In general, a cryptocurrency is a decentralized digital currency protected by cryptography. Most cryptocurrencies rely on blockchain technology and a community of miners to validate transactions, store data, and mint new tokens. Together, these qualities create a widely distributed and highly secure peer-to-peer financial system, eliminating the need for central oversight.
Since Bitcoin became a phenomenon in 2009, thousands of other cryptocurrencies have winked into existence, many powered by different blockchains and designed for different purposes. Several of these -- like Dogecoin (DOGE -0.76%) and Ethereum (ETH -2.25%) -- have captured the interest of investors.
Notably, both Dogecoin and Ethereum have skyrocketed in value over the last year, gaining 18,400% and 1,400%, respectively. But to decide which is the better investment, we need to consider the purpose and utility of both.
In 2013, Adobe Systems marketing manager Jackson Palmer tweeted these words: "Investing in Dogecoin, pretty sure it's the next big thing." At the time, Dogecoin didn't actually exist and the comment was meant to poke fun at Bitcoin, while also referencing a popular Shiba Inu meme.
Even so, the tweet caught the eye of IBM software engineer Billy Markus. One thing led to another, and eventually the pair brought the meme-inspired currency to life. Notably, Palmer later said: "Dogecoin, to a certain degree, is testing what happens when you have a more approachable mascot as the face of your coin."
In other words, Dogecoin was a marketing experiment. But beyond that, it was created without real purpose. Even so, the meme-currency caught fire in the Reddit community, and it became common practice to tip users with Dogecoin. That popularity persists today, and it has powered the digital currency's soaring price.
Regardless, Dogecoin still has limited utility. Yes, it is a currency, but you'll probably find it difficult to spend. Wirex recently partnered with Mastercard to launch a crypto debit card, and Visa has partnered with Coinbase for the same purpose. But neither of these cards support Dogecoin. In fact, Coinbase -- one of the largest crypto exchanges in the world -- doesn't even allow users to buy Dogecoin.
To add, fintech companies like Square and PayPal also support cryptocurrency. In fact, PayPal recently launched Checkout with Crypto, a service that allows users to make purchases with Bitcoin and other digital tokens. However, neither of these fintechs support Dogecoin in any capacity.
In 2013, Vitalik Buterin published the Ethereum White Paper at the age of 19, convinced he could improve upon Bitcoin's "limited functionality." The project officially launched in 2015, two years after Dogecoin.
Unlike Bitcoin (and Dogecoin), the Ethereum blockchain was designed to be more than a record of transaction data. It was also built to support computer code, which automatically executes when a transaction takes place. For example, a buyer and seller can create a digital contract, coding the terms of the agreement into the Ethereum blockchain. This "smart contract" then self-executes when the terms are fulfilled, making the process more efficient for all parties involved.
Non-fungible tokens (NFTs) are a good example. Ethereum makes it possible to represent physical assets like artwork as a digital token. When that token is purchased, ownership automatically transfers to the buyer -- there is no need for third-party oversight or paperwork. This system could theoretically be applied to any asset of value, from collectibles to real estate.
Today, Ethereum's market value sits at $302 billion, well ahead of Dogecoin's $46 billion. Ethereum is also more widely adopted in terms of active accounts, and its mining profitability is much higher. All of these factors indicate greater demand, and demand is directly related to value.
A cautious verdict
Currently, the mining reward for each Dogecoin block is 10,000 tokens, and the reward for each Ethereum block is two tokens. Unlike Bitcoin, there is no built-in mechanism to limit the supply of these cryptocurrencies.
This differs from assets like gold, which benefits from its scarcity. Instead, the supply of Dogecoin and Ethereum will increase forever. So investors should ask themselves this question: Is an infinite asset a good store of value?
In terms of which is the better buy, Ethereum wins that contest. It benefits from greater demand, which has garnered support from fintechs like PayPal, crypto exchanges like Coinbase, and various crypto debit cards. More to the point, the Ethereum blockchain supports smart contracts and other decentralized applications, and that technology could be a disruptive force across industries.