Bitcoin (BTC) and ethereum (ETH) are the two cryptocurrencies with the largest market cap, which simultaneously makes them the two most popular projects in the blockchain space. This is why many newcomers to the industry wonder if 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 this type of decision. In this guide, we will go through the main differences between ETH and BTC, their roles as investment vehicles, as well as their respective values.
Bitcoin vs Ethereum: Main Differences
Although both projects are based on blockchain and their coins are used as cryptocurrencies, they are fundamentally different.
Bitcoin was initially created by a mysterious pseudonym Satoshi Nakamoto as an aspiring alternative to centrally-issued and managed fiat currencies. Its main selling point is that it is not backed by any central bank or other financial institution but by a decentralized network of computers and nodes who verify the rules of a secure, transparent, and immutable blockchain. These things make it possible for bitcoins to be safe to use, verify ownership and hold while avoiding common pitfalls when it comes to network attacks, currency debasement, and double-spending. Additionally, 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 identify and censor them immediately; this amount of privacy was heretofore seen only with the use of cash.
On the other hand, Ethereum goes beyond offering a currency option based on blockchain. The idea for Ethereum was born when Vitalik Buterin, one of its co-founders, realized the possibilities of Bitcoin if it was programmable.
Today, Ethereum enables the deployment of smart contracts and decentralized applications (dapps) to be built and run without any interference from third parties. The basics upon which the trustworthiness of Bitcoin was founded are also used to lend significant credibility to the Ethereum network as well as competing blockchain platforms.
While ether, Ethereum’s native currency, can also be used as a store of value and a payment option, its primary use is powering the network. It is used to pay gas fees, deploy smart contracts, as a staking option, mint non-fungible tokens (NFTs), and much more.
In other words, the main differences between Bitcoin and Ethereum, as projects, can be summed up in the following points:
- Store of value: bitcoins are designed to be, primarily, a store of value, while ether is not.
- Programmability: Bitcoin is not a programmable platform; it can only do what it is designed to do, while Ethereum can host a myriad of projects as well as other blockchains.
- Block time: interestingly, Bitcoin—which is supposed to act as an alternative to traditional payment systems—is significantly slower than Ethereum, for security purposes.
- Market cap: at the time of writing (October 2021), bitcoin has a market cap of USD 1trn, while ether’s is USD 407bn—meaning bitcoin’s worth is more than double that of ether.
While this list of differences is far from exhaustive, it offers a high level overview of the two projects and their respective goals.
Why Ethereum and Bitcoin Are Very Different Investments
In spite of the aforementioned differences between the two projects, many laymen tend to cast ether as the replacement for bitcoin. This can add confusion to an already complex space, which means newcomers tend to misunderstand the relationship between Bitcoin and Ethereum.
Bitcoin is often referred to as digital gold. It is a scarce asset, as there can only ever be a maximum of 21 million bitcoins in circulation (at the time of writing, there were around 18.8m BTC in circulation). This makes it deflationary, which serves to increase its value over time. Another factor in its deflationary nature is the fact that some people, often early adopters, will inevitably lose their private keys, which locks them out of their BTC holdings forever. On the other hand, a deflationary currency could theoretically become too valuable to use. However, Bitcoin addresses this as well: it is infinitely divisible, so people will just use smaller units, like satoshis, to get around this.
On the other hand, ether’s use case within its own ecosystem—that is, outside of treating it as a store of value, like with bitcoins—means that the coin is not treated like a digital commodity in the same sense. Still, in order to improve its usability and simplify the fee-paying process of the network, a new upgrade on Ethereum has started burning the coins that were used to pay fees with. This is going to lessen Ethereum’s inflation level (currently at around 4%), potentially even making it deflationary as time goes on. However, Ethereum does not have a hard cap on its coins like Bitcoin does, which means it is not deflationary by design.
This means that, while bitcoin’s deflationary nature is a key piece of its design that is supposed to make it more valuable, ether’s value does not lie here, but in its usability and applicability. Ether being used as a store of value and payment option is secondary to its true use case. When deciding which investment to make, it is important to be able to tell these two apart through their specific applications.
Is Ethereum More Valuable Than Bitcoin?
This question arises often, even with the coins reversed. However, it’s not surprising, as the two coins are often shown as rivals: in terms of price and market cap, ETH is the biggest competitor that BTC has in its market domination. On the other hand, our guide up until now has shown that the two are not necessarily comparable in all aspects, so the equivalences that are so often made tend to be false.
Therefore, the value of each depends on what the investor deems valuable. In the broadest strokes, BTC has a significantly higher market cap than ETH, making it more than double the worth of ETH.
Another common talking point is intrinsic value. This is a measure of the worth of an asset, derived not from its current price, but through complex financial models and calculations. Among numerous other applications, it is meant to establish the worth of an asset and whether it is overvalued or undervalued, which in turn can offer some useful pointers as to the asset’s future.
There is an important caveat here, however: currencies, as a rule, have no intrinsic value and this goes for bitcoin and ether as well. They’re not backed by any physical assets (neither are fiat currencies, which are instead backed by the state and their value is derived from the people’s trust in their government). Therefore, self-proclaimed analysts that rate cryptocurrencies on their perceived “intrinsic value” (or lack thereof) should not be taken seriously.
Finally, it comes down to what each of the assets represents, and where a prospective investor’s priorities lie. This is what we will cover in the next section.
Bitcoin Vs. Ethereum: Which Is A Better Buy
When deciding between investing in ETH or BTC, the first thing you need to determine is which of the investments appeals more to you and your personal beliefs.
Do you prefer a commodity, which you can either use as a payment system, a store of value, or a speculative investment—or even all three at once? In this case, your best bet is buying bitcoin through a trusted online broker. This enables you to spend your BTC wherever you want (and where it is accepted), send it to other wallets, or simply hold it.
However, if your main goal is to profit off the volatility of cryptocurrencies, you are not required to buy BTC directly. Nowadays, depending on your region, many brokers offer different types of BTC derivatives. Sometimes called synthetic products, they let you wager on the price of bitcoin without holding the asset directly, which could slow you down when you need to make split-second decisions. Recently, the US Securities and Exchange Commission (SEC) has recently approved the first bitcoin futures exchange-traded fund (ETF), which means that investors from the States now have the opportunity to gain exposure to 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 derivative—cannot be spent or sent on-chain. This means that, if you would like the option of using crypto to pay for something privately and securely, you will still need to hold the actual asset.
Choosing to buy ether is based on a similar decision. Would you rather go for a coin that has an applied use case within a growing ecosystem that serves as the basis for decentralized finance (DeFi)? This is especially worth noting if you’re interested in participating in Ethereum’s vast, sprawling ecosystem in any way.
Ether offers the same possibility as bitcoin in terms of derivatives trading. However, there are currently no ETH ETFs approved for trading in the US, although there are a number of asset managers who have filed for it. In other jurisdictions, it is possible to trade different types of derivatives—just be sure to check which ones are supported in your area, and where they stand legally. Some regions have outlawed some types of derivatives, so you should always do your own research first.
Why Is Ethereum Rising Faster Than Bitcoin
For a period of time during August and September 2021, the price of bitcoin and ether was both on the rise, but ether seemed to be rising much faster than bitcoin, relative to size. That trend has slowed down since (as of October 2021). It must be said, however, 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 type of relationship, compared to the other.
More specifically, at the time of this trend, Ethereum was undergoing a series of updates that were designed to take it down an important road towards a different consensus. The new business model would make Ethereum cheaper to use, faster, more scalable, and overall more friendly towards newcomers with less technical knowledge than before.
Migrating such a huge platform from one approach to another, especially with the pressure of keeping it fully decentralized and secure at all times, is no small feat. The Ethereum 2.0 ascent sets a precedent for the whole crypto community, showing that change—although slow and laborious—can still happen even in the world of rigid, immutable blockchains. The crypto community is largely aware of this, and this has generated incredible hype that quickly spread outside the borders of the industry. Ethereum has garnered a lot of institutional interest as well, which could have further contributed to its rapid rise in price.
Still, it is hard to pinpoint all the exact reasons why an asset’s price could have moved at a specific time, especially when it comes to assets with large caps like ether, or even bitcoin. These price movements always depend on innumerable factors, most of which occur behind the scenes and out of the public eye. This is why it is important to always do your own research, weigh the risks, pros and cons of investing in something, and stay diligent in tracking your investments. Finally, the most important advice is never to invest more than you can afford to lose.
Finishing Thoughts
The purpose of this guide was to highlight the different ways in which bitcoin and ether could be good investments for you, depending on your personal preferences in terms of size, applicability, volatility, and other factors. In that sense, neither of these is the better investment by itself. However, after this guide, you should be able to decide which one is the better fit for you.
If you’re still unsure, you can find more information about each coin on our dedicated coin pages for BTC and ETH. Additionally, our guides section offers the answers to many common (and some less common) questions on all things crypto. Happy trading!