Often we are presented with a pair of fierce competitors: Coca-Cola vs. Pepsi or Walmart vs. Target. We like to choose sides based on our past experiences or our taste buds. Today, I present the latest competitors to step into the ring: Bitcoin vs. Ethereum. Which one deserves your investing dollars? Let’s find out.
I am relatively new to the world of cryptocurrency, and as an investor, it is my job to do my due diligence. Over the last couple of weeks, I have read a book on each of the cryptos. For Bitcoin, I read “Bitcoin: Hard Money You Can’t F*ck With,” and for Ethereum, I read “Ethereum.”
Both books gave me a deeper look into each of the cryptos and allowed me to form an investing thesis. Having an investing thesis, or reason to invest, helps me sleep well at night knowing precisely why I am putting my money into things. Let’s look at some of the similarities and differences between the cryptos.
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Blockchain. Both cryptos build upon blockchain technology. Think of blockchain as someone laying bricks onto a road. However, each brick has a unique designator or token. To ensure that no one can disturb the order of the bricks, elements of the last brick imprint onto the new brick.
Then all work between the bricks is verified constantly by a legion of computers. All work is verified before the next brick can be laid. It is called “proof of work”—this makes the blockchain decentralized, transparent, and immutable (cannot be manipulated).
Don’t worry; I plan to go deeper into the world of blockchain in separate articles. Just know that blockchain is highly secure, and each block is its own unique item. The uses of blockchain are unimaginable at this point.
Rarity. Rarity speaks to how much of these cryptos can be mined and added to the blockchain. Bitcoin is hardwired ever to have 18 million coins mined. Every four years, the amount of bitcoin eligible to be mined is cut in half, making the coins in existence even rarer. Rarity is probably Bitcoins’ most remarkable feature. Consider it digital gold.
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Ehtereum also has a set limit of coins eligible to be mined each year, at 18 million per year. I believe this number can be adjusted as required, but my understanding of this could be shaky. However, every transaction on the Ethereum network requires a certain amount of Ether, called its gas expense. So we are mining Ether yet also burning through it every year, making Ethereum rare but not nearly as rare as Bitcoin.
Use cases. The use cases for Bitcoin and Ethereum are vastly different, which may be where you start to form your investing theory. Bitcoin’s primary use case is as a store of wealth like gold. It may one day become the next world reserve currency if you were to believe the book I read. Ethereum is like the world wide web on top of the internet protocol. It is an application layer on top of the blockchain. Its use cases are too many to even imagine in our brains at this current moment. Let’s look at each coin individually.
World Reserve Currency. What is a world reserve currency, you may ask? A long time ago, gold was the currency everyone used to barter for goods and services. Eventually, it became a burden to carry gold around because of the weight and bandits. It was dangerous on the trade routes.
Therefore, traders were given paper to travel with on their routes. When traders arrived at their destinations, the paper could be exchanged for gold. Eventually, it became more prudent just to hold the paper. This scenario was the beginning of fiat currency.
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All fiat currency was still linked to the amount of gold that a country was holding—this was called the gold standard. Eventually, all monies were interlinked to the US Dollar, which itself was interlinked to gold.
So, the whole world was tied to the USD, which itself was tied to gold. The USD was considered the world reserve currency, and its trust amongst the world was strong. Then in 1971, US Present Richard Nixon took the USD off of the gold standard. The world changed instantly.
Countries were now allowed to print unlimited amounts of money and put themselves deeply in debt. Money printing became a way to prevent or lessen bad economies. I won’t go into the doom and gloom of everything here, but I know this hasn’t been a good thing for the world.
Now, back to Bitcoin. Eventually, all this money printing will come to a head (or conclusion). Something will have to give. Because of Bitcoin’s rarity and decentralized nature, many believe that it may be considered the next world reserve currency. Please read the book to form your own opinions. I will give my opinion later in the article.
The New Internet. Ethereum is perhaps the most interesting of the cryptos. As I mentioned, it is an application layer above the blockchain, presenting interesting future use cases and an unimaginable road towards future applications.
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Attempting to understand what the future holds for the future of Ethereum is like trying to imagine watching Youtube in 1999 when it took 2-3 minutes just to download a JPEG picture over the internet. I remember the days of dial-up internet that you needed a disc to access.
We have come a long way on the internet, and Ethereum is just beginning to identify its uses. I think of Ethereum like the movie the “Matrix.” A world on top of a world. Here are a couple of benefits we know now.
Smart Contracts. Programmers write smart contracts into the Ethereum blockchain. These smart contracts act as their own entity and, once programmed, can’t be tampered with or reset. For example, let’s say we write a smart contract for child support payments. Once created, it will transfer the money when certain conditions are met—no need for a lawyer or unique recording mechanisms. Everything is completed and recorded as required, on its own, and can’t be messed with by anyone. Now consider car loans or exchanges between giant corporations—Smart Contracts will be the next thing in the world of secure transactions.
Non-Fungible Tokens. NFTs may be all the rage now for their meme value, but they can offer great use in reality. Imagine playing a game and working towards receiving a scarce item, the only one in the world. NFTs are unique items written into the Ethereum blockchain. No two NFTs are the same. I believe we are at the start of something great with NFTs.
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My Investing Thesis. Okay, now time for my investing thesis. Disclaimer, my theory doesn’t have to be your thesis. I give mine out for educational use only. Please form your own opinions.
I view the two coins like this: Bitcoin I view as Gold, and Ethereum I view as Facebook. Back in 2008, we would have never guessed what Facebook would become. The more we interact with Facebook, the more uses that it creates. Today, we move money, chat, video chat, create stories, etc., all on Facebook.
However, gold is even more valuable today than it was in 2008. There will always be a place for gold in this world, as a store of value. Gold is necessary to maintain generational wealth and financial security.
So would you invest in Facebook back in 2008 or Gold? How about both. They are vastly different investment vehicles, but they both would have made you rich. You will have to come up with your allocation percentages to invest. Currently, I believe we know Bitcoins use case as a store of wealth and potential world reserve currency. Ethereum use cases are already excellent, but I think more is to come in the future. Ethereum has unlimited potential, and I would invest in it with that mindset.
I hope that helped a little. In investing, there is no easy answer, and nothing is guaranteed. It is best to do your research and pinpoint your investing thesis. Stay invested until something changes your view, at which point you decide to divest or double down. Look out for much more cryptocurrency content as I understand more. Good Luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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