Both Bitcoin (BTC 0.10%) and Ethereum (ETH 1.31%) have been hit hard by the current downturn in the crypto market. Bitcoin, for example, is down 68% over the past 12 months while Ethereum is down 67%. Yet there are still some investors looking to get into the crypto market, and for many, the choice about where to start may come down to Ethereum or Bitcoin, which are the two top tokens by market capitalization.
While Bitcoin and Ethereum are down by similar amounts, they are very different cryptos. It’s worth taking a closer look at their strengths and weaknesses to see if one is a better investment than the other.
Bear markets and crypto crashes
Bitcoin has a well-deserved reputation for extreme market volatility. Huge spikes have been followed by similarly large plunges. Yet, ever since its launch back in 2009, Bitcoin has proven surprisingly resilient. Over the past decade, Bitcoin has experienced at least five different bear markets. Each time, it bounced back stronger than before.
While the crypto winter of 2022 has been gut-wrenching, it is hardly the scariest downturn Bitcoin has experienced. That distinction would have to go to the bear market of 2011, when the price of Bitcoin cratered from $32 to $0.01 in just a few days. At that time, it really did look like Bitcoin was going to zero, and even some die-hard crypto enthusiasts threw in the towel. But nearly 20 months later, Bitcoin was again testing all-time highs. This pattern has been repeated again and again. The only real question, it seems, is how long it will take for Bitcoin to start setting new highs the next time around.
Of course, the big caveat here is that past performance is no guarantee of future results. That said, investors should be cheered by the fact that Bitcoin has seen the same types of dramatic highs and lows before. It has usually taken anywhere from 18 months to three years for it to reach another high, so investors will need to be patient.
Institutional money flows
Another factor in Bitcoin’s favor is the relatively recent influx of institutional money into the token. This will help to prop up Bitcoin’s price over the long run. In comparison, institutional investors have been less eager to acquire Ethereum.
This shift in thinking about Bitcoin can be traced back to 2019, when several big Wall Street banks began thinking about crypto as an uncorrelated asset class.
That was back in 2019, of course. As we’ve seen in 2022, Bitcoin appears to be much more correlated with the broader market (and especially tech stocks) than originally thought.
Nonetheless, the superior long-term returns of Bitcoin are apparently too good to pass up. Just as institutional investors have already embraced risky assets such as real estate and private equity, they now have begun to consider the merits of crypto. Things really came to a head this summer when BlackRock (BLK 0.29%) announced a unique partnership with cryptocurrency exchange Coinbase (COIN -1.65%), opening up new opportunities for large institutional investors to allocate a portion of their portfolios to crypto.
The one crypto that institutional investors appear to agree on is Bitcoin. A major factor in their decision is that Bitcoin is easier to understand than Ethereum. It is also generally considered to be the one crypto that is not a “security,” and thus, the one crypto that is least at risk of being regulated by the Securities and Exchange Commission.
In contrast, there are now concerns that Ethereum could be categorized by regulators as a security, which could have a chilling effect on interest pension funds or endowments might have in investing in Ethereum. If given a choice between Bitcoin and Ethereum, the path of least resistance leads to Bitcoin. Until the SEC or some other regulatory body gives the stamp of approval to all crypto, including Ethereum, it’s hard to see how this thinking will change.
Bitcoin for the long run
From this perspective, Bitcoin appears to be the superior investment option. Of course, this does not guarantee that it will outperform Ethereum over the next six to 12 months. But it does suggest that Bitcoin is the better long-term investment, as long as you are willing to buy and HODL — crypto lingo for “hold” — Bitcoin for an extended period of time. Remember, as we’ve seen from past Bitcoin bear market rallies, it could take anywhere from 18 months to three years before Bitcoin sees another all-time high. For that reason, many seasoned crypto investors are now looking ahead to 2024, and not to 2023, as the earliest that we’ll see Bitcoin soar again.
Dominic Basulto has positions in Bitcoin and Ethereum. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, Inc., and Ethereum. The Motley Fool has a disclosure policy.