Cryptocurrencies, also known as digital currencies, were all the rage in 2021 — and likely will be in 2022 as well. Coins like bitcoin have skyrocketed in recent years, and financial institutions are starting to get on board. Two of the largest and most popular coins are ethereum and bitcoin. This article explores and compares both currencies and will help you understand the pros and cons of each so you can determine which one might be right for you.
About Cryptocurrencies
A cryptocurrency is a secure, virtual currency that is nearly impossible to counterfeit. These digital coins are assets that exist on distributed networks. The networks’ decentralized nature means that governments and other central authorities can’t control them.
Blockchain technology, which is a technology based on a distributed ledger database, underpins cryptocurrencies. Cryptography and encryption techniques secure the network and prevent tampering. Every transaction is stored as a separate block on the chain, and those records are guaranteed to be accurate and immutable.
Ethereum vs. Bitcoin
Ethereum and bitcoin are arguably the most popular cryptocurrencies on the market today. They certainly are the largest by market cap. Bitcoin’s market cap is over $560 billion, while ethereum’s market cap is around $242 billion.
Bitcoin
Bitcoin was the first cryptocurrency, launched in 2009 by a crypto architect known pseudonymously as Satoshi Nakamoto. The idea for this digital currency was simple yet revolutionary. It promised an alternative to traditional currency, called fiat currency, via a decentralized and transparent financial system accessible to all.
Bitcoin works on a blockchain network. Transactions happen between bitcoin wallets using private keys, which provide mathematical proof of their authenticity. Cryptography ensures both the integrity and the chronological order of transactions, and a distributed consensus system confirms pending transactions.
Bitcoin has capped the number of coins that can be minted at 21 million. Once that number has been reached, the coins can still be traded but no more can be introduced.
Ethereum
Ethereum’s white paper was released in 2013, and the project officially launched in 2015. Ethereum is an open-source, community-driven project and has seen quite a bit of evolution since its inception.
Like Bitcoin, Ethereum is a decentralized, peer-to-peer network that snubs censorship and surveillance. The focus of the project is to enable access to financial services and commerce for everyone. It does this by allowing for the development of other cryptos as well as the execution of smart contracts on its platform, CoinMarketCap explained. IBM describes smart contracts as programs stored on a blockchain that run automatically when predetermined conditions are met. These functionalities make Ethereum a more versatile platform than Bitcoin.
Unlike Bitcoin, Ethereum allows for an unlimited number of tokens.
Good To Know
The main difference between Ethereum and Bitcoin is the fact that Ethereum is programmable. That feature broadens the scope of Ethereum, making it more than just a digital currency. It makes Ethereum a marketplace for financial services, games and apps.
Bitcoin and Ethereum: Pros and Cons
Bitcoin and Ethereum are both blockchains, but they serve different purposes, each with its own benefits and drawbacks.
Pros and Cons of Bitcoin
Bitcoin has a narrow purpose: provide an alternative to fiat currency and a system for processing transactions.
Pros
Cons
Pros and Cons of Ethereum
Whereas the purpose of the Bitcoin blockchain is to process transactions and store value, Ethereum is a platform that also supports the development of other projects.
Pros
Cons
Know the Risks of Investing In Bitcoin and Ethereum
All cryptocurrency investments are speculative. The more aware you are of the risks, the better you can mitigate them if you decide to invest.
Hype and FOMO Risks
The fear of missing out is a powerful driver for people to buy cryptocurrencies. With bitcoin’s explosion in value over the past few years, it’s easy to get caught up in the hype. No one wants to lose out on the chance of getting rich from cryptocurrency, especially when it has already made many people extremely rich.
However, regulators continue to warn the public that you could lose all your money in crypto. For example, bitcoin’s price has dropped about 60% since the beginning of the year, and Ethereum is down significantly, too.
Security Risks
Because cryptocurrencies are digital assets, they’re potentially vulnerable to hackers. The first month of 2022 saw several notable hacks. Hackers stole $80 million worth of crypto from Quibit, a decentralized platform. And the Crypto.com exchange reported the theft of about $35 million in cryptocurrency, most of which was ethereum and bitcoin. Analysts also warn that quantum computers could hack crypto wallets, even though the technology isn’t mainstream yet.
Tax Risks
The IRS wants to know about gains from crypto investments you’ve sold. There’s a new tax question on Form 1040 specifically regarding cryptocurrencies. Failing to disclose this information could lead to stiff penalties or possible criminal investigation.
Regulatory Risks
Government-imposed regulations could make cryptocurrency safer and more secure, but they might also affect your access, the ways you use it and how it’s taxed.
Which Investment Is Right for You?
Both bitcoin and ethereum have increased in value by staggering percentages since their release. But they’re still experimental, and with innovation comes problems that the Consumer Financial Protection Bureau warns haven’t been resolved. For example, the decentralized nature of blockchains means there’s no one to turn to if things go wrong. In addition, transactions can be much more expensive on a blockchain than through a bank or debit or credit card.
If you decide that investing in a blockchain is the way to go, it makes sense to consider the top two. Determining which one’s right for you depends on your needs and goals.
Bitcoin is the most popular cryptocurrency and has the most support commercially. If you’re looking for a cryptocurrency alternative to fiat currency, bitcoin seems to be a good choice, as long as you’re prepared to weather the volatility.
Technically speaking, Ethereum is more than a cryptocurrency. The Ethereum network acts as a marketplace for users to buy and sell goods and decentralized applications. If you’re interested in more than a cryptocurrency, ethereum might be a good choice for you.
Daria Uhlig contributed to the reporting for this article.
Data is accurate as of May 16, 2022, and subject to change.
This article originally appeared onGOBankingRates.com:Ethereum vs. Bitcoin: Which Crypto Is Better?
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
