Hey, remember that time you walked into your bank and sent $40,000 to a friend on the spot, and paid for the entire transaction with your pocket change? Yeah, I know. It’s impossible. But what if I told you that it’s actually possible, and you could actually do it right now?
Sure, not with the money in your bank, but with Bitcoin you can. And with Bitcoin, you can be your own bank too (and earn interest rates similar to the ones your bank has access to, using your money to earn.)
And with Ethereum, things can get even more wild, thanks to decentralized finance (DeFi) protocols. But we’re getting ahead of ourselves.
Let’s first cover what these crypto assets are, and go over several critical differences between Bitcoin and Ethereum.
When we think of Bitcoin and Ethereum, it helps to think of them in two ways: first, as assets
, and second, as decentralized networks
. As crypto assets, we are talking BTC
. As networks, the most important difference between Bitcoin and Ethereum is in their structure.
Specifically, as a blockchain technology, Bitcoin is a transactional network. Its inherent value is thus derived from transacting BTC. ETH can be used as a digital currency for transacting too, but we'd be overlooking its more interesting properties.
See, the Ethereum blockchain has an account-based model
. It was presented as a "World Computer,” powered by self-executing algorithms called smart contracts
On the other hand, we can think of BTC as purely transactional
— while Ethereum is more of a smart contracts platform on which decentralized applications (DApps)
can be built.
So is Ethereum better than Bitcoin? It’s hard to compare the two. As a Layer 1, you can't do anything on Bitcoin except transact BTC. (You can't buy NFTs. You can't even lend, borrow or stake.)
But let's not forget: BTC is the fastest asset to reach a $1 trillion market cap in history. And as a store of value, BTC still wears the crown. Does Ethereum deliver more utility? Sure. But is Ethereum the next Bitcoin? No way, Jose.
There is no next Bitcoin. Bitcoin is Bitcoin.
You might now be wondering, “Ok, I understand that Bitcoin is transactional — but what can I actually buy with BTC?" The answer is — "Anything and everything." But this is related to another frequently asked question: "When can I take out my BTC and exchange it for 'real' money?" (*smh*)
Let’s dig briefly into the properties of "real money" here: BTC and ETH have sounder properties of hard money than fiat currency. Why? Well, for one, they’re deflationary, and there’s no central authority that can devalue them at a moment’s notice.
You can also self-custody your BTC and ETH, essentially acting as your own bank. And if you want to lend your tokens, a 5% APY sounds pretty sweet… until you find out it’s the norm, and some yields go much, much higher.
It may be best to HODL
and earn until mass adoption allows us to purchase everyday things with our BTC, ETH and other crypto holdings.
Could mass adoption happen sooner than you think?
In 2021, El Salvador was the first country
to announce that BTC would become legal tender. (Many others are sure to follow.) But it isn't just nation-states that are discussing crypto adoption.
Companies, both large and small, are looking at ways to incorporate crypto into their payment systems. Even legacy financial institutions like Visa and Mastercard are offering users ways to gain exposure to crypto. (Newer third-party payment gateways like Paypal and Venmo are now onboard too.)
For mass adoption, BTC is the clear winner here. Crypto moves in waves. People who are new to crypto are exposed first to Bitcoin, then learn about Ethereum, and then the other altcoins. This is why price movement in the cryptocurrency markets tends to follow this pattern every cycle.
Investing in Ethereum vs Bitcoin
Let's compare Bitcoin and Ethereum from an investor's perspective. Your portfolio allocation between these two crypto assets depends primarily on how bullish you are for the decentralized finance (DeFi)
If you’re a serious investor, you'll need to determine whether the transition to Ethereum 2.0
will be smooth and successful — this could determine Ethereum’s long-term future price. Both Bitcoin and Ethereum are proof-of-work (PoW)
blockchains (which take up a fair amount of energy to mine and confirm new blocks). But Ethereum 2.0 will see a full transition from PoW to proof-of-stake (PoS)
(a much more energy-efficient alternative).
You’ll also want to compare layer 2 solutions for Bitcoin against those of Ethereum. For Bitcoin, these include the Lightning Network
payment protocol and Stacks (STX
For Ethereum, a promising layer 2 project is Polygon (MATIC
). It purports to resolve the trilemma problem first introduced by Vitalik Buterin in the Ethereum white paper.
Here's a quick breakdown: you can have decentralization, scale, and security, but not all three. Something must be sacrificed.
Not so, says Polygon. Not so, repeat the other Ethereum killers in chorus.
But word of advice: I wouldn't go all in on either one (or any one!) of these crypto assets. (You never want to go maxi.) Let me explain.
Diversification is a form of risk management to consider. You want to hedge your bets, especially when it comes to cryptocurrency markets. Yes, the greatest gains come from going all in, but so do the greatest losses. And when you spread your bets among several strong horses, you don't need all your horses to win.
Even just your money bets, like Bitcoin and Ethereum, should continue gaining against all other asset classes. (This includes the world's reserve currency, the "almighty" U.S. dollar.)
It's best to have healthy exposure to both BTC and ETH; doing so limits your risk to other popular cryptocurrencies and asset classes like real estate and gold.
Say you're convinced and want to hold both BTC and ETH. But which one should you hold more of? The answer depends on upside potential and maturity, which is also related to risk.
Here's a brief description of how this works:
As a digital currency, BTC has had a long time to mature (i.e., circa 11 years). Compare this with ETH, which has had a life cycle of roughly half that. In other words, despite the high price volatility of both, BTC is more stable (and thus, less risky) compared to ETH. But this also means that ETH has a lot more upside potential (albeit with more risk).
And because BTC stands alone with no competitors as a solely transactional blockchain, ETH may be the riskier bet. Many "ETH killers" have launched in the past with interesting applications of blockchain technology. However, a convincing one has yet to present itself. (And from a market share perspective, none of them come close.)
Instead, tools helping the growth of Ethereum's DeFi ecosystem have been enjoying positive price action. One example is LoopRing (LRC
), which brings zk-rollups to Ethereum. Rollups can be used to bundle thousands of transactions off-chain and move them on-chain via cryptographic hashing.
BTC and ETH: Both Big Winners?
To wit: big things are happening with both BTC and ETH…and crypto as a whole.
Don't blink. Just hold your bags, and hold them tight. And let's see what the future holds for both Bitcoin and Ethereum.
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