Ethereum vs Bitcoin: The Debate
As the world’s second-largest cryptocurrency by market capitalisation, there has been much speculation about whether or not Ethereum will become king over the next couple of market cycles.
With its focus on decentralised finance, the Ethereum blockchain is positioning itself as a leader in the decentralised application space. With Bitcoin likely to break into six figures in the next bull run, many are looking for alternative investment opportunities, such as Ethereum, to increase their potential earnings.
In this blog, we will explore some of Ethereum’s essential functions and examine whether or not it is a good investment. We will look at the technology behind Ethereum, some real case uses, and its current price in the context of where the cryptocurrency market is at the time of writing.
But before we conclude whether ETH is a good investment, let’s look at some of the key technical differences between the two giants of the crypto world, Bitcoin and Ethereum:
- Both use blockchain technology, but Ethereum is more versatile and has wider application usage
- Bitcoin is primarily a digital currency or store of value, while Ethereum is a decentralised platform for building and running smart contracts and decentralised apps (dapps)
- Bitcoin has just the BTC token used for transactions. In contrast, Ethereum has both an ETH token for commerce and a Gas token used as fuel (payment) for the computational power required to execute smart contracts – more on this later.
- Scalability: Ethereum is more scalable than Bitcoin, with faster transaction times and the ability to handle more transactions per second.
Now, you might ask – why hasn’t Ethereum ousted Bitcoin yet if it is so much better? There are a few reasons for this. The biggest reason is down to something known as First Mover Advantage.
Simply put, Bitcoin was the first. And as the cryptocurrency industry has such a limited market share and user base, being the first counts for an awful lot.
When people are sceptical about entering a new investment industry, they turn to the most well-known, least-volatile asset – meaning other cryptocurrencies will need to create far greater value and resources to convince investors to migrate away from the most secure long-term investment.
Another reason Ethereum has struggled to compete with Bitcoin is primary security concerns. Some of Ethereum’s most notable security breaches include The DAO hack in 2016, where a hacker exploited a vulnerability in the code of the decentralised autonomous organisation (DAO) and stole approximately 3.6 million ETH ($50 million at the time).
A hard fork was then coded in to reverse the stolen funds – but it could not change the damage to the Ethereum reputation.
Then in 2019, the Ethereum Classic blockchain (a version of Ethereum which didn’t implement a hard fork to reverse the hack of the DAO) experienced a 51% attack, where a group of miners controlled more than half of the networks mining power – allowing them to reverse transactions and double spend coins.
The developers were able to mitigate the attack and make the network more secure, but it flagged huge warning signs as to what could happen if the network remained vulnerable in the future.
Ethereum & Smart Contracts
As previously mentioned, the Ethereum network has been designed to support smart contracts and provide the infrastructure for decentralised finance (DeFi) applications, making it a key player in the growing world of decentralised applications.
These smart contracts allow for the automation of traditional business processes whilst revolutionising the way we approach efficiency and security.
As opposed to Ethereum classic, which uses PoW (proof or work) to validate transactions and secure the network, Ethereum 2.0 uses the improved PoS (proof of stake) method, which allows nodes to validate transactions and create new blocks just by holding a deposit of ETH.
Smart contracts are very similar to real-life agreements, but instead of the validation being down to a person or organisation, it is enforced by code. This code automatically executes the terms of a contract when certain conditions are met.
What sets Ethereum and other cryptocurrencies that use intelligent contracts apart from the rest is their real-world utility. With the development of smart contracts, the long-lasting argument that the crypto industry relies on intrinsic value rather than real-world value no longer stands.
Let’s look at some examples:
- Supply chain management: Smart contracts executed on the Ethereum network can be used to automate and track the movement of goods. An example would be the transparent and efficient oversight of a farmer’s produce from its source, through distributors, wholesalers, and retailers – into the consumer’s home.
- Real estate: Smart contracts can be used to automate financial processes, including loans, trading, and settlements – making them faster and more secure.
- Insurance: Smart contracts can automate the claims process, reducing the need for intermediaries and increasing efficiency.
- Healthcare: Smart contracts can facilitate and automate the sharing of medical data between patients, doctors, and hospitals – with complete security and reliability.
- Media and Entertainment: Smart contracts can streamline and improve micro-payments and royalties, ensuring that content creators are paid without intermediaries and mitigating fraud.
These are just a few real-world cases of how smart contracts, executed on the Ethereum network, are not only providing value to fundamental business processes – but progressing them. See our blog on The Utility of The Blockchain for more detailed examples.
Is Ethereum a good investment?
Ethereum, like every other cryptocurrency, has endured a drop of around 80% from the highs of Q4 2021 to the lows of the recent bear market – despite fundamentals tightening and adoption increasing all the time.
So why does this matter if the price is still falling?
In truth, the whole crypto market is controlled by the Bitcoin market cycle. Like every other financial market, that involves periods of sustained growth (known as bull markets) and periods of considerable pullback (known as bear markets).
Although an 80% drop may sound alarming for an asset type, this is very standard in cryptocurrency. Smaller altcoins can gain and lose thousands of % in a single bull run or bear market – carrying both extreme appeal and devastating risk.
At the time of writing this blog, Bitcoin has either bottomed out or is expected to do so over 2023. During this time, Ethereum has been trading between $1000 and $1600, currently priced around the latter.
As a rule of thumb, any investor across all asset types will tell you that the experienced people sell when the less experienced people think it’s time to buy, and vice versa.
If we go back to the all-time high of 2021, when Ethereum was trading at around $4000, everyone would have said it was a great time to buy Ethereum, as it would be any cryptocurrency.
People would have bitten your arm off to buy ETH below $2000 again.
Fast forward to the bottom of the bear market, and inevitably, as human psychology so often demonstrates, people are still rejecting the same opportunity they would have jumped at a few years ago.
So, in conclusion, depending on your risk appetite and capacity, now may be a great time to invest in Ethereum – and many other cryptocurrencies, for that matter. Although it cannot be determined how long is left of this bear market in the short term, how much lower it could go, or if the price of Ethereum has bottomed out already, long-term investors will see anything within this range of lows as a generational buying opportunity.
*It must be said that this is NOT financial advice, and you should only invest what you can afford to lose. We recommend that you speak with a financial adviser if you are unsure about your investment decisions.