Bitcoin and Ethereum are leading the crypto market, but how do their differences set them apart?
The cryptocurrency market is experiencing massive growth, so naturally more investors are considering crypto investments for their portfolios. But which crypto is the best choice?
Market leader Bitcoin (BTC) has seen a 16% price rise within the past month alone, and it is currently valued at around $45,000. The second-largest by market cap, Ether (ETH), the native cryptocurrency of the Ethereum platform, handily beat Bitcoin’s gain during the same period, with a return of more than 29%. Ether is trading at roughly $3,400.
There are thousands of alternatives on the market, but for most investors, these two are at the top of the heap.
Bitcoin has been one of the best-performing assets in the past decade. According to a February 2022 report by the Wells Fargo Institute called “Cryptocurrencies – Too Early or Too Late?” the digital currency’s price has compounded at a 216% annual rate since its first recorded transaction in 2010. Ethereum has also had a breakout performance from inception due to the multiple use cases this blockchain-based crypto offers. Since it was created in 2015, Ethereum is up more than 115,000%.
Gemini, one of the world’s largest cryptocurrency exchanges, recently released its “2022 the Global State of Crypto” report, which outlines attitudes, trends, and adoption of cryptocurrency globally. Among the top findings: 41% of crypto owners surveyed globally purchased crypto for the first time in 2021, with the primary driver for crypto adoption being inflation. Nearly half of all crypto owners in the U.S., Latin America, and the Asia Pacific first bought crypto in 2021.
As Bitcoin and Ethereum continue on their road to global adoption, investors are still assessing which investment options are right for them as the crypto market matures. Since Bitcoin and Ethereum are usually the starting points for crypto investors, it’s important to understand the differences between them and their growth potential. Here are some important distinctions between Bitcoin and Ethereum that investors need to know about:
- What is Bitcoin?
- Companies that invest in Bitcoin.
- What is Ethereum?
- Ethereum 2.0.
- Bitcoin vs. Ethereum: Bottom line.
What Is Bitcoin?
Bitcoin has held on to its status as the worlds most widely traded and held cryptocurrency since its creation in 2008 by a person or group with the pseudonym Satoshi Nakamoto. Bitcoin is the world’s first cryptocurrency and is considered the benchmark for how cryptocurrencies perform.
Bitcoin allows quick peer-to-peer transactions to take place globally without a central authority, such as a bank. No one controls Bitcoin, and anyone can take part. Bitcoin’s secure transactions take place through a public ledger called the blockchain, which records every transaction that is processed.
Bitcoin’s market cap is more than $870 billion, taking nearly 41% of the entire crypto market. Ethereum accounts for roughly 19% of the crypto market. One of the main characteristics that give Bitcoin its value is its scarcity combined with growing demand from institutional and everyday investors. There can only be 21 million bitcoins created. So the 19 million bitcoins already created and circulating in the market represent about 90% of the total supply. As the creation of bitcoins gets closer to its limit, Bitcoin’s value may continue to increase. Ethereum doesn’t have supply limitations like Bitcoin.
Companies That Invest in Bitcoin
One way to evaluate investing in cryptocurrencies is to measure adoption by Wall Street. An increasing number of publicly traded companies have added Bitcoin to their balance sheets. MicroStrategy Inc. (ticker: MSTR) was the first public company to buy Bitcoin, and it has committed to continuing to buy digital currency regardless of its volatility and price drops in the short term. But this wasn’t the first crypto-related record it set.
MicroStrategy also was the first publicly-traded company to adopt Bitcoin as its primary treasury reserve asset. Instead of keeping its reserves in cash, much of its cash reserves were used to buy Bitcoin as a store of value and to benefit from Bitcoin’s adoption and market growth. MSTR’s Bitcoin initiatives are spearheaded by the company’s CEO, Michael Saylor, who is a strong supporter of Bitcoin and vocal about his bullish position on the crypto king.
The business-intelligence software company owned 125,051 Bitcoins as of Jan. 31, 2022, bought at an aggregate purchase price of $3.78 billion, according to its SEC filing. Since the company is heavily invested in Bitcoin, shares of MicroStrategy tend to increase as the price of Bitcoin rises.
Electric vehicle maker Tesla Inc. (TSLA) is another major company that has invested some of its cash in Bitcoin and accepts Bitcoin as a form of payment for certain products on its website. Tesla periodically accumulates and sells Bitcoin to capture some gains. As of Dec. 31, 2021, the value of Tesla’s Bitcoin holdings was $1.99 billion. In the company’s SEC filing, it stated its belief in the long-term potential for digital assets as both an investment and a cash alternative.
Other top names that hold Bitcoin include Square (SQ), Coinbase Global Inc. (COIN), and Marathon Digital Holdings Inc. (MARA).
Bitcoin is an emerging store of value, says Carlos González-Campo, research analyst at 21Shares. “Bitcoin is going to benefit more from this narrative over time and will be seen as ‘digital gold,'” he says. “Bitcoin will consolidate as a store of value, while Ethereum maintaining the lion’s share in the Web3 infrastructure remains challenged.”
There hasn’t been a company the size of the aforementioned names that have bought Ethereum. But with persistent inflation, more companies may choose to use Ethereum as a store of value.
González-Campo says Bitcoin will benefit from this narrative more over time because it isn’t competing with any other asset, whereas Ethereum has multiple competitors, including Solana (SOL), Avalanche (AVAX), and Cardano (ADA).
What Is Ethereum?
Ethereum was created in 2015 by computer programmers including Vitalik Buterin. It is a decentralized computing platform that has smart contract capabilities that allow a variety of decentralized applications to be built on the network.
Similar to Bitcoin, Ethereum is an open-source, decentralized project used to make peer-to-peer payments, but it is much more than that. Developers can execute smart contracts and build databases for decentralized finance, or DeFi; nonfungible tokens, or NFTs; and gaming. These applications are not possible on the Bitcoin network.
Ethereum, like Bitcoin, uses the proof-of-work, or PoW, protocol to keep the decentralized network running and maintain the integrity of the platform’s operations. Ethereum’s transactions tend to be processed faster than Bitcoin’s, but this comes with higher “gas fees” that users have to pay. Gas fees compensate network participants who validate transactions on the platform. These fees can be costly to new investors, even for small transaction amounts.
The crypto market is patiently awaiting the rollout of Ethereum 2.0, a more energy-efficient and cost-effective model that uses the proof-of-stake, or PoS, protocol instead of PoW. The transition to PoS will allow the network to support more transactions per second to make the network more scalable.
“The blockchain behind the second-largest cryptocurrency, Ether, will soon undergo a highly anticipated upgrade that may lead to more institutional investors putting money in the network and help lift Ether’s price,” says Eloisa Marchesoni, a crypto entrepreneur and public speaker.
While Bitcoin today is the largest crypto by market value, Marchesoni says, Ether could become the leader after its infrastructure upgrade, also called the “Merge,” marking the end of the proof-of-work for Ethereum.
One of the top concerns regarding Ethereum’s current network is the amount of energy consumed during operations. Ethereum 2.0 promises to be a more sustainable alternative. The Ethereum Foundation estimates that Ethereum’s PoS upgrade will decrease its energy usage by 99.95%. Ethereum 2.0 is expected to launch sometime in 2022 in separate phases.
Bitcoin vs. Ethereum: Bottom Line
There are some other key differences between Bitcoin and Ethereum. Some parts of the world use Bitcoin as a means of exchange for goods and services. Bitcoin has been adopted as legal tender in El Salvador, for example. This has been met with scrutiny because Bitcoin’s volatility can be a challenge for the local population that uses it for transactions.
Ethereum’s transactions are not monetary in nature; rather, a collection of codes, or smart contracts, are deployed on the network. These smart contracts are the building blocks of Ethereum applications.
“This feature makes Ethereum dynamic and growing, while Bitcoin wants to be boring and stodgy. Ethereum’s value comes from what its network can create, while Bitcoin’s value derives from what its network can protect,” Marchesoni says.
Crypto investors commonly hold both Bitcoin and Ethereum, given their stronger fundamentals and longer track records compared with other cryptocurrencies. Although they have different roles, most analysts agree that both will have a leading position in the crypto market for the foreseeable future.
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