While the crypto market is notoriously volatile, Bitcoin (BTC 0.04%) and Ethereum (ETH 0.20%) have emerged as the two top options for crypto investors looking for relative safety. Bitcoin and Ethereum have the longest track records, a demonstrated ability to overcome down market cycles, and very deep liquidity. Together, these two coins account for nearly 60% of 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 during a difficult macroeconomic period. If forced to choose, though, which one is better for your portfolio?
The primary allure 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 was the single-best performing asset in the entire world, generating annualized returns of 230%. This eclipsed the returns of even risky, high-growth tech stocks by 10 times. While past returns are certainly no guarantee of future returns (this has been evident in 2022), this type of historical track record is certainly enticing. In two of those years, Bitcoin produced truly abysmal performance (down 58% in 2014 and 73% in 2018), so that gives me hope that Bitcoin will be able to overcome a dreadful 2022, in which it is down nearly 65%.
From a long-term perspective, Bitcoin is also attractive as a form of online payment. Amid all the talk about a “cashless society” and the introduction of new central bank digital currencies (CBDCs) on a global basis, there’s clearly growing demand for digital currencies. And Bitcoin, of all the major cryptocurrencies, offers the best chance to profit from this secular trend. Right now, the number of ways to pay with Bitcoin might appear limited, but some financial pundits predict that soon, customers will be paying for everything online with Bitcoin. When that happens, Bitcoin will become even more valuable.
Ethereum offers an equally attractive outlook based on future growth projections. Right now, the Ethereum blockchain is acting as the foundational layer for rapid innovations taking place in areas such as smart contracts, decentralized finance (DeFi), gaming, the 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 a certain measure of safety and much-needed diversification. Yes, the NFT market might be crashing right now, but the gaming and metaverse segment is ready to take off. So, while investing in cryptos is always risky, there’s less risk involved 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 popping up to challenge it. Rival Layer 1 blockchains such as Solana and Avalanche are still 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, though, should help assuage some of those concerns. The Merge will make Ethereum faster, more scalable, more resilient to network outages, and more capable of defending its competitive moat.
Bitcoin or Ethereum?
Choosing between Bitcoin and Ethereum can seem like choosing between two favorite children, but if forced to choose, I’d go with Bitcoin. In part, this has to do with the historical returns Bitcoin has delivered over time. Over its entire lifetime, Bitcoin has delivered an unbelievable 16,531.8% to investors. And it has survived at least five crypto bear market cycles, skyrocketing higher each time.
In my opinion, Bitcoin has one overlooked advantage over Ethereum: regulatory clarity. While there is now tremendous speculation over the regulatory outlook for crypto (especially in the wake of the FTX meltdown), Bitcoin seems to be in a much better position than Ethereum to weather the storm. The Securities and Exchange Commission, for example, has already noted that Bitcoin is a cryptocurrency and not a security. In contrast, it has suggested that Ethereum might now fit the definition of a security.
Either way, however, 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. That will continue to make both attractive investment targets for investors seeking quality amid macroeconomic uncertainty.