Despite recent volatility in the crypto markets, Bitcoin (BTC 0.82%) and Ethereum (ETH +0.22%) remain two of the best-performing large-market-cap cryptos. For the year, Bitcoin is now up 65% while Ethereum is up 40%.
Based on recent performance, Bitcoin would seem to be the obvious better buy. But just remember -- past performance is no guarantee of future performance. If you are a long-term investor, you need to keep your eye on future developments as well. With that in mind, there are three key factors that could determine which crypto is the better buy over the long haul.
Flow of institutional money
The most important factor remains the flow of institutional money into the crypto asset class. Currently, Bitcoin appears to have a massive edge over Ethereum, with many institutional investors viewing it as a "safe haven" asset that can protect them from volatility in the broader market. We saw this scenario play itself out earlier this year, when a regional banking crisis in the U.S. immediately led to a flow of new money into Bitcoin, which in turn led to rapid price gains.
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Moreover, this entire summer seemed to be dominated by one single topic: the launch of the first-ever spot Bitcoin ETF. This led to a mini-rally for Bitcoin in mid-June, as investors recalibrated what it could mean for institutional investor flows into crypto if the SEC finally signs off on a spot Bitcoin ETF.
Here, too, Bitcoin seems to have the edge over Ethereum, since there seems to be much more investor appetite for a spot Bitcoin ETF than a spot Ethereum ETF. As long as that remains the case, there will likely be more institutional money flowing into Bitcoin than Ethereum.
User adoption rates
The next major factor to keep in mind is user adoption rates. The big-picture view here is that, as both Bitcoin and Ethereum continue to go mainstream, they will both likely see a massive surge in their built-in user bases. So which blockchain is set to grow at a faster pace in coming years?
For Bitcoin, some of the best user adoption rate numbers come from Cathie Wood and Ark Invest, which released a research report this year with a set of scenarios to describe how Bitcoin usage will increase between now and the year 2030. In a base-case scenario, for example, Bitcoin could soon account for 3% of the M2 money supply of emerging market nations, 10% of the remittance asset market, and 2.5% of all institutional assets. Over time, these percentages could grow even higher, as Bitcoin increasingly goes mainstream around the world.
CRYPTO: BTC
Key Data Points
In the case of Ethereum, the best user adoption rate numbers typically come from valuation models based on Metcalfe's Law, which states that the value of any network is directly proportional to the square of the number of users on it. This law has been used to model the valuation of telecom and internet companies, and now it is being used to model the valuation of cryptocurrencies. Thus, it's very possible that Ethereum's future valuation could be quadratic, not linear, in nature as more users are added to its ecosystem.
The easiest place to see the impact of this growth happening is in the Layer 2 space, which describes all of the blockchains that are building directly on top of the main Ethereum blockchain. By some accounts, Ethereum's total market capitalization should be $250 billion right now, not $200 billion, if you calculate all of the extra user activity that is happening on Layer 2 blockchain networks. In short, Ethereum could be undervalued by as much as 25% right now.
Technological improvements
If there's one area where Ethereum has a decided edge, it's in the technology supporting its blockchain. Whereas Bitcoin is built on old, proof-of-work technology that requires expensive, energy-intensive mining, Ethereum recently transitioned to new, proof-of-stake technology that does not require mining at all. As soon as Ethereum pulled off The Merge last year, it immediately became 99.9% more energy-efficient.
And Ethereum is hardly resting on its laurels. As founder Vitalik Buterin has pointed out, Ethereum still has at least five new cycles of technological improvement incoming, all of which will finally lead to the creation of a super-fast, super-efficient "Ethereum 2.0." When that happens, Ethereum will become one of the fastest, most secure transaction networks in the world.
And the winner is...
Crypto investors for years have been looking forward to "the flippening" -- the moment in time when Ethereum finally overtakes (i.e., "flips") Bitcoin as the most valuable crypto in the world. For that to happen, Ethereum's future growth needs to outpace Bitcoin's future growth by a significant margin.
Based on the above, it's possible to see such a scenario taking place. But for now, I'm sticking with Bitcoin, which currently accounts for approximately 50% of the total market value of the entire crypto market. As long as Bitcoin remains the clear favorite option of both retail and institutional investors, it's likely to outpace Ethereum as the better buy going forward.
