Ethereum.
As with most investments, it's possible Ethereum's higher risk brings with it potential for higher rewards. In either case, it's not 2009 anymore: Both currencies have sprinted past the proof-of-concept phase; it's now time for investors who haven't considered this asset class in the past to start taking both BTC and ETH seriously.