The rivalry between the leading cryptocurrency, Bitcoin (BTC -0.77%), and the coin often viewed as its successor, Ethereum (ETH -2.01%), is well known.
However, despite the competitive narrative, these two cryptocurrencies have fewer similarities than one might think. There are stronger arguments for investing heavily in one over the other, so let’s analyze the situation further.
Bitcoin relies on “scarcity” for value
Bitcoin serves as both a store of value and, to a lesser degree, a medium of exchange, fulfilling two of the primary functions of money. Its value stems from demand from investors who recognize its inherent “scarcity”.
Thanks to Bitcoin’s supply mechanics, including the continually increasing difficulty of mining, it is more advantageous for investors to purchase it at today’s prices rather than in the future when prices are expected to rise due to increased scarcity.
As long as investors maintain faith in this investment premise, those who buy Bitcoin today can reasonably expect there will be future buyers willing to purchase it from them.
It’s important to note that even in this simplified view of Bitcoin, there are no guarantees that future prices will be advantageous for you if you choose to buy and hold; yet there exists a framework that can lead to price appreciation over the long term, even if overall demand remains constant during that time.
Ethereum flourishes from its ecosystem
While Ethereum also functions as a store of value and a medium of exchange, it uniquely benefits from being the primary coin on its blockchain. This gives it additional utility, as it is required for paying gas fees when engaging with decentralized finance (DeFi) applications, minting non-fungible tokens (NFTs), executing smart contracts, and more.
As the value of projects hosted on its blockchain rises due to their success, the overall value tied to Ethereum increases, driving up its price.
Conversely, if developers’ offerings on the Ethereum blockchain fail to attract investor interest, there will be less capital entering or remaining in the ecosystem.
For Ethereum to sustain future capital inflows, it must continue to advance its core blockchain technology to remain appealing to developers and investors alike. A failure to consistently align its technical capabilities with market demand could result in talent and capital flowing to competitors.
This puts Ethereum at a higher risk of losing valuable human and financial resources to faster, cheaper, or more efficient alternatives.
Thus, Ethereum’s position is inherently less stable than Bitcoin’s. While it undoubtedly presents more growth opportunities as its leaders can explore emerging market segments, it also runs the risk of capital siphoning off to newer chains and coins that may be more adept at serving niche areas.
Ethereum is unlikely to become worthless as long as it adequately meets the majority of developer and investor needs. However, it’s easy to foresee a scenario where it gradually loses ground to specialized competitors focused on specific applications, such as music or sports in the blockchain space.
Fewer features can lead to decreased competition
Ethereum’s past reinforces that the threat of competitors is not just hypothetical. Cardano, currently the ninth-largest cryptocurrency, was created as a direct response to the weaknesses perceived in Ethereum.
Solana, although also inspired by Ethereum, distinguishes itself by succeeding where Ethereum falters, offering cheaper and much faster transactions. In contrast, coins developed to compete with Bitcoin, such as Litecoin, remain significantly smaller and less impactful within the cryptocurrency ecosystem.
This suggests that, in this scenario, less can be more. Bitcoin’s early development and its stable characteristics contribute to its resilience, as fewer changes mean reduced risk in comparison to market trends.
Meanwhile, Ethereum is already facing challenges from numerous competitors, and there seems to be little chance for a favorable shift in its standings, even in the long run.
So between these two currencies, especially in today’s environment where Ethereum contends against various threats, Bitcoin appears to be the wiser investment choice for your $5,000. While there’s potential for Ethereum to grow at a faster pace, the risk-reward ratio for investing in it currently lacks appeal.
