Ethereum vs. Bitcoin: How do they compare?
Money.ca / Money.ca
Updated: October 29, 2024
When it comes to cryptocurrency, Bitcoin is a household name, but Ethereum has made a significant mark as the second most popular digital coin.
Over the past five years, Ethereum's growth has been extraordinary, significantly surpassing Bitcoin in terms of percentage returns. As of October 2024, Ethereum’s price has risen by 1,344.87% since 2018, reflecting its growing adoption in decentralized finance (DeFi), NFTs and scalability solutions.
In comparison, Bitcoin has increased by about 55% year-to-date and experienced 8.28% growth annually during the same period, with the potential for further gains driven by upcoming ETF approvals and a possible bull market ahead of the next halving cycle
Compare Ethereum vs. Bitcoin stock charts
This begs the question: Will Ethereum continue to outperform Bitcoin over the next five years and beyond?
To better understand where each stands as an investment, let’s examine their differences and similarities and consider what the future might hold for both.
How does Ethereum work vs. Bitcoin?
Bitcoin was the pioneer of cryptocurrencies. Launched in 2009 by the elusive Satoshi Nakamoto, Bitcoin's primary purpose is to act as a decentralized digital currency and store value, often compared to digital gold. Transactions are recorded on a blockchain, a type of digital ledger, and new Bitcoins are created through "mining," where computers solve complex puzzles to validate transactions and secure the network. Bitcoin has a finite supply of 21 million coins, making it deflationary.
In contrast, Ethereum, proposed by Russian-Canadian programmer Vitalik Buterin in 2013, is more than just a currency. It’s an open-source platform designed to enable developers to build decentralized applications (DApps) and execute smart contracts — automated agreements coded directly into the blockchain. The native cryptocurrency of the Ethereum network is Ether (ETH), which is used to fuel transactions and pay fees on the network.
Ethereum operates on a blockchain like Bitcoin, but it’s designed to be far more adaptable. Ethereum is transitioning to a proof-of-stake model called Ethereum 2.0, which aims to reduce energy consumption and increase the network's speed and capacity. Unlike Bitcoin, Ethereum doesn’t have a fixed supply, allowing for the creation of new coins each year to maintain the network.
Key differences: Ethereum vs. Bitcoin
While Ethereum and Bitcoin are both digital currencies operating on blockchains, the similarities end there. Here are the key differences that set them apart:
- Supply: Bitcoin's cap of 21 million coins creates scarcity. Ethereum has no such cap, though Ethereum 2.0 aims to limit its annual creation rate to about 2%
- Mining: Bitcoin uses a proof-of-work system that requires powerful computers to solve complex algorithms. Ethereum is moving towards proof-of-stake, which relies on validators who hold and stake Ether
- Block Time: Ethereum’s average block time is 14 seconds, while Bitcoin’s is about 10 minutes, resulting in faster transaction speeds for Ethereum
- Purpose: Bitcoin's primary goal is to be an alternative currency that challenges the traditional financial system. On the other hand, Ethereum's versatility is a key factor that sets it apart. It aims to be a platform for decentralized applications and smart contracts, making it more than just a currency
Should you buy Ethereum or Bitcoin?
Bitcoin and Ethereum have their strengths as investments but also carry risks. Bitcoin’s appeal lies in its finite supply and established reputation as a store of value. Meanwhile, Ethereum's value is derived from its broad potential applications in finance, tech and more, with its role in decentralized finance (DeFi) and non-fungible tokens (NFTs) gaining traction.
A diversified approach might be the best strategy, as both assets are prone to extreme volatility. Diversification can provide a sense of security, as it can balance the risks and rewards of your investment. Some investors opt for a 50/50 split between the two, using platforms such as Wealthsimple Crypto, which allows you to trade Bitcoin and Ethereum commission-free with as little as $1.
The future of Ethereum vs. Bitcoin
Predicting the future of these two major cryptocurrencies is a complex task. Both have experienced significant volatility, with massive surges and equally sharp declines. Ethereum reached an all-time high of $4,182 in 2021, driven by excitement over Ethereum 2.0. Bitcoin, on the other hand, has reached highs of nearly $69,000, riding waves of mainstream adoption and increased institutional interest.
Ethereum 2.0 could be a game-changer, making the network more efficient and eco-friendly by reducing energy use and increasing transaction speed. If Ethereum succeeds in becoming the backbone of DeFi and other blockchain innovations, it could continue to outpace Bitcoin. This potential for growth and innovation in Ethereum’s future is something to look forward to.
Are you buying Bitcoin or Ethereum?
Bitcoin and Ethereum are the top two cryptocurrencies, but they’re designed for different purposes.
Bitcoin aims to be an alternative currency and a store of value, while Ethereum supports a decentralized network for applications and smart contracts. Both have seen impressive growth as investments, though they remain highly volatile and speculative. Invest carefully and only with amounts you can afford to lose.
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Robb Engen is a leading expert in the personal finance realm of Canada and is also the co-founder of Boomer & Echo, an award-winning personal finance blog.
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