Bitcoin‘s (BTC 0.40%) the price has more than doubled to an all-time high in the past 12 months. Four catalysts led to this rally: approvals from The first Bitcoin spot-priced exchange-traded funds (ETFs) in January, its last halving in four years in April, the Federal Reserve’s two interest rate cuts and Trump’s victory in the presidential election.

ETFs have made it easier for traditional and institutional investors to invest in Bitcoin, halving cut the growth rate of Bitcoin’s supply in half by cutting mining rewards in half, and declines Fed rate hikes will likely bring investors back to cryptocurrencies, growth and more speculative stocks. investments. The new Trump administration is also expected to reverse the Biden administration’s restrictions on the crypto market.

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All of these tailwinds make the world’s leading cryptocurrency an attractive investment right now. But as Bitcoin approaches its all-time highs, investors may also consider investing in small cryptocurrencies still trading below their all-time highs. Let’s take a closer look Ethereum (ETH 4.24%)the second most valuable cryptocurrency in the world, to see if it currently fits the more interesting buying profile than Bitcoin.

The differences between Bitcoin and Ethereum

Bitcoin is a proof of work (PoW) token that must be digitally mined with power-hungry ASIC (application-specific integrated circuit) miners. Its supply is limited to 21 million coins, of which almost 20 million have already been mined.

The difficulty of mining Bitcoin, which doubles with each halving over four years, gradually slows down this process. The last Bitcoin will likely be mined by 2140. This scarcity makes it more similar to gold, silver and others precious metals than other cryptocurrencies.

Ethereum, which hosts ether as its native token, was once a PoW blockchain like Bitcoin. But in 2022, it switched to a more energy-efficient model. proof of stake (PoS) mechanism in a process called The Merge.

PoS tokens like those of Ethereum cannot be mined. Instead, its investors “stake” (or lock up) their tokens on the blockchain to earn interest-like rewards. Unlike PoW blockchains, PoS blockchains also support smart contractswhich are used to develop decentralized applications (dApps), non-fungible tokens (NFT)and other crypto assets. This is why the value of Ether is often linked to the popularity of Ethereum among developers, while Bitcoin is more frequently valued by its scarcity.

Ether has no supply limit and there are currently around 120 million tokens in circulation. It became deflationary after The Merge two years ago, but its fee-cut Dencun upgrade this year made it inflationary again. Ethereum investors attempt to limit its supply by periodically burning (removing from circulation) large numbers of tokens – but this process is not as predictable or transparent as Bitcoin’s scheduled halvings.

Why has Ethereum underperformed Bitcoin?

Ethereum’s price is up more than 50% over the past 12 months, but it has underperformed Bitcoin and remains about 40% below its all-time high. The first Ethereum spot-price ETFs were approved and began trading in July, but they haven’t generated as much buzz as Bitcoin ETFs. Ether also didn’t seem to attract as many bulls as Bitcoin as interest rates fell, but it rallied alongside Bitcoin and the broader crypto market after the end of the presidential election.

Ethereum appears to be held back by two near-term challenges. First, Ethereum faces stiff competition from newer, faster PoS blockchains like Solana (GROUND -0.80%) And Cardano (ADA 2.03%). Second, its growing supply is holding back its price growth.

But in the long term, other tailwinds could emerge. Ethereum’s next upgrade, “The Verge,” will improve its security features and reduce its hardware requirements so it can run on smaller devices like smartwatches and Internet of Things (IoT) devices. UBS (UBS -2.24%) also recently launched its first tokenized fund on the Ethereum blockchain, suggesting that it is still a more stable PoS platform than Solana or Cardano.

So, does it make sense to choose Ethereum over Bitcoin?

Some bullish investors expect Ethereum to skyrocket. Matthew Sigel and Patrick Bush of VanEck expect its price to quadruple to $11,800 by 2030, while Cathie Wood of Ark Invest estimates it could soar more than 5,600% to $166,000 by 2032.

However, I personally think it is still smarter to buy Bitcoin rather than Ethereum. Bitcoin is like digital gold, so its value is expected to stabilize and increase compared to most fiat currencies. Ethereum tokens are always inflationary, their supply is unlimited, they cannot be mined, and their future value will be largely defined by Ethereum’s usefulness to dApp developers and financial institutions. The price of Ethereum may continue to rise, but I doubt it will consistently outperform Bitcoin over the next few years.