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Bitcoin had a wild run in 2020. From a low of US$4,748 in March last year, it rocketed to around US$57,000 today.
This brings its market cap over $1 trillion, making it more valuable than Visa and Mastercard combined.
Bitcoin is considered the gateway asset into crypto, by way of being the most established cryptocurrency. It accounts for around 61% of the crypto market cap.
However, another asset worth considering is Ethereum, the second largest cryptocurrency with around 11% of the market cap.
From an investment perspective, it is important to look past the market cap and consider both assets individually. They have vastly different use cases and purposes. Coindesk’s report on the same topic provides a good summary of their differences:
“Many institutional investors see bitcoin as a store-of-value play, a type of “digital gold.” Ether, on the other hand, tends to be seen more as a technology play, or as a consumable asset similar to “digital oil.” Both analogies only cover part of the picture, but represent the need to employ different mental models when considering the relative merits.”
What is blockchain?
First, a quick primer on blockchain technology and cryptocurrencies.
A blockchain is a decentralised network of physical computers that work together to form a huge virtual computer. Cryptocurrencies are coins and tokens built into specific blockchains to reward people for participating in the network.
Bitcoin is just one application of blockchain technology – processing transactions and keeping unchangeable records. But blockchain can also be used for many things, including processing instantaneous international payments and creating NFTs you may have heard about recently.
The technology is exciting because, if successful, has the potential to change the landscape of the internet.
Naval Ravikant, tech investor and former CEO of AngelList said on a podcast: “I believe that blockchains are the third wave of the internet after the web and mobile. And they’re quite fundamental to how the internet does and will operate in the future.”
Bitcoin (BTC)
Market cap: US $1.06 trillion
Category: Currency
Value proposition: Digital Gold
Where to buy: Complete Guide to buying Bitcoin in Singapore
Key facts
Bitcoin was envisioned to be a currency free from the control of government and financial institutions. In 2008, a white paper, “Bitcoin: A Peer-to-Peer Electronic Cash System”, was published.
Its author was Satoshi Nakamoto, the mysterious inventor of Bitcoin whose identity still remains unknown.
Bitcoin aimed to reimagine money for the digital and globalised world by creating an alternative to national currencies. This is what earned its moniker of digital gold, reflecting its aspirations to be a medium of exchange and a store of value.
Strengths
Bitcoin became a successful currency because it contained the same characteristics as fiat money. It is durable, portable, divisible, uniform and scarce.
Beyond these qualities, it also needed something much less tangible: the faith of the people using it. Money is a social construct. It becomes valuable only when people believe it has value.
As the leader in the crypto space in terms of market cap and institutional demand, Bitcoin’s growing mainstream appeal is its biggest strength. Last October, Paypal announced that it would join Square and Robinhood in allowing retail investors to buy and sell bitcoin.
One explanation for bitcoin’s spike is that many investors see bitcoin as a hedge against inflation, especially in the wake of the historic $1.9 trillion stimulus package. Whereas the Fed can print an unlimited supply of money, only 21 million bitcoins can ever be created.
Bitcoin’s price will grow if play a pivotal role as corporate cash. This February, Tesla announced it bought US$1.5 billion worth of bitcoin. According to ARK Invest’s Big Ideas Report 2021, if all S&P 500 companies allocated 1% of their cash to bitcoin, its price could increase by approximately $40,000.
Weaknesses
This is a big if, because bitcoin has just as many proponents as detractors. Critics point out that the asset is too volatile to be a store of value. This stems from bitcoin being too young and untested to equate it to digital gold.
Bitcoin has been around for 12 years; physical gold has been around for over 5000. Gold is a time tested idea deeply entrenched in human society.
Bitcoin’s technology also has crucial scalability problems. It uses what is called a Proof-of-Work (PoW) consensus to add a transaction to the blockchain.
One definition by Cryptopedia: Proof-of-Work systems rely on a process of mining to maintain the network. Miners provide computer hardware that competes to solve the complex cryptographic puzzles required to confirm data transacted on the network, and are rewarded for doing so with the network’s underlying cryptographic token for doing so.
Although this design ensures the security of the network, it is also an incredibly energy-inefficient way to process transactions. How inefficient? According to The New York Times, one Bitcoin transaction uses the same amount of energy 735,121 Visa transactions.
Bitcoin’s scalability and huge carbon footprint are hurdles it faces to becoming a global currency.
Ethereum (ETH)
Market cap: US $205 billion
Category: Software platform
Value proposition: Global computer
Where to buy: Complete Guide to buying Bitcoin in Singapore
Key facts
Ethereum was launched by Vitalik Buterin in 2015. It has since become the largest and most established open-ended decentralized software platform.
While Bitcoin was created with the singular goal of creating an internet currency, Ethereum’s aims to use blockchain technology to create decentralised applications, or dApps.
Think of it as Apple’s app store, for blockchain. Ethereum’s purpose is to provide a platform, similar to iOS for developers, to build dApps. The platform is continuously improving and adding new tools to reduce friction in creating application.
dApps aims replace internet third parties. The idea in a nutshell is to replace the need for expensive middlemen, such as lawyers and bankers. With blockchain, there is no need for trusted intermediaries.
Smart contracts
Powering this idea are smart contracts. Bitcoin is a single-purpose tool – the blockchain only serves to process transactions. Ethereum uses smart contracts to turn blockchain into a Swiss Army knife.
Smart contracts allows people to build their own applications and the rules on top of the Ethereum blockchain. Smart contracts make it possible to automate digital tasks without needing a central authority to manage and approve the transaction.
To give a simplified example, a smart contract could be programmed to automatically release funds for someone’s birthday every year.
Strengths
Ethereum’s strength lie in network effects. As the community grows and more developers build on Ethereum, the ecosystem becomes more attractive. Even as more competing blockchain networks enter the space, dApps exist almost exclusively on the Ethereum blockchain.
There are more than 3000 dApps currently running on the Ethereum blockchain.
Users pay a small fee, charged in Ether, whenever a transaction takes place. And so, as popularity of the Ethereum platform grows, so will the price of Ether.
Ethereum is also undergoing a long-planned upgrade to its network. Ethereum 2.0, as it is called, aims to solve problems with the network’s scalability and security.
Ethereum 1.0 uses the same Proof-of-Work consensus as Bitcoin. Ethereum 2.0 makes the shifts to a Proof-of-Stake consensus. With PoS, users stake their Ether to become a validator on the network. These validator nodes validate the block data, and earn Ether as a reward.
This mechanism eliminates the need for the energy intensive computational mining process in PoW blockchains, enabling the network to process more transactions and ease bottlenecks. Ethereum 1.0 current processes 30 transactions per second (TPS) – Ethereum 2.0 promises up to 100,000 TPS. For comparison, bitcoin can only handle around 5 TPS.
Weaknesses
Ethereum faces stiff competitions. Dubbed “Ethereum Killers”, crytopcurrencies like Polkadot (DOT) and Cardano (ADA) claim to offer superior technology. Things move extremely quickly in the crypto sphere. Today’s cutting-edge technology may become outdated in a few years.
Ethereum’s future depends on a smooth transition to 2.0. However, migrating to an entirely new network is complex and risky. Success is not guaranteed, and the network may face vulnerabilities and disruptions as it makes the shift.
Conclusion
To sum up, Bitcoin and Ethereum are not in competition. They both have different use cases and purposes. As the crypto landscape grows, they might occupy fundamental roles.
If you’re investing in cryptocurrencies, holding both might be a prudent strategy for diversification.
Looking to invest in Crypto, check out Financial Horse’s 2021 Complete Guide to buying Bitcoin!
This article was submitted by a Guest Contributor. If you would like to submit an essay, email hello@financialhorse.com!
The opinions expressed in this publication are those of the Guest Author/Contributor. They do not purport to reflect the views or opinions of the Financial Horse Team.
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