Bitcoin, the highest-priced cryptocurrency, with a market capitalisation of $824bn at the time of writing (23 September), with ether carrying a little less than half that value at $370bn.
If you are new to cryptocurrency investing you may be wondering, what’s the difference between bitcoin and ethereum? Which coin should you focus on in 2021?
In this article, we look at the key features of the two cryptocurrencies and projects behind them to help you make a more informed decision.
Ethereum vs bitcoin: is one cryptocurrency better than the other?
What are the main features of bitcoin vs ethereum? How do they work and what are they used for?
Bitcoin (BTC) was created in January 2009 by an anonymous developer known as Satoshi Nakamoto, who described the decentralised, peer-to-peer online currency in a 2008 whitepaper in response to the 2008 global financial crisis.
Bitcoin is based on a decentralised ledger, or blockchain, that processes transactions in blocks that are secured by cryptographic algorithms. Transactions are processed without the need for an intermediary. The blockchain uses a Proof-of-Work (PoW) consensus algorithm. Bitcoin miners validate transactions by solving cryptographic calculations and receive bitcoins as a reward.
This has become the source of criticism from some market observers, as PoW has resulted in bitcoin mining becoming controlled by groups of large mining pools using costly computer processing equipment. The process is highly energy intensive, with BTC mining reported to consume as much electricity as a small country.
Bitcoin was created with the intention to be a decentralised global digital currency used for payments and transactions. However, investors increasingly began to view the cryptocurrency as a form of “digital gold” that serves as a store of value.
Ether (ETH), the native cryptocurrency of the Ethereum platform, is the first among thousands of so-called “altcoins” – alternatives to bitcoin. It was launched in 2015 by a group of eight co-founders led by Vitalik Buterin, who continues to work on the platform. Buterin first described the decentralised open-source Ethereum blockchain in a 2013 whitepaper. An initial coin offering (ICO) was held in 2014 to raise funding for the launch.
Unlike Bitcoin, the Ethereum blockchain was launched as a development platform, with ETH as its native coin to facilitate transactions. The Ethereum blockchain is used by numerous other cryptocurrencies which run on the platform. The blockchain uses the ERC-20 compatibility standard, which has resulted in the creation of more than 280,000 cryptocurrency tokens.
The execution of decentralised smart contracts – automatic, self-executing contracts – on the Ethereum blockchain allows cryptocurrency projects to develop decentralised finance (DeFi) products and services as well as other decentralised applications (dApps) and non-fungible tokens (NFTs). This has driven the popularity of Ethereum among developers and investors, particularly since the emergence of DeFi in 2020.
Ethereum was designed to use PoW consensus. But the process of ethereum vs bitcoin mining is changing because of a series of upgrades to Ethereum 2.0, which involves shifting to a Proof-of-Stake (PoS) algorithm. PoS works by staking ether coins into pools to help secure the network by processing transactions on the blockchain. Stakers, also known as validators, receive rewards for locking in their coins. This is a far less energy intensive process than PoW. Some of the newer blockchains have launched using PoS rather than PoW.
Ethereum 2.0 aims to increase the speed and efficiency of the blockchain, while also introducing coin burning that should act as a deflationary factor to support the ETH price in the future.
What does that mean for investors? Is ethereum better than bitcoin?
Ethereum vs bitcoin: history and performance
Bitcoin is the clear leader in the cryptocurrency markets when it comes to traded pricing. It reached an all-time high of $64,863.10 on 14 April 2021. By comparison, the ether price reached an all-time high of $4,362.35 on 12 May 2021.
Although percentage-wise, ETH is winning by a wide margin.
As the market leader, bitcoin is the cryptocurrency that traders and investors look to for price direction. While some individual coins such as ether may move in response to news and announcements that affect their fundamental supply and demand, most of the time cryptocurrency prices take their direction from BTC.
Bitcoin has had several major surges over the years, each time breaking records and reaching new all-time highs.
On 17 December 2017, the BTC price skyrocketed to $20,089, which triggered a run to record highs for altcoin prices into January 2018. Ether reached a high of $1,432.88 on 13 January 2018. This brought the cryptocurrency industry to broader public attention, attracting the interest of retail investors and traders looking to profit from the volatility in prices.
What followed was a massive correction that took BTC from $20,000 to a little over $3,000, causing many to call it a bubble, a failed asset, and to predict the end of the industry. The market bottomed out in March 2020 during the COVID-19 pandemic-related sell-off in financial assets. But it subsequently began to rebound.
Increased interest in early 2021 lifted prices for many cryptocurrencies like BTC and ETH to new all-time highs in April and May that were well above the previous rally’s peaks.
Prices have since fallen back, but a rally over the summer that saw bitcoin touch the $50,000 mark and ether approach $4,000 has investors expecting the market to continue advancing to new highs over the long-term.
The potential for large returns, as well as the emergence of dApps and NFTs, has attracted the interest of institutional investors, further driving acceptance of cryptocurrencies as legitimate products and investments.
On 7 September 2021, UK investment bank Standard Chartered initiated coverage of cryptocurrencies with reports on BTC and ETH that estimated their long-term value. It valued ether at $26,000-$35,000 based on bitcoin reaching the top end of its valuation of $50,000-$175,000, as such an explosion in the price of the dominant cryptocurrency would “benefit investor perceptions of other crypto assets”.
The bank sees the ETH vs BTC cross-currency pairing doubling to 0.161, at which level ether’s market capitalisation would catch up with that of bitcoin.
It’s important to keep in mind that cryptocurrency markets remain extremely volatile, making it difficult to accurately predict what a coin’s price will be in a few hours and even harder to give long-term estimates. As such, analysts can get their predictions wrong.
Investing in ethereum vs bitcoin: which is the better pick in 2021?
One of the primary questions new cryptocurrency investors ask is: should I buy bitcoin or ethereum? The answer simply depends on the risk tolerance and financial goals of each investor.
The features and aims of the two are different, with bitcoin looking to become a global currency while Ethereum acts as a development platform for new financial services. Both BTC and ETH have the potential to increase in value. As Standard Chartered noted in its Ethereum report:
“While potential returns may be greater for ETH than for BTC, risks are also higher.”
Bitcoin is designed to halve the block rewards for miners every four years, with the number of coins that can be created capped at 21 million. This creates a scarcity that is expected to support the price. There are currently 18.8 million BTC in circulation, with halving reducing the creation of new coins so that the cap is expected to be reached in 2140. However, it's possible that the network protocol will be changed by that time.
Ether does not have a fixed supply cap, but the introduction of coin burning is expected to reduce supply as the use of the blockchain grows. There are currently around 117.6 million ETH coins in circulation, with more than 351,291 coins burned at the time of writing, according to Etherchain data.
But is ethereum better than bitcoin? Each investor should decide which is the best choice for their portfolio.
While there is a misconception that there’s a rivalry between the projects, and that the BTC vs ETH debate will result in one project's demise, they have different goals and purposes. Both have the potential to grow. Or they could equally lose their value if cryptocurrencies collapse in a bear market.
Several prominent investors, including Ray Dalio, the founder of Bridgewater Associates, and John Paulson, president and portfolio manager of US investment company Paulson & Co., warn that cryptocurrencies could ultimately fail.
In an interview with Bloomberg Wealth in August 2021, Paulson said:
“Cryptocurrencies, regardless of where they’re trading today, will eventually prove to be worthless. Once the exuberance wears off, or liquidity dries up, they will go to zero. I wouldn’t recommend anyone invest in cryptocurrencies.”
In the meantime, speaking to CNBC on 15 September 2021, Ray Dalio suggested that regulators would shut down bitcoin if the cryptocurrency becomes too successful: “I think at the end of the day if it’s really successful... [regulators] will try to kill it.”
When choosing financial assets to invest in, especially highly volatile ones such as cryptocurrencies, we recommend that you always do your own research and consider the latest trends, news, technical and fundamental analysis, and expert opinion to form your own view of the market and its potential. Never invest more than you can afford to lose.
How to start trading BTC and ETH in 2021
If you are looking to invest in bitcoin or ethereum, you can buy the coins on a number of cryptocurrency exchanges, like Binance, Coinbase, Huobi and Kraken. If you intend to hold them for the long term, you can withdraw them to a hardware or software wallet for storage.
Alternatively, if you want to try to profit from their short-term price fluctuations, you can do so by trading BTC and ETH, as well as other cryptocurrencies, with contracts for difference (CFDs) at Capital.com.
CFDs are derivative products, which means that their value depends on the value of the underlying assets. With CFDs you are buying or selling a derivative contract, so you do not need to hold the coins themselves and worry about storing them securely.
Trading CFDs offers the opportunity to try to benefit from both bullish and bearish price action. You can either open a long position, if you expect the price to rise, or a short position, if you expect it to fall.
As a leveraged product, CFDs are designed to maximise gains, which can be large on volatile products such as cryptocurrencies. However, you should be aware that using leverage increases the size of the loss if the price moves against your position. Be sure to do your own research before investing your money.
Make sure you understand how CFDs work before you begin, and never invest money you cannot afford to lose. Learn more about cryptocurrency CFDs with our comprehensive guide.
Create an account on Capital.com and stay on top of the latest market news to help you identify the best trading opportunities.
Edited by Valerie Medleva