Bitcoin vs. Ethereum: Which Is the Better Buy?

Bitcoin, introduced in 2009, revolutionized the concept of digital currency with its decentralized nature and transparent blockchain technology. It operates as a peer-to-peer payment system, allowing users to conduct transactions without the need for intermediaries. Bitcoin's finite supply of 21 million coins and deflationary model contribute to its appeal as a store of value, often compared to digital gold.

Since the April 2024 Bitcoin halving, which reduced the rate at which new Bitcoins are created, Bitcoin's supply dynamics and price trajectory have been influenced. This event, encoded in the Bitcoin protocol, aims to control inflation and mimic the scarcity of precious metals like gold.

Bitcoin's market performance remains closely tied to factors such as investor sentiment, regulatory developments, and technological advancements. Generally speaking, Bitcoin continues to lead the entire crypto market, and where Bitcoin goes, the rest of crypto typically follows in terms of price and sentiment.

Ethereum, founded in 2015 by Vitalik Buterin, extends beyond the concept of digital currency to introduce smart contracts and decentralized applications (DApps) to the blockchain. At time of writing, the Ethereum market cap is the second largest in crypto, behind Bitcoin.

Ethereum serves as a global platform for developers to build and deploy a wide range of applications, from decentralized finance (DeFi) protocols to non-fungible tokens (NFTs) and beyond.

Following the recent Ethereum upgrades, including the transition to a proof-of-stake consensus mechanism, Ethereum aims to address scalability and sustainability concerns. This transition positions Ethereum as a leading hub for innovation in the crypto space. Ethereum's adaptability and versatility make it an attractive option for investors seeking exposure to the broader blockchain ecosystem.

Bitcoin and Ethereum, the two leading cryptocurrencies, fundamentally differ in their underlying purposes and functionalities. Bitcoin primarily functions as a decentralized store of value and medium of exchange. Its main goal is to provide an alternative to traditional fiat currencies and serve as a hedge against inflation.

On the other hand, Ethereum was designed to be a versatile platform for DApps and smart contracts. Beyond serving as a digital currency, Ethereum aims to revolutionize various industries by enabling developers to build decentralized solutions on its blockchain.

One key distinction between Bitcoin and Ethereum is their respective focuses. Bitcoin's primary use case is monetary, aimed at facilitating peer-to-peer transactions and preserving wealth over time.

In contrast, Ethereum's focus extends beyond currency to include programmable contracts and applications. This difference in purpose influences how each blockchain is used and the types of projects built on each respectively.

While Bitcoin remains dominant as a digital currency, Ethereum's flexibility has led to its widespread adoption in DeFi, NFT, and gaming sectors.

"When comparing Bitcoin and Ethereum, it's important to look beyond their investment potential and consider the tax implications of each. While the IRS treats both similarly for income and capital gains taxes, Ethereum's additional features, like staking, can add some complexity. I recommend investors keep detailed records of all your transactions and consult with a crypto tax expert to help you navigate the unique challenges of each. Staying informed and prepared can make a big difference in optimizing your returns and staying on the right side of tax compliance.”

— Ty Gaines, EA, Tax Expert at TokenTax

Looking to calculate your Ethereum profit? Try our free Ethereum profit calculator.

Bitcoin and Ethereum use different consensus mechanisms to validate transactions and secure their networks. Bitcoin operates on a proof-of-work (PoW) system, where miners compete to solve math puzzles to add blocks to the blockchain. This requires substantial computer power and energy, but it ensures network security and decentralization.

In contrast, Ethereum has transitioned to a proof-of-stake (PoS) model with the Ethereum 2.0 upgrade in 2022. In a PoS system, validators are selected to make blocks based on the amount of crypto they hold and are willing to lock as collateral. This approach is more energy-efficient than PoW and incentivizes network participants to act in the ecosystem's best interest.

Bitcoin's performance in the market has been marked by periods of volatility and significant price fluctuations, driven by factors such as supply dynamics, investor sentiment, and macroeconomic trends. Since the April 2024 halving, Bitcoin's price trajectory has been influenced by reduced supply dynamics and increased institutional interest.

A major story in 2024 is the launch of Bitcoin ETFs, which has driven the market to new highs, with Bitcoin leading the way. As of May 2024, ETH ETFs have also been approved by the SEC, which suggests the potential for further price surges across the crypto market. That noted, there are no guarantees in crypto, and investors should always approach the market with an understanding of the risks involved and do their own research.

Ethereum has also experienced volatility but has demonstrated resilience and growth potential, fueled by its expanding ecosystem of decentralized applications and upgrades to its underlying infrastructure. The recent Ethereum upgrades, including the transition to a proof-of-stake consensus mechanism, have positioned Ethereum for continued growth and innovation.

Looking to calculate your crypto profit? Try our free crypto profit calculator.

Investing in Bitcoin and Ether can be done through various platforms, including cryptocurrency exchanges, brokerage accounts, and digital asset management platforms.

Before investing in cryptocurrencies, it's essential to undertake comprehensive research and consider factors such as risk tolerance, investment objectives, and regulatory considerations.

Taxation of Bitcoin and Ethereum transactions varies depending on factors including jurisdiction, holding period, and use case. For US taxpayers, crypto received from staking, mining, or as payment for services is generally taxed as income, whereas short- and long-term capital gains taxes usually apply to profits generated from buying, selling, or trading cryptocurrencies.

International taxpayers can refer to our helpful country guides, and US taxpayers can refer to our crypto tax guide. It can be helpful to consult with crypto tax professionals and utilize cryptocurrency tax software like ours at TokenTax to plan a crypto tax strategy and ensure compliance with relevant tax laws and regulations.

Here are answers to frequently asked questions about Ethereum vs. Bitcoin, which is the better buy, and is Ethereum a good investment?

How many BTC and ETH are currently in circulation?

As of May 2024, approximately 19.70 million BTC and 120.2 million ETH were in circulation. The maximum total supply of BTC is 21 million, and there is no fixed supply limit for ETH. ETH does have a yearly limit of 18 million ETH, which is not easily reached.

BTC and ETH operate on blockchain technology, providing transparency, security, and immutability for transactions. They are traded on cryptocurrency exchanges and stored in digital wallets.

Is it better to buy Bitcoin or Ethereum?

The choice between Bitcoin and Ethereum depends on individual preferences, investment objectives, and risk tolerance. Bitcoin is often considered a store of value, akin to digital gold, while Ethereum offers a platform for decentralized applications and smart contracts.

Will Ethereum outperform Bitcoin?

Bitcoin is the largest crypto by market cap, with the Ethereum market cap being second at time of writing. Predicting the future performance of cryptocurrencies is inherently speculative and subject to various factors.

While Ethereum's innovative features and growing ecosystem may contribute to its outperformance, Bitcoin's established presence and store of value narrative also present compelling investment cases. Investors should conduct thorough research and consider market dynamics before making investment decisions.