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So you've probably heard of cryptocurrency by now, and there's a good chance you've heard of Bitcoin too. But did you know there are many different cryptocurrencies well beyond the world of Bitcoin.
One of the biggest alternatives to Bitcoin is Ethereum. In this article we will explain what Ethereum is, how it works and what the key differences are to Bitcoin.
Bitcoin vs Ethereum: What are the differences?
The original cryptocurrency, Bitcoin is a medium of exchange, a digital currency, a store of value, or all of the above, depending on who you ask. It was created in late 2008 by the pseudonymous developer Satoshi Nakamoto as a decentralised, peer-to-peer currency.
Ethereum is similar, but operates as a decentralised "smart contract" network on which people can build apps, programs, games and even other cryptocurrencies. The Ethereum token itself, known as Ether or ETH, is used to power the network and to cover the cost of transaction fees required to use the Ethereum network.
While Bitcoin is transitioning towards being its own smart contract network via the Taproot upgrade, it's got a lot of ground to make up on already-established smart contract platforms like Ethereum. On the flipside, Ethereum isn't as well known as Bitcoin.
Which is the better investment?
With the total value (market capitalisation) of Bitcoin comfortably over US$1 trillion, it's not surprising that many of us would-be investors might feel like we've already missed the boat when it comes to making serious money on Bitcoin. And with the price of a single Bitcoin above US$50,000 (as at 2 December 2021), owning a whole Bitcoin is pretty unrealistic these days compared to back in 2013 when 1 Bitcoin was US$20.
In contrast, the price of a single Ether is around US$4,500. But before you throw your money into Ethereum due to its "cheaper" price, it's worth learning a bit about unit bias.
While 1 Ether is a lot cheaper than 1 Bitcoin, the Ethereum market cap is actually around half that of Bitcoin's. This isn't to say that the price of Ether couldn't one day equal, or even surpass, the price of Bitcoin, but it's something to be aware of.
What is unit bias?
In cryptocurrency trading, unit bias basically means that investors tend to favour buying cryptos that have a lower price per token, in the mistaken belief that it is a "cheaper" investment and might lead to bigger profits.
For example, 1 Bitcoin may be trading for US$60,000, whereas 1 Dogecoin could be trading for only US$0.20. For the price of 1 Bitcoin, an investor could instead buy 300,000 Dogecoin. If the price of Dogecoin then went on to "do a Bitcoin", this investment would be worth a staggering US$18 billion.
Unfortunately, this would also mean the market cap of Dogecoin (that is, the total value of all Dogecoin in circulation) would be worth more than all the money in existence, which seems unlikely. When comparing the values of certain cryptocurrencies, the lesson is to always keep the total market cap in mind, as this is a better indication of its potential as an investment. You can calculate the market cap of specific cryptocurrencies by multiplying the value of a single token by the total number of tokens available.
While plenty of investors might see Bitcoin as a safer bet, they might also see it as being without the possibility of the higher returns offered by other cryptocurrencies. On the other hand, Ethereum might offer the potential for better gains, but lacks the institutional investment interest of Bitcoin.
How to invest
Overall, both Bitcoin and Ether are highly regarded cryptocurrencies, and popular choices for people wanting to start investing in crypto.
You can easily trade Bitcoin and Ethereum in the Finder app, and set up recurring buys too. Just head to the Crypto tab to get started.
This information should not be interpreted as an endorsement of cryptocurrency or any specific provider,
service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and
involve significant risks – they are highly volatile and sensitive to secondary activity. Performance
is unpredictable and past performance is no guarantee of future performance. Consider your own
circumstances, and obtain your own advice, before relying on this information. You should also verify
the nature of any product or service (including its legal status and relevant regulatory requirements)
and consult the relevant Regulators' websites before making any decision. Finder, or the author, may
have holdings in the cryptocurrencies discussed.