2021 has been a spectacular year for cryptocurrencies. Bitcoin (BTC) reached its all-time high of US$64,899 on 14 April 2021 while Ethereum (ETH) reached its peak of US$4384.43 on 12 May 2021. As cryptocurrency prices soared, many new crypto-millionaires and billionaires were created and mainstream public and institutions started paying more attention to this previously niche field.
According to DBS Bank, which launched its digital exchange for cryptocurrencies in December 2020, daily trading value has increased more than 10 times since its launch. The digital assets under custody totalled over $80 million, while there has been a strong momentum in the growth of investor base with close to 120 investors. Considering that DBS Digital Exchange is only limited to accredited investors, these numbers suggest a strong interest in cryptocurrencies in Singapore.
For the uninitiated, Bitcoin and Ethereum are the top two cryptocurrencies by popularity and market capitalisation. Together, Bitcoin and Ethereum comprise US$1.36 trillion (almost 60%) of the US$2.29 trillion global crypto market capitalisation (according to CoinMarketCap.com).
So what exactly is the difference between the two dominant cryptocurrencies. Bitcoin and Ethereum?
Bitcoin And Ethereum Are Both Anchored By Blockchain Technology
Bitcoin was first released on 3 January 2009 while Ethereum’s live blockchain was initially launched on 30 July 30 2015. Both cryptocurrencies are based on blockchain technology and powered by the principles of distributed ledgers and cryptography. In a blockchain, there is a secured historical record of each transaction recorded on the blockchain ledger kept by different people. This helps ensure transparency of the system, as the public ledger keeps track of the transaction history of each cryptocurrency in the system. This enables cryptocurrencies to be decentralised, distributed and stable.
Bitcoin And Ethereum Have Different Applications
While both cryptocurrencies are based on blockchain technology and function as digital currencies, they differ in their applications and goals.
Created by the unidentified Satoshi Nakamoto, bitcoin acts as a digital store of value and has the reputation of “digital gold”. Its main application is a virtual decentralised currency that may be used in transactions. PayPal US allows users to use Bitcoin for PayPal transactions. For a while, you could also buy a Tesla with Bitcoin before Elon Musk reversed his position in bitcoin.
Created by Vitalik Buterin, Ethereum is more than a digital currency (its cryptocurrency is actually called ether). It is an open-source computing platform and is a programming language that developers can use to build and publish distributed applications. One key application of Ethereum is the use of Smart Contracts and Distributed Applications (DApps). In fact, prominent cryptocurrencies, such as Tether (USDT) and Chainlink (LINK), are built on the Ethereum platform.
This enables Ethereum to be the key driver for decentralised finance (DeFi) projects where traditional financial services such as collateralised lending can take place without centralised financial institutions. Examples of DeFi platforms based on Ethereum include Uniswap (UNI), Compound (COMP) and MakerDAO (DAI).
Ethereum also allows for the creation of unique and indivisible tokens, also known as non-fungible tokens (NFTs). These have been used to tokenise digital collectibles, paying the way for digital ownership as each NFT is differentiated by a unique code that cannot be duplicated (the ownership is verified on the public ledger). In March 2021, a piece of digital artwork, “Everydays – The First 5000 Days” by artist Mike Winkelman, also known as Beeple, sold for US$69.3 million.
As it can be seen, the use cases for Ethereum due to its ability to execute Smart Contracts and DApps, are much more than Bitcoin which functions mainly as a medium of exchange and store of value.
Bitcoin Is Currently Double The Market Capitalisation Of Ethereum
As of 16 May 2021, Bitcoin’s market capitalisation of US$922 million is slightly more than double that of Ethereum’s US$445 million market capitalisation.
Since the start of 2021, Bitcoin (BTC) has risen 70% from US$28,990 to US$49,425. In comparison, Ethereum (ETH) has risen 420% from US$738 to US$3,840.
Source: Percentage of Total Market Capitalization (Dominance), CoinMarketCap.com
Bitcoin’s dominance of the total crypto market has been slowly decreasing while alternative coins (including Ethereum) have been correspondingly increasing. While it is premature (and foolhardy) to say that Ethereum will supersede Bitcoin as the dominant cryptocurrency, there is a trend towards a lower dominance of Bitcoin in the future crypto market.
This also bears out in increased investor interest in ether, the native cryptocurrency of Ethereum. The Chicago Mercantile Exchange (CME) recently launched futures contracts for ether (ETH) in February 2021. This is the second cryptocurrency available for futures contracts, the first being bitcoin in 2017.
Both Bitcoin and Ethereum Face The Same Cryptocurrency Risks
Regardless of whether you favour Bitcoin or Ethereum, both cryptocurrencies carry the same risks inherent to all cryptocurrencies. Cryptocurrencies are affected by regulatory changes, such as Turkey’s central bank ban on the use of cryptocurrency payments which triggered a fall in cryptocurrency prices.
While the price momentum of cryptocurrencies has been stunning, the price volatility has also been correspondingly high. The price volatility and the correlation between the two cryptocurrencies are also highlighted when Elon Musk’s tweet reversing the acceptance of bitcoin as payment for Telsa, triggered another fall in bitcoin prices (almost 12%) . Ethereum was also not entirely unaffected, falling about 8% that same day.
Should You Invest In Bitcoin Or Ethereum?
Both Bitcoin and Ethereum have survived previous “crypto winters” – harsh bearish periods of market-wide drawdown in crypto asset prices. Throughout these periods, Bitcoin has maintained its reign as the dominant cryptocurrency with Ethereum hovering in near attendance. While past history is no indication of future performance, there is some credibility to Bitcoin’s reputation as the “digital gold”. Investors who want a margin of assurance in a very volatile asset class may wish to consider Bitcoin as a potential alternative investment.
Regardless, any investment into cryptocurrencies should be taken as having the potential to go to zero. While Bitcoin and Ethereum are the current dominant cryptocurrencies, each with its own merits, no one can predict the future of the crypto market.
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