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Ethereum vs. Bitcoin: What’s the Difference?

Ethereum vs. Bitcoin: What's the Difference?
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You’ve done your research, understood your risks, and made sure that any potential crypto investments won’t get in the way of your other financial goals. Now it’s time to choose your coins.

Financial experts say it’s a good idea to start with the two most popular cryptocurrencies on the market right now: Bitcoin and Ethereum. Bitcoin and Ethereum recently set all-time highs, but don’t take that to mean there isn’t a lot of volatility ahead.

Bitcoin and Ethereum are also the two largest cryptocurrencies by market cap and exchange volume, but they are very different when you go beyond the popularity they share. While either could be a good choice for a crypto beginner, deciding which one is right for you may require a close look at your own goals.

Bitcoin (BTC) price vs. Ethereum (ETH) price over time

Note: Based on historical CoinDesk data using Bitcoin and Ethereum closing prices since 2015

“I’m a firm believer in understanding what you’re investing in, rather than just putting your money where other people tell you to put it,” says Humphrey Yang, the personal finance expert behind Humphrey Talks.

In addition to the technical differences of the two cryptocurrencies, Bitcoin and Ethereum offer two completely different value propositions to investors, which can be the deciding factor for you.

“Think [which one you should buy] It depends on what you think is most important in terms of the underlying value that Bitcoin and Ethereum provide. Although they are cryptocurrencies, I think they both serve two different purposes that everyone will have different opinions about,” says Dan Heron, CPA with Elemental Wealth Advisors.

Related: This week’s top crypto news

Bitcoin

Bitcoin was the first cryptocurrency, and it is known as digital gold. Bitcoin is the most valuable cryptocurrency on the market – although not the least volatile. The value of one coin has ranged from less than $30,000 to over $60,000 in recent months. Many investors still see bitcoin as a store of value, like gold, that can be used as a hedge against inflation.

Unlike investing in the stock market, with more predictable returns on investments like index funds, investing in bitcoin has been likened to investing in gold or other alternative assets like art or horses. This is because there is a limited amount of Bitcoin out there. While the company can issue more stock options, there will be only 21 million bitcoins.

People buy bitcoin “for the same reason that people have diamonds, or about $100, or some gold in a vault,” says Galen Moore, director of data and indexes at Coindesk, a leading cryptocurrency news outlet. Even if the value of the dollar falls, bitcoin, like gold, will maintain a separate value.

Ethereum

You will not see Ethereum described as digital gold. Ethereum is a software platform that allows developers to build other crypto-oriented applications on it. To use Ethereum, developers have to buy and pay a fee to the network in Ethereum’s native digital currency, ether.

By buying ether, Ethereum investors are essentially betting that continued use and expansion of the Ethereum network will mean more and more developers trying to get in – and buy ether to pay the fee. The more people buy ether, the higher its value.

While not as direct a comparison as bitcoin and gold, some experts compare investing in Ethereum to investing in a technology company.

“It acts as a technology platform, as well as money,” says Bill Noble, chief technical analyst at Token Metrics, a crypto-analytics platform. “Think of it like a Google stock.”

If you are just an investor, not a developer, buying ether is betting that more and more people will use and expand the capabilities of Ethereum.

Should I buy Bitcoin or Ethereum?

There are similar risks associated with both Bitcoin and Ethereum, and the potential growth of either is highly speculative. As they are the two best cryptocurrencies in the market, most experts say that both are good options if you are just starting your crypto investment journey. Then others say it’s also a good idea to split the teams and invest in both.

professional advice

Experts generally agree to keep the extension Crypto Investments to less than 5% of your portfolio — and only if investing in cryptocurrency won’t stand in the way of things like setting up an emergency fund and paying off high-interest debt.

Others assert that while Bitcoin is more established, the technological potential of Ethereum outweighs it.

“[I would] You are likely to invest in Ethereum since it has the highest upside potential for cryptocurrencies, given that products like NFTs are part of the Ethereum blockchain,” says Ryan Sterling, CFP and founder of Future You Wealth. “There also appears to be a growing adoption and acceptance of Ethereum.”

The upcoming update to the Ethereum network may bring more interest to Ethereum in the coming months, says Vrishin Subramaniam, founder and financial planner at CapitalWe, which is why he is currently going to Ethereum. But he is also aware of the potential of both cryptocurrencies. “We are still fairly early in the adoption curve and I think both Bitcoin and Ethereum will continue to hold value. I think Bitcoin is the more popular of the two, while Ethereum is the more utilitarian of the two,” Subramaniam says.

Then there are investment experts who ask: Why should you choose?

“If I had the opportunity to choose between the two, I wouldn’t force questions of ‘Which?'” says Teresa Morrison, CFP at Beckett Collective. ”

“I would invest in both,” says Jeremy Schneider, creator of Personal Finance Club on Instagram.

How to invest in Bitcoin and Ethereum

Even if you choose to buy both Bitcoin and Ethereum, your personal financial goals and knowledge of cryptocurrency can play a big role in how much money you set aside for each currency. If you are going to split your investment, Subramaniam recommends a 60/40 split and Sterling recommends a 50/50 split.

You can also consider investing with a weighted market value strategy by placing your relative investment in each asset based on market value, says Schneider. For cryptocurrencies, market capitalization refers to the total market capitalization of all the coins that have been mined. If you are starting with $100 and want to invest in Bitcoin and Ethereum, that would be $71 in Bitcoin and $29 in ETH based on current market limits.

Schneider also recommends using this strategy if you plan to diversify into more coins in the future. For example, a wallet of 10 coins worth $100 based on market capitalization would look like this:

  • Bitcoin (BTC) 54.4%
  • Ethereum (ETH) 21.9%
  • Tether (USDT) 4.9%
  • Binance Coin (BNB) 4.3%
  • Cardano (ADA) 3.7%
  • Dogecoin (DOGE) 3.2%
  • XRP (XRP) 3.1%
  • US Dollar (USDC) 1.8%
  • Polkadot 1.6%
  • Uniswap (UNI) 1.0%

No matter which method you choose, experts warn not to invest too much of your wallet in crypto assets at all. In general, you should keep your cryptocurrency investments at less than 5% of your portfolio.

(Read more: Here’s how big your cryptocurrency investment portfolio should be, according to five experts)

Should I consider any other encryption?

Certainly not as a beginner, according to the experts we spoke to. Even the altcoins are more unpredictable than the already volatile Bitcoin and Ethereum.

“It’s like playing with small stocks,” says Nate Nieri, CFP and founder of Modern Money Management. For every winner, there is a long path of losers. Your guess is as good as anyone else.”

“I only look at bitcoin and ethereum,” Sterling says. “Like the dotcom boom, I believe that in 20 years, most of these cryptocurrencies will be worthless, with the exception of Bitcoin and Ethereum.”

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