Bitcoin was the first digital currency to take off. It was also the first successful application of blockchain technology. When it debuted in 2009, it didn’t face any competition. That fact helped it become extremely popular as network effects kicked in.
Research has shown the value of a company or project is correlated to these network effects. What Bitcoin had in its favor was a runway of a few years before any other digital coins could steal attention away.
The advantage of that runway has persisted to this day as evident by the fact that no coin has come close to toppling Bitcoin in terms of market capitalization. But Bitcoin does have a strong contender threatening in the wings: Ethereum. So which is best?
How Bitcoin and Ethereum Differ
The big idea behind Bitcoin was to allow people transact exclusive of Central Bank policy. Each year the purchasing power of the dollar declines because money supply increases, purposefully. By limiting the supply of Bitcoin to 21 million coins, the founder’s vision was to create a rival to the existing monetary system, and one that could not be controlled by any single governing authority.
In contrast, Ethereum was intended to be a layer upon which applications could be built, much like the internet. It was built as a general purpose blockchain versus a means for exchange of goods and services.
While Ethereum’s digital currency, Ether, can be used to transact, its primary utility is to support smart contracts and dApps.
From a market cap perspective, Ethereum has historically traded at about half the size of Bitcoin – ballpark $220 billion for Ethereum vs $560 billion for Bitcoin.
In short, when you think of Bitcoin you can think of a store of value or a coin to transact. But when you think of Ethereum you can associate it with many other utilities, including:
- Decentralized Finance
- Token Exchanges
- Social Networks on blockchain
How Bitcoin and Ethereum Are Similar
It’s generally accepted that Bitcoin is the gold standard of cryptocurrencies. Even many major companies accept Bitcoin, such as:
- Whole Foods
- Home Depot
Unlike most less-popular cryptocurrencies, you can actually spend Bitcoin.
Both Bitcoin and Ethereum are cryptocurrencies with a limited supply of coins. Bitcoin has a fixed supply of 21 million coins while Ethereum’s supply is less clear to the casual onlooker. That’s because originally Ethereum was launched with a variable token emission schedule. And with Ethereum 2.0, it’s possible that the original 4% inflation rate targeted will turn deflationary.
In spite of this difference, both Bitcoin and Ethereum have much in common. Both rely on blockchain technology to validate transactions. And both have garnered mass network adoption. In the case of Bitcoin, institutional ownership has increased in recent years while applications built on Ethereum have mushroomed. As crypto goes full mainstream, expect Bitcoin and Ethereum to enjoy a staying power that smaller cryptos lack.
Some Other Things To Know
Bitcoin is fully decentralized. Because the currency is based on blockchain technology, transactions are recorded in public ledgers stored on thousands of devices. As such, no one person controls Bitcoin, so it doesn’t have any central authority.
It doesn’t even have an official wallet where owners can keep their coins. That has some advantages, but it also creates challenges. For example, you could lose access to all your BTC if the company that manages your wallet goes out of business or files for bankruptcy. Coinbase has said as much. In its defense, Coinbase CEO Brian Armstrong has stated this policy was mandated by regulatory bodies.
Ethereum Requires Less Time and Energy Than Bitcoin
Bitcoin’s design means that a limited number can exist. The developers enforce this by making it more difficult to create new coins. It requires a lot of computing power to create a new BTC in 2022. Some critics argue that Bitcoin uses an unsustainable amount of electricity.
Ethereum can process transactions more quickly while using less energy. Ethereum 2.0 promises to operate even more efficiently. Expect ETH 2.0 to launch in 2023.
Bitcoin and Ethereum Could Evolve Together
Interestingly, Bitcoin and Ethereum don’t always exist as independent cryptocurrencies. Wrapped Bitcoin (WBTC) is a version of Ether that’s pegged to the value of Bitcoin. The innovation makes it possible for Bitcoin owners to exchange their coins for other assets on the Ethereum blockchain. For example, you might earn interest by lending Wrapped Bitcoin to someone on the Ethereum network.
Bitcoin and Ethereum, therefore, can exist together on the same network. Bitcoin will give you more flexibility than Ethereum, but that often means you end up using Bitcoin as Ethereum. There’s a good chance that Bitcoin will remain an essential aspect of Ethereum, making it possible for them to evolve together.
Should You Choose Bitcoin or Ethereum?
Both Bitcoin and Ethereum offer compelling value propositions. If you want more flexibility, Bitcoin will probably stand out as the better option. If you want a digital currency built on a blockchain with real-world applications, though, you will probably gravitate toward Ethereum.
In the long run, these two cryptocurrencies will probably change in ways that people cannot predict and a smart hedge is probably to buy both.