Which is a better investment? Bitcoin (BTC -2.14%) or Ethereum (ETH -4.08%)? The truth is that these two cryptocurrencies are fundamentally different. They perform different functions and have different risk vs. return profiles. Bitcoin and Ethereum coexist and complement each other rather than compete directly. Let's dig into what exactly differentiates the two investments and what their roles are in the broader cryptocurrency landscape.
Bitcoin is used within DeFi apps based on Ethereum: Image source: Getty Images.
Bitcoin is digital gold
One of the main reasons why Bitcoin and Ethereum do not compete directly is because they make each other better. Bitcoin can be used within financial applications on Ethereum. It can be borrowed, loaned, and supplied as liquidity in yield farms. This is made possible by an Ethereum token pegged to Bitcoin. The token is called Wrapped Bitcoin (WBTC -2.26%). It allows Bitcoin to be used within Ethereum despite these cryptocurrencies belonging to two separate blockchains. The Bitcoin network has no native capability of facilitating peer-to-peer loans or yield farming. So Bitcoin has to be used within a different blockchain. This is where Ethereum comes in and makes Bitcoin a more useful asset.
Almost all other blockchains that have decentralized finance (DeFi) ecosystems have created the ability to use Bitcoin within their systems. The largest and oldest cryptocurrency serves as a digital store of value, with the ability to transfer that value to other accounts. For that reason, Bitcoin can be thought of as digital gold or as the native currency of the internet. It is a form of digital money that can be used in all blockchains and traded for any cryptocurrency.
It has become so widely held and ubiquitous that the blockchains that don't integrate it into their systems will be unable to compete with those that do. Any platform that creates an ability for Bitcoin to be used within its system tends to attract a large number of users. So in this sense, Bitcoin and Ethereum are not competitors; instead, Bitcoin enhances Ethereum and brings more users to the platform.
Ether is digital oil
Ether can be thought of as the fuel that drives the Ethereum platform. To interact with any app or make any transaction happen on Ethereum, the transaction requires paying an ether-based fee. That fee is called gas. Most trains, planes, and automobiles still require oil and gas to run. Similarly, yield farms, non-fungible tokens (NFT), and metaverse applications (which are part of the infrastructure of the financial internet) require ether in order to interact with the Ethereum network and each other. Ether is valuable because it enables the interaction with and usage of other applications. Like oil, it's necessary for a range of other useful things.
For example, if a user has wrapped Bitcoin in their Ethereum wallet and wishes to loan it to other users to earn a return, they must pay a small gas fee to do so. The ether payment allows the Ethereum user to make use of Bitcoin in their lending efforts. The ability to synergize two unrelated tokens is what creates a wide range of useful financial applications.
Bitcoin and Ethereum have a future together
Bitcoin and Ethereum are likely to be around for some time. Both have established network effects and massive user bases. When one network grows, the other does too. This complementary relationship is not necessarily something that you'd expect from competing cryptocurrencies. Rather, it shows that Bitcoin offers Ethereum the ability to expand its user base and overall network utility.
Ethereum is the DeFi platform of choice for the majority of cryptocurrency users. As long as Ethereum maintains its position as the go-to platform for lending, borrowing, and yield farming, Bitcoin will continue to enhance the ecosystem with its digital value storage functions.
