Despite growing competition from hundreds of popular altcoins, Bitcoin (BTC) and Ethereum (ETH) will remain the clear leaders in the cryptocurrency market in 2024. Together, Bitcoin and Ethereum account for roughly 70% of the entire global cryptocurrency market. Bitcoin’s $1.3 trillion market cap seems small compared to Ethereum’s $420 billion market cap, but Ethereum’s market cap is more than three times larger than all other cryptocurrencies.
In the coming years, other competitors may emerge to challenge the two cryptocurrency market leaders, but for now, Bitcoin and Ethereum are the two most obvious choices for crypto investors. But before you can choose the top cryptocurrency that’s right for you, you need to understand the differences between Bitcoin and Ethereum and why each plays a unique role in the cryptocurrency world.
What is Bitcoin?
Bitcoin was the first cryptocurrency. It is a blockchain-based decentralized digital currency run by a network of users, enabling financial transactions without relying on a central authority or intermediary.
Bitcoin and other cryptocurrencies are alternatives to fiat currencies such as the US Dollar that are backed by a federal government or central bank. Bitcoin is secured by cryptography, and transactions are verified through a process called mining, in which users race to verify transactions by using powerful computers to solve complex mathematical puzzles. This verification method is called Proof-of-Work or PoW. Bitcoin transactions are permanently recorded on a public ledger and cannot be altered or manipulated in any way.
When Bitcoin miners successfully add a block of verified transactions to the blockchain, they receive a reward in the form of newly minted Bitcoins. This reward is currently 3,125 BTC per block, but is halved every 210,000 blocks are added to the blockchain. Unlike fiat currencies, Bitcoin has a hard cap of 21 million BTC that cannot be exceeded. This limit limits Bitcoin supply and prevents inflation. This feature leads Bitcoin investors to believe that the cryptocurrency will be an effective store of value in the long term.
What is Ethereum?
Ethereum is a blockchain platform designed to support smart contracts and secure financial transactions. Ethereum’s native cryptocurrency is Ether.
Smart contracts are software that allow decentralized apps (dApps) to run automatically on the blockchain if certain conditions are met.
The Ethereum network includes dApps for gaming, gambling, socializing, and even decentralized finance and DeFi. Most non-fungible tokens or NFTs are also based on the Ethereum network.
The Ethereum network is decentralized and runs on a network of thousands of computers around the world. In 2022, the Ethereum network switched from the energy-intensive PoW validation system to a Proof-of-Stake (PoS) model. Instead of miners competing to solve mathematical puzzles, Ethereum’s PoS system selects validators through an algorithm. To qualify as a potential validator, traders must “stake” a portion of their cryptocurrency as collateral. The more cryptocurrency they stake, the higher their chances of being selected to validate a block and receive rewards.
Ether does not have a hard cap on its supply, but the supply is managed through a process called burning. Each time a transaction is completed on the Ethereum network, users must pay a transaction fee or “gas” fee. The Ethereum protocol specifies that a portion of each gas fee is burned, essentially destroying ETH. As a result, Ether has been in a deflationary state for a long period of time, meaning that more ETH has been burned than has been generated. However, after significantly lowering fees and reducing burns through the Dencun upgrade in March 2024, Ether is now inflationary.
What is the difference between Bitcoin and Ethereum?
Bitcoin and Ethereum are both popular cryptocurrencies that run on a decentralized blockchain network, but otherwise there are few similarities between the two investments. Some of the many differences between Bitcoin and Ethereum include:
- Bitcoin’s network runs on a PoW validation system, while Ethereum uses a less energy-intensive PoS consensus validation system.
- Bitcoin’s primary purpose is to be a digital currency and an alternative to fiat currencies such as the US Dollar that can be easily exchanged for goods and services. Ethereum’s primary purpose is to act as a platform for running smart contracts and other dApps, while ETH is simply the native cryptocurrency used to facilitate transactions.
- Bitcoin’s supply is limited to 21 million, while Ether’s supply is theoretically infinite. Ether has been in deflationary states at times, but since fees were significantly reduced in March 2024, supply has been steadily increasing.
- Bitcoin’s future price performance will likely depend on its acceptance as a legitimate global currency and its popularity as an inflation hedge and store of value for investors. Ether’s future price performance will likely depend on the popularity of the Ethereum network and the growth of dApps and smart contracts.
Bitcoin vs Ethereum Performance
Bitcoin and Ethereum are both exceptional long-term investments, but both are prone to extreme price fluctuations. Purchasing either of the two cryptocurrencies requires a high level of risk.
Looking at past performance, it is difficult to pick a winner between Bitcoin and Ether, as relative returns vary by time frame. Over the past year, Bitcoin’s price has increased 157% and Ether’s has increased 100%. Looking back over the past five years, Bitcoin’s price has increased approximately 740% and Ether’s price has increased approximately 1,330%.
While Ether may seem like a better long-term investment, this trend has reversed over the past year due to the growing excitement surrounding the recent launch of a spot Bitcoin exchange-traded fund (ETF). Of course, past performance is no guarantee of future results, and it is very difficult to accurately predict cryptocurrency market movements, even for professional analysts.
How to invest in Bitcoin and Ethereum
Investors can buy Bitcoin and Ethereum directly from popular cryptocurrency exchanges such as Coinbase, Gemini, and eToro. You can also buy both cryptocurrencies through a brokerage account with Robinhood, Interactive Brokers, TradeStation, or other platforms that support crypto trading. You can also buy Bitcoin or Ether through your PayPal or Venmo account.
Bitcoin and Ether are both traded as futures on the Chicago Mercantile Exchange. While futures trading is somewhat advanced for the average investor, there are several Bitcoin and Ether ETFs that hold futures contracts. ProShares Bitcoin Strategy ETF (ticker: BITO), VanEck Ethereum Strategy ETF (EFUT), and ProShares Ether Strategy ETF (EETH) are three examples of popular crypto futures ETFs.
Starting in January 2024, Bitcoin investors will also be able to purchase spot Bitcoin ETFs, which hold the cryptocurrency itself rather than futures contracts. The Securities and Exchange Commission has approved the following spot Bitcoin ETFs to trade on major U.S. exchanges:
- ARK 21Shares Bitcoin ETF (ARKB)
- Bitwise Bitcoin ETF (BITB)
- Fidelity Wise Origin Bitcoin Trust (FBTC)
- Franklin Bitcoin ETF (EZBC)
- Grayscale Bitcoin Trust (GBTC)
- Hashdex Bitcoin ETF (DEFI)
- Invesco Galaxy Bitcoin ETF ( BTCO)
- iShares Bitcoin Trust (IBIT)
- Valkyrie Bitcoin Fund (BRRR)
- VanEck Bitcoin Trust (HODL)
- WisdomTree Bitcoin Trust (BTCW)
Several companies have filed to launch spot Ether ETFs, but none have launched yet. The SEC has approved one. However, the SEC approved rule changes regarding spot Ether ETFs in May, seemingly opening the door for the approval of the first spot Ether ETF in the near future.
Conclusion
Although Bitcoin and Ethereum may seem similar at first glance, the investment theories of both are very different. Bitcoin’s biggest challenge in the future may be scalability, given its energy-intensive PoW consensus mechanism. Ethereum’s biggest challenge may be fending off competition from so-called Ethereum killer blockchains, such as Solana (SOL) and Avalanche (AVAX), which often have faster transaction speeds and lower gas fees. It’s hard to say whether Bitcoin or Ether will be a better long-term investment in the future, but if history is any indication, investors can’t go wrong with either choice.