12/2020
Note: Bitcoin with capital "B" usually refers to the network, while bitcoin with a lowercase "b" to the currency.
All the friends with whom I regularly talk about crypto have asked me this: "Should I buy bitcoin or ether?". As I thought many of you will probably be asking yourself the same question, here is my answer!.
In fact, you are definitely not the first ones to wonder. In the crypto-twitter sphere, countless hours have been spent debating over which of Bitcoin or Ethereum is "better". There, better usually means more decentralized, secure, or even "valuable". In this post, I want to explain why I think they are simply too different to be evaluated against one another, and shouldn't be seen as exclusive but rather complementary.
I will start by looking at the differences between the goals of each protocols (Bitcoin and Ethereum), and continue by comparing their respective currency (bitcoin and ether, or BTC and ETH). This should help us understand how Bitcoin and Ethereum complete themselves in a very useful way rather than obfuscate one another.
The first thing to know is that Bitcoin and Ethereum were not made with the same goal in mind. They are not two different means to the same end, but are inherently different both in how they work and what they do (or intend to do). It is obvious when reading the titles of their whitepapers:
Bitcoin is intended to be a decentralized payment network. Ethereum is a platform to power smart contracts and decentralized applications.
Their characteristics and actual developments today simply reflect these different objectives. To strive as a payment system, Bitcoin needs stability and finality. It was designed with this in mind from the start. As a consequence, Bitcoin Core, the main protocol, hasn't suffered any deeply modifying changes since it first came out. A lot of updates have been realized (we're now at version 0.20.x), but when a big change was discussed in 2017, the Bitcoin Core community chose to go with stability rather than change.
Ethereum, on the other hand, needs more built-in complexity to handle all the functionalities smart contracts and decentralized applications have to offer. Even if a lot has been done before launching the original version, many features and updates are yet to be implemented to fulfill the original vision. Naturally, this makes it a less stable protocol, with a community ready to take on more risk for the sake of innovation. A striving example is the current update taking place right now, from ETH1.0 to ETH2.0. This update has been under development for more than 2 years now, and is expected to take between 1 and 2 more years to be fully working. It includes core changes to the protocol like switching from Proof-of-Work to Proof-of-Stake (different consensus algorithms, which are central pieces of every decentralized protocol).
With such core differences between Bitcoin and Ethereum at the protocol level, it doesn't come as a surprise that their associated cryptocurrencies, bitcoin (BTC) and ether (ETH), reflect them.
Now that you grasp the differences at the root of the Bitcoin and Ethereum protocols, you should start to understand why both assets must be playing different roles in their network. Let's have a look at what sets BTC and ETH apart, and how it results in terms of investment opportunity.
As a Decentralized Payment System, the Bitcoin network needs a native currency to **denominate the amounts being transferred and incentivize the network in some sense. To make the system resistant and its currency valuable, Satoshi Nakamoto made sure bitcoin had some very specific characteristics: the maintainers of the network verifying transactions are rewarded in bitcoin, the fees users pay to transact have to be paid in the system's currency, and its issuance decreases over time, up to a maximum limit of 21,000,000 coins. These characteristics create internal incentives for the network's users to value bitcoin. It is at the same time a unit of account, a medium of exchange, and a scarce (limited) asset needed to use the network.