Buy Better: Bitcoin Vs. Ethereum

Cryptocurrency investors cannot only invest in cryptocurrencies. There is no equivalent to that of the stock market S&P 500 (^GSPC -0.29%) index yet, where you could buy an exchange-traded fund that represents the overall performance of the market. Instead, investors must manually select crypto names.

The biggest and most popular choices are Bitcoin (BTC 4.23%) and Ethereum (ETH 5.23%). But which of these industry-defining pioneers is the best buy right now?

Motley Fool contributors Dominic Basulto and Anders Bylund disagree on the answer to that question. Read on to see where you stand in this clash of classic cryptocurrency juggernauts.

Ethereum: The “Digital Oil” of the Blockchain World

Dominic Basulto (Ethereum): For almost its entire existence, Ethereum has played second fiddle to Bitcoin. In the minds of many investors, Bitcoin is “digital gold” and there’s no way Ethereum can ever compete with that.

But there is one major advantage that Ethereum has over Bitcoin. While the latter is generally just a digital asset that you buy and hold for the long term, the former is both a digital asset and a blockchain ecosystem.

That’s not to say developers aren’t building on top of the Bitcoin blockchain, but all the real action is happening on smart contract platforms like Ethereum.

Image source: Getty Images.

When it comes to any new blockchain innovation, Ethereum is usually the first to hit the market. For example, with non-fungible tokens (NFTs), blockchain gaming, decentralized applications and decentralized finance (DeFi), Ethereum was an early pioneer. Yes, there have been a few hiccups along the way (does anyone remember the first metaverse worlds built on Ethereum?), but by and large, the new innovations that have emerged within this blockchain ecosystem have driven the price of Ethereum higher.

When considering Ethereum’s future growth potential, you need to consider how fast each of these very different areas of the blockchain world is growing.

Consider DeFi, for example. Ethereum’s unique smart contract platform has resulted in tremendous value that is already being created.

Ark Invest’s Cathie Wood believes the real value creation process is just beginning. She estimates that smart contract platforms, led by Ethereum, will create more than $5 trillion in market value over the next five years as they fundamentally reshape the face of modern finance. If you’re keeping score, that’s almost five times the current market cap of Bitcoin.

Bitcoin might be the future of money, but Ethereum is the future of finance. While Bitcoin might be “digital gold”, Ethereum is the “digital oil” that powers the blockchain world. Both are fantastic long-term investments, but there is a case for Ethereum to eventually overtake Bitcoin in value and become the world’s most valuable cryptocurrency.

Bitcoin is the only serious choice for a crypto-based store of value

Anders Bylund (Bitcoin): Don’t get me wrong – there is definitely a place for Ethereum in the portfolio of any serious cryptocurrency investor. But the smart contract pioneer is surrounded by hungry rivals, some of whom come with clear technical advantages.

In the meantime, I don’t see a serious alternative to Bitcoin’s function of storing (and building) value. A few contenders emerged, but none had real staying power.

Given the network effect of Bitcoin’s $1 trillion market cap, it will be difficult for newcomers to steal market share from this proven platform. This is true even if someone comes up with a superior technical solution right now.

It’s too late to dethrone the king of digital currencies. Bitcoin is almost guaranteed to provide investors with tremendous returns for years and decades to come. Million dollar price targets are common and for good reason. Bitcoin is an inflation-proof digital currency that can disrupt financial markets over time, and these are the early days of that long-term revolution.

I’m not saying that all your money should be converted to Bitcoin, of course. I won’t go further than “almost guaranteed” on its long-term return prospects. Digital currency can be protected from rival store of value solutions such as Kaspi and Bitcoin Cashbut they face other risks.

For example, blockchain has been safe and secure until now, but future technologies — such as a mature quantum computing system — could break that security. Governments and regulators around the world have the power to help or hurt Bitcoin in the long run.

And what if Bitcoin prices don’t rise in line with halving history? The transaction approval system could break down in this scenario. It only scratches the surface of a long list of real Bitcoin risks.

That’s why I can’t match the Bitcoin optimism of maximalists like MicroStrategy Executive Chairman Michael Saylor. Under his leadership, MicroStrategy buys Bitcoin with cash reserves, borrowed money, cash flow from the company’s software business and the occasional sale of stock.

It’s a great idea, as long as Bitcoin doesn’t face any of the potentially game-changing challenges I’ve mentioned or new ones I haven’t thought of yet. But Saylor’s company could lose everything if something goes wrong. This is a risky example that I do not want to follow.

There has to be room for error here, and Bitcoin should represent a modest portion of your overall investment portfolio. But if I had to pick just one cryptocurrency to buy today and hold for the long term, Bitcoin would be it. This cryptocurrency should be a healthy part of any balanced investment portfolio, especially during low price periods like today, when the cryptocurrency is preparing for the next halving-based price increase.