With its low transaction fees, faster time, and decentralized nature, cryptocurrency is revolutionizing the way people think about business, investment, and even retail. If you are a new investor, you’re probably thinking about which cryptocurrency to invest in. Bitcoin and Ethereum are the two largest cryptocurrencies in the market both by their exchange volume and general popularity. In the last 12 months, Bitcoin has surged by 300% and Ethereum by 900% despite the wild fluctuations in mid-2021.
Contrary to the popular belief that both are just digital assets, there is actually a huge difference between these two. Both were created for different purposes and for people with different financial goals and it is important to understand that in order to invest in either. Bitcoin and Ethereum offer two completely different propositions to their investors, which should be the deciding factor for your investment. In this article, we will highlight the basic differences between these two that will help you make a more informed investment decision.
Basic Purpose
Bitcoin was the first cryptocurrency developed in 2009. It has been the “face of crypto” for several years. Until 2013, Bitcoin had no major competitor in the crypto market. Bitcoin is quite an established cryptocurrency with over 15,000 companies already accepting it as a form of payment. Investing in bitcoin is often compared with buying gold or other assets that retain a separate value even if the dollar goes down. Despite its volatile nature, it is considered a guard against inflation.
Ethereum, on the other hand, is not digital gold. It was designed in 2015 as a decentralized finance platform that allows developers to build other crypto apps on it. In order to use this platform, developers have to pay fees in its native currency, ether. Ethereum network allows developers to create “smart contracts” without the involvement of a third party, which helps users to perform safe and credible transactions. This is the reason why Ethereum is considered a revolutionary technology as it can change the way people perform security trading, mortgage transfers, and many other fields of work.
So, while bitcoin is an alternative to fiat currencies, Ethereum is a completely different platform that runs contracts in its own currency. If you are buying Ethereum, you’d be betting that there will be an increase in the number of developers that will use the Ethereum network and pay the fees in Ether. As more people buy Ether, its value will increase. Another reason why Bitcoin is compared to gold is its finite number of 21,000 as compared to Ethereum, which has an infinite number of Ether. From the above discussion, it seems like investing in Bitcoin is similar to investing in gold while investing in Ethereum is more like investing in a tech company.
Stability and Risks
Bitcoin is a finite digital currency with the longest history. Even though it’s prone to fluctuations, it has consistently been the best-performing investment asset for almost 10 years. Big companies like Tesla and Square hold and advocate for investment in Bitcoins. This kind of institutional support has given Bitcoin an impeccable reputation, more liquidity, and stable prices.
Ethereum investment is more like investing in the future of blockchain technology. With the emergence of several decentralized finance platforms, there is a huge probability that the value of Ethereum will increase over time. Today, Ethereum holds most of the decentralized finance platforms, which has led to an increasing acceptance and popularity of Ethereum. But if Ethereum loses its leadership in such platforms, its value will decline.
A decentralized finance platform is not the only product of Ethereum blockchain. Non-fungible Tokens (NFTs) are a kind of digital asset that allows users to collect art and other unique items digitally. Buying NFT is like buying the authenticity of the artwork or collectible. These NFTs are built on Ethereum blockchains, which means to buy NFTs one needs to buy Ether. Some NFTs are being sold for millions of dollars. For example, Twitter’s CEO Jack Dorsey sold his first tweet as an NFT for $2.9 million in March 2021. Given the popularity of NFTs and digital art these days, Ether seems to have an edge. Therefore, the investment risk in the case of Ethereum is higher but so are the profits.
Then what should I do?
Both Bitcoin and Ethereum are high-risk investments given the volatile nature of the cryptocurrency market. So before investing in anything, you should analyze your risk tolerance and invest only what you can afford to lose. However, due to its relative stability and longer track record, Bitcoin may be less risky than Ethereum. On the other hand, Ethereum might have more opportunities for growth over time since it can hold more than just its native assets and have more applications. So, your investment will really depend on your risk tolerance and your financial vision for the future.
Investing experts say that Ethereum has a greater utilitarian value due to which it will witness a continuous and enormous increase in its value. Several investors have also suggested that one must diversify one’s portfolio by investing in both. Investing all your money in a single asset is probably not a great idea. Both Bitcoin and Ethereum have the potential to grow and expand. If you decide to split your investment between Bitcoin and Ethereum, you must take into consideration your financial goals. Some experts recommend a 50/50 split while some say you should split 60/40 of your investment between Bitcoin and Ethereum. Whatever you decide, it is important that you take both of these asset classes seriously in the current crypto boom.
The use of cryptocurrencies is becoming more mainstream, which has challenged the dominant framework of the traditional banking system. This might be the right time for you to diversify your investments into crypto and other digital assets to stay on top of innovation.
