Bitcoin or Ethereum: which is the better buy?

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While the crypto market is notoriously volatile, Bitcoin (BTC 0.04%) and Ethereum (ETH 0.20%) have become the top two options for crypto investors looking for relative safety. Bitcoin and Ethereum have the longest track records, a proven ability to ride out market cycles, and massive liquidity. Together, these two coins account for nearly 60% of the total crypto market capitalization.

And, as Coinbase Global (COIN 2.60%) points out in its new 2023 Crypto Market Outlook Report, the situation is likely to remain much the same next year. According to Coinbase, investors will continue to flock to Bitcoin and Ethereum in 2023 as part of a general flight to quality in difficult macroeconomic times. If you’re forced to choose, however, which is best for your wallet?

Choose Bitcoin

The main appeal of investing in Bitcoin, of course, is the potential for jaw-dropping long-term portfolio returns. Over the 10-year period from 2011 to 2021, Bitcoin has been the best performing asset in the world, generating annualized returns of 230%. That eclipsed the returns of even risky, high-growth tech stocks by 10x. While past returns certainly don’t guarantee future returns (this was evident in 2022), this type of historical track record is certainly appealing. In two of those years, bitcoin produced truly abysmal performance (down 58% in 2014 and 73% in 2018), which gives me hope that bitcoin can overcome a terrible year 2022, during which it is down nearly 65%.

Image source: Getty Images.

From a long-term perspective, Bitcoin is also attractive as a form of online payment. Amid all the talk of a “cashless society” and the introduction of new central bank digital currencies (CBDCs) globally, there is clearly a growing demand for digital currencies. And Bitcoin, of all the major cryptocurrencies, offers the best chance of profiting from this age-old trend. Right now, the number of ways to pay with Bitcoin may seem limited, but some financial experts are predicting that soon customers will be paying for everything online with Bitcoin. When this happens, Bitcoin will become even more valuable.

Choose Ethereum

Ethereum offers equally attractive prospects based on future growth projections. Currently, the Ethereum blockchain acts as the foundational layer for rapid innovations in areas such as smart contracts, decentralized finance (DeFi), gaming, metaverse, Web3, and non-fungible tokens (NFTs). This has led to the creation of a very vibrant ecosystem for Ethereum users and developers. Some of the most valuable cryptocurrencies are, in fact, tokens created on top of the Ethereum blockchain.

From a portfolio diversification perspective, this growth in so many different areas of the blockchain and crypto space provides some much-needed security and diversification. Yes, the NFT market may be crashing right now, but the gaming and metaverse segment is ready to take off. So while investing in cryptos is always risky, there is less risk because Ethereum is so well diversified.

The risk, however, is that Ethereum has become such a leader in the blockchain space that other rivals are constantly springing up to challenge it. Rival Layer 1 blockchains such as Solana and Avalanche are consistently mentioned as potential “Ethereum killers” due to their speed, low transaction fees, and superior scalability. Ethereum’s successful transition to a proof-of-stake blockchain as part of The Merge this year should help alleviate some of these concerns, however. The merger will make Ethereum faster, more scalable, more resilient to network outages, and more able to defend its competitive moat.

Bitcoin or Ethereum?

Choosing between Bitcoin and Ethereum may seem like choosing between two favorite children, but if I had to choose, I would opt for Bitcoin. This is partly related to the historical returns that Bitcoin has provided over time. Over its entire lifespan, Bitcoin has delivered an incredible 16,531.8% to investors. And it has survived at least five crypto bear market cycles, soaring each time.

In my opinion, Bitcoin has an overlooked advantage over Ethereum: regulatory clarity. Although there is now huge speculation about the regulatory outlook for crypto (particularly following the collapse of FTX), Bitcoin appears to be in a much better position than Ethereum to weather the storm. The Securities and Exchange Commission, for example, has previously noted that Bitcoin is a cryptocurrency and not a security. In contrast, he suggested that Ethereum might now fit the definition of a security.

Either way, though, you really can’t go wrong with Bitcoin or Ethereum. As Coinbase noted in its 2023 Crypto Market Outlook Report, both possess attractive market liquidity, sustainable tokenomics, and mature ecosystems. This will continue to make both attractive investment targets for quality-seeking investors amid macroeconomic uncertainty.

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