What if you could only have one cipher in your portfolio?Most people will probably answer Bitcoin (BTC 0.21%)., And there is a good reason. Bitcoin is not only the most famous and most popular cipher, but also a benchmark compared to all other ciphers. When it comes to market capitalization, Bitcoin is always far ahead of its rivals.
So is it possible? Ethereum (ETH 3.01%). Could it actually be better than Bitcoin as a long-term investment? For years, Ethereum has played Bitcoin’s second fiddle. However, there are several main reasons why Ethereum can be a good long-term purchase. Most importantly, the tech platform that powers Ethereum is about to get a major upgrade.
If there is only one reason to rethink your investment treatise on Ethereum, it should be a merge. This is a very promising moment when the Ethereum blockchain is finally transformed from proof of work to proof of stake consensus mechanism. In layman’s terms, it means that Ethereum will soon be implemented with superior technology, allowing everything on the Ethereum blockchain to be faster, cheaper and better.
In contrast, Bitcoin consumes a lot of energy, has a low throughput, and continues to plague proof-of-work mining technology. According to some accounts, the July crypto rally has been driven by optimism about the merge scheduled for September, for good reason.
Real world utilities
This leads to a second reason that Ethereum is a longer-term purchase than Bitcoin. Very simply, Ethereum has more real utilities than Bitcoin. The developers have created non-fungible tokens (NFTs), smart contracts, and decentralized finance (DeFi) protocols. All of this runs on the Ethereum blockchain. Around Ethereum is an entire ecosystem that Bitcoin does not have.
Sure, Bitcoin may be trying to get more avatars on social media, but Ethereum has more developers, entrepreneurs, and IT professionals delivering real-world applications. You can use Bitcoin to pay for transactions or sit in Bitcoin as a long-term store of value in the hope that it will increase in value as a result of a digital shortage. However, due to its underlying technical infrastructure, Bitcoin is far more restricted than Ethereum.
Change of investment description
And that leads us to the ultimate reason that Ethereum is a better long-term play than Bitcoin: the entire investment story surrounding Bitcoin is beginning to collapse. Until this year’s market collapsed, the basic argument for long-term holding of Bitcoin was that it was uncorrelated with traditional investments such as stocks. In other words, if the entire stock market is down, Bitcoin is not. In this respect, it works like “digital gold”. It will have intrinsic value when everything else is melted.
As more investors have come to think of Bitcoin as “digital gold,” it makes sense for people to want to hold BTC during a crisis or recession. But what happened during the recent market downturn? Bitcoin has fallen like all other cryptocurrencies, and in some cases has become more difficult and faster. As a result, some of Bitcoin’s appeal as “digital gold” is beginning to fade.
At the same time, the transition to a proof of stake mechanism as a result of the merger will transform ETH into deflationary assets, making it even more attractive as an inflation hedging potential. In addition, the staking mechanism “locks up” more and more ETH, making it impossible to trade. This will, of course, push up the price of ETH simply based on the principles of supply and demand.
The future is built on Ethereum
As if that weren’t enough, more and more prominent companies around the world are building on the Ethereum blockchain. Quite simply, its flexibility and scalability make Ethereum the perfect blockchain for large institutions. If Bitcoin is “Digital Gold”, Ethereum is “Digital Oil”. In the long run, Ethereum will be a more valuable cipher because it has more practical uses.
Dominique Basto has positions in Bitcoin and Ethereum. The Motley Fool has positions in Bitcoin and Ethereum and recommends them. The Motley Fool has a disclosure policy.