Bitcoin vs. Ethereum: Which One Should You Invest In?

August 30, 2023

Investing in cryptocurrency is a hot topic these days, as more and more people are looking for ways to diversify their portfolio and take advantage of the potential returns that this new asset class can offer. However, with hundreds of cryptocurrencies available in the market, it can be hard to decide which one to invest in. Two of the most popular and well-established cryptocurrencies are Bitcoin and Ethereum, but they have different features, advantages, and risks that investors should be aware of. In this article, we will compare Bitcoin and Ethereum and help you decide which one is the better investment for you.

What is Bitcoin?

Bitcoin is the first and most famous cryptocurrency, created in 2009 by an anonymous person or group using the pseudonym Satoshi Nakamoto. Bitcoin is a decentralized digital currency that can be transferred on a peer-to-peer network without the need for any central authority, unlike government-issued currencies. There are no physical bitcoins, only balances associated with a cryptographically secured public ledger. All the transactions are stored in this immutable distributed ledger, called the blockchain, which is maintained by a network of nodes (computers) that validate and record transactions. Bitcoin is created, stored, transacted, and distributed using a decentralized, distributed system known as Blockchain ¹.

Bitcoin has a limited supply of 21 million coins, which means that there will never be more than that amount of bitcoins in existence. This makes Bitcoin scarce and deflationary, as opposed to fiat currencies that can be inflated by central banks. Bitcoin’s supply is controlled by an algorithm that releases new bitcoins into circulation through a process called mining, where nodes compete to solve complex mathematical problems and earn rewards in bitcoins. The difficulty of these problems adjusts every 2016 blocks (approximately every two weeks) to ensure that the average time between blocks is 10 minutes. As of November 2021, there are about 19.5 million bitcoins in circulation ² , and the last bitcoin is expected to be mined around the year 2140 ³.

What is Ethereum?

Ethereum is a blockchain-based distributed platform that was launched in 2015 by programmer Vitalik Buterin. Ethereum is not just a cryptocurrency, but also a platform that enables building and deploying smart contracts and decentralized applications (dApps) without downtime, fraud, control, or interference from a third party ⁴. Smart contracts are computer codes that are stored on the blockchain and executed when the predetermined terms and conditions are met. Decentralized applications are applications that run on the blockchain and use smart contracts to perform various functions, such as lending, gaming, voting, etc.

Ethereum’s native cryptocurrency is called ether (ETH), which is used to pay for transactions fees (called gas) and computational services on the network. Ether can also be traded on various exchanges like any other cryptocurrency. Unlike Bitcoin, Ethereum does not have a fixed supply limit, but rather has an annual issuance rate that depends on various factors, such as network activity and demand. As of November 2021, there are about 120 million ether in circulation ⁵ , and the annual issuance rate is around 4%⁶.

Ethereum is currently undergoing a major upgrade called Ethereum 2.0, which aims to improve the scalability, security, and efficiency of the network by transitioning from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) consensus mechanism. PoW requires nodes to use computational power to solve mathematical problems and validate transactions, while PoS requires nodes to stake their ether to participate in the consensus process and earn rewards. PoS is expected to reduce energy consumption, increase transaction speed, and lower transaction fees on Ethereum ⁷. Ethereum 2.0 is being implemented in phases over several years, with the first phase (called the Beacon Chain) launched in December 2020 ⁸.

Bitcoin vs. Ethereum: Comparison

Bitcoin and Ethereum have many similarities but also some significant differences that make them suitable for different purposes and investors. Here are some of the main aspects to compare:

Purpose: Bitcoin was designed as a way to carry out relatively simple digital payments and act as a store of value and an alternative to traditional money. Ethereum was designed to utilize blockchain technology for maintaining a decentralized payment network and storing computer code that can power various smart contracts and dApps.
Performance: Bitcoin has a limited transaction capacity of about 7 transactions per second (tps), which can cause congestion and high fees during periods of high demand ⁹. Ethereum has a higher transaction capacity of about 15 tps ¹⁰, but it also faces scalability issues as more dApps are deployed on the network. Both networks are working on improving their scalability through various solutions, such as layer-2 protocols or sharding.
Price: Bitcoin has a higher price than Ethereum, as it is the most dominant and valuable cryptocurrency by market capitalization. As of November 2021, one bitcoin is worth about $26,000, while one ether is worth about $1,600 ¹¹. However, price alone is not a good indicator of value, as different cryptocurrencies have different supply and demand factors. A better metric to compare cryptocurrencies is market capitalization, which is the total value of all the coins in circulation. As of November 2021, Bitcoin has a market capitalization of about $507 billion, while Ethereum has a market capitalization of about $199 billion ¹¹.
Volatility: Both Bitcoin and Ethereum are volatile assets, meaning that their prices can fluctuate significantly in a short period of time. This can create opportunities for profit, but also risks for loss. Volatility is influenced by various factors, such as supply and demand, news and events, regulations, hacks, etc. Generally speaking, Bitcoin is less volatile than Ethereum, as it has a longer track record and greater name recognition. However, both cryptocurrencies can experience extreme price movements that can affect the entire market.
Risk: Cryptocurrency in general is a high-risk investment, as it is subject to various uncertainties and challenges. Some of the common risks that affect both Bitcoin and Ethereum are:
- Regulatory risk: Cryptocurrency regulation varies from country to country and can have a significant impact on the adoption and development of the industry. Some countries have banned or restricted cryptocurrency activities, while others have embraced or regulated them. Regulatory changes can affect the legality, taxation, and compliance of cryptocurrency transactions and operations.
- Security risk: Cryptocurrency transactions are irreversible and rely on the security of the network and the users’ devices. If the network is compromised or the users’ devices are hacked or lost, the funds can be stolen or lost forever. Cryptocurrency users need to take precautions to protect their private keys and wallets from unauthorized access or theft.
- Technical risk: Cryptocurrency technology is still evolving and facing various challenges and limitations. Some of the technical risks that affect both Bitcoin and Ethereum are:
  - Forks: A fork is a change in the protocol or software of a blockchain network that creates two or more versions of the same blockchain. Forks can be intentional or unintentional, and can have various effects on the network and the users. For example, in 2017, Bitcoin experienced a hard fork that created Bitcoin Cash (BCH), a new cryptocurrency with different features and rules ¹². Ethereum also experienced a hard fork in 2016 that created Ethereum Classic (ETC), a new cryptocurrency that maintained the original version of the blockchain after a hack ¹³.
  - Upgrades: An upgrade is an improvement or enhancement of the protocol or software of a blockchain network that aims to fix bugs, increase performance, or add new features. Upgrades can be smooth or disruptive, depending on how they are implemented and adopted by the network and the users. For example, Ethereum 2.0 is a major upgrade that requires a transition from PoW to PoS consensus mechanism, which involves various technical challenges and uncertainties ¹⁴.
  - Bugs: A bug is an error or flaw in the code or software of a blockchain network that can cause malfunctions, vulnerabilities, or failures. Bugs can affect the security, functionality, or performance of the network and the users. For example, in 2010, Bitcoin had a bug that allowed someone to create 184 billion bitcoins out of thin air ¹⁵. In 2016, Ethereum had a bug that allowed a hacker to steal $50 million worth of ether from a smart contract called The DAO.