Newcomers to crypto trading often ask whether they should buy Bitcoin (BTC) or Ethereum (ETH). However, this is a simple approach that overlooks the differences between the two cryptos, the role that each plays in the crypto world, and their respective appeal to investors.
An optimised portfolio will include both BTC and ETH, allocating funds to each in a proportion that maximises the potential for returns but minimises downside risk.
Bitcoin And Ethereum: The Similarities
Bitcoin and Ethereum are both large-cap cryptocurrencies that are popular with traders and investors. They are also both well-established. Bitcoin, the first cryptocurrency, was announced with a white paper in 2008 and launched in 2009. Ethereum’s white paper was published in 2013 and the platform was launched in 2015.
At the very basic level, the two cryptos have a number of similarities from a technical and practical perspective:
- Blockchain. Both use the shared ledger technology that underpins all cryptocurrencies and makes peer-to-peer online transactions possible.
- Consensus. Both currently use Proof-of-Work (PoW) consensus – the means by which the network is secured and miners process transactions. However, Ethereum 2.0, which will take the form of a series of upgrades, will see the network transition to Proof-of-Stake.
- Large, liquid markets. Both BTC and ETH are widely listed on exchanges.
- There is strong institutional interest in both BTC and ETH.
Beneath these superficial similarities, though, Bitcoin and Ethereum are very different platforms, and serve very different purposes.
Bitcoin vs. Ethereum: The Differences
Bitcoin and Ethereum were built for completely different use cases, and over time have carved out unique niches within the crypto world. Some of the major differences include:
- Purpose. Bitcoin was designed to do just one thing well: secure storage and transfer of value with no middlemen. Ethereum, meanwhile, extends the use of shared ledger technology by providing a platform for smart contracts: software that runs on the blockchain.
- Use cases. The different functionality the two networks provide has resulted in very different applications for each. Bitcoin was launched as the first Peer-to-Peer Electronic Cash System’ and has become established as ‘digital gold’. Ethereum, meanwhile, is a platform for decentralised applications (dApps), with ETH as the payment currency for all software operations. The decentralised finance (DeFi) movement is primarily built on Ethereum, and offers open, trustless financial applications that anyone can use, anywhere in the world.
- Founders. Bitcoin was launched by Satoshi Nakamoto, an anonymous developer who released the software and helped bootstrap the network, before disappearing and leaving others to maintain it. Ethereum was created by a small team of developers, the best-known of whom is Vitalik Buterin, who is still influential in the Ethereum world.
- Developers. Since Satoshi Nakamoto stepped back, Bitcoin’s development has been limited, while Ethereum is actively maintained by a relatively centralised group of developers. (In each case, this is seen as a benefit: Bitcoin’s lack of innovation, which could bring uncertainty and risk to the network, is viewed by the community as a feature rather than a bug.)
For these reasons, asking which one is ‘better’ is like comparing apples and oranges. Moreover, BTC and ETH perform differently over the course of a crypto market cycle, which means that neither can be considered the more profitable option without taking further information into account.
Bitcoin and Ethereum: Investment Considerations
Which is the better investment: stocks or bonds? Gold or real estate? Cash or crypto?
The answer to all of these is, of course, ‘It depends’. Some of the factors traders and investors consider when creating a portfolio include:
- Time. How long do you plan to hold the asset – or how long can you do without the money if the asset’s value falls?
- Return. How much money do you potentially stand to make if the asset performs as expected?
- Risk. How volatile is the asset, and what are the chances of losing money over your timeframe?
For example, stocks have outperformed all other conventional asset classes over the long term. If you buy an index of global shares and hold it for 40 years, you’ll likely beat bonds, real estate, and maybe even gold. But stocks are volatile in the short term, which means if you need the money in the next couple of years, you’ll probably want a safer investment with a lower yield, but that is less likely to crash in value.
Crypto is a high-risk, high-return investment. Bitcoin has historically performed very well over the long term, appreciating an average of around 250% per year. But there have been times when it crashed 80-90% in value, and even in the bull runs there have been many ‘corrections’ of 30-50%.
ETH is even more volatile. ETH’s returns have been higher than for BTC – but so has the risk. Take the 2017 crypto bull market. BTC rose from a price of around $1,000 in January 2017 to a high of $19,666 in December that year – an increase of 2,000%. ETH rose from around $10 to over $1,400 in the same period, increasing 14,000%, or seven times more than BTC. But ETH then crashed almost 95%, while BTC crashed 85%.
The question therefore becomes: How can you maximise your potential for profit, while minimising your risk of loss?
The risk-adjusted return for an asset or portfolio takes into account whether the return was worth the risk of loss, and can help investors construct an efficient portfolio that increases their chances of success. Modern Portfolio Theory explores how investors can build a portfolio of assets for their preferred level of risk.
There are lots of ways to do this for conventional assets like stocks and bonds, but things become a little more difficult with crypto – partly because many cryptocurrencies do not have a long track record that allows investors to gauge the potential downside. For example, they may not have been around long enough to experience a bear market. Fortunately, BTC and ETH are old enough to gather at least some useful data – bearing in mind, as always, that past performance does not guarantee future returns. To summarise:
- ETH arguably has higher potential for profit, but greater risk of loss in the event of a downturn.
- BTC has lower (but still strong) potential for returns, but you’re more likely to preserve the value of your portfolio if the market falls.
One analyst’s example of an optimised BTC/ETH portfolio gives a ratio of around 75% BTC to 25% ETH. However, that was for one point in time. The exact ratio will depend on where we are in the market cycle, and can be as low as 60% BTC.
As a rough guide, then, the optimal portfolio is likely to contain between a quarter and a third of ETH, with the remainder allocated to BTC. (This does not take into account any other altcoins you may hold.) If you’re happy taking on more risk, you can allocate more to ETH. Just be aware that although your gains could be higher, your losses could be worse if the market turns against you.
If you’re interested in learning more about trading, check out TimeX’s Crypto Trading Tips.