Bitcoin vs. Ethereum: understanding the differences
Here are the key features that distinguish bitcoin and Ethereum from the rest of the pack — and from each other.
There are thousands of cryptocurrencies in existence, but two dominate the market: Bitcoin (BTC) and Ethereum (ETH). Bitcoin is by far the most popular cryptocurrency by market capitalization, accounting for 66% of the cryptocurrency market in 2020. According to real-time tracking of the top 100 cryptos by market capitalization, Bitcoin is by far the most popular, consistently followed by Ethereum in the No. 2 spot.1
Deutsche Bank senior economist and market strategist Marion Laboure highlighted the pre-eminence of these two cryptocurrencies, saying in September 2021 that "if bitcoin is sometimes called 'digital gold,' Ethereum would then be the 'digital silver.'"2
Here are the key features that distinguish bitcoin and Ethereum from the rest of the pack — and from each other.
Bitcoin: The world's first cryptocurrency
Bitcoin came into existence in 2009, shortly after the pseudonymous Satoshi Nakomoto released a detailed white paper explaining the purpose of bitcoin: to create a decentralized peer-to-peer payment system that relies on cryptography to verify transactions. The idea was groundbreaking and gained numerous followers among the investor class and others who felt that the current financial system was ripe for disruption.
While many other cryptocurrencies followed in bitcoin's footsteps, none were ever able to gain the same momentum as the original. Enjoying a first-mover advantage as cryptocurrencies became popular, bitcoin's value soared from $1,000 in 2013 to a high of over $68,000 in 2021.
Besides its role as the established standard-bearer of cryptocurrencies, another key attribute of bitcoin that appeals to investors is the hard cap on the number of coins available to be mined. No more than 21 million bitcoin will ever be available, giving the cryptocurrency a built-in defense against inflation. This leads to the natural analogy between bitcoin and gold: many people consider it a store of value and a hedge against standard currencies.
Ethereum: The cryptocurrency that drives innovation
Like bitcoin, Ethereum is a digital currency based on blockchain technology. However, that's essentially where the similarities between the two popular investments end. While bitcoin's purpose is solely to serve as an alternative to traditional currencies, Ethereum was built with a different goal in mind: to create a platform for developers to utilize its underlying blockchain technology.
Ethereum is all about practical and innovative real-world applications, like its popular “smart contracts." Smart contracts enable parties to sign a contract, which will automatically execute transactions once the parties meet pre-set conditions. They take advantage of the decentralized, “no third-party necessary" approach that makes cryptocurrencies so popular. Ethereum can also be used to create non-fungible tokens (NFTs), which are beginning to enter the mainstream through recent highly publicized sales in the digital art world.
In order to utilize Ethereum's applications, users must pay in Ether, the coins traded on the Ethereum network (technically, Ethereum is the name of the network and Ether is the name of the cryptocurrency, although they're often used interchangeably). Bullish ETH investors hope that the innovative uses of the Ethereum network will cause its associated cryptocurrency to appreciate in value. Unlike bitcoin, there is no cap on the total amount of Ethereum that will be made available.
Which one should investors choose?
Just as there can be a role for both gold and silver in any portfolio, there can also be a role for both bitcoin and Ethereum. Bitcoin offers a well-known alternative currency with impressive historical returns and a possible hedge against inflation. Ethereum offers multiple practical uses and impressive potential for innovation. The right choice depends on an individual investor's aspirations, outlook, and predictions for the future.