What is a better investment, Bitcoin or Ethereum?

At the outset, everyone should understand that cryptocurrencies fundamentally differ from stocks. Stocks have intrinsic value -- they represent a real piece of a physical business. In the short term, stocks can swing up and down for no apparent reason, but long-term, as a company's intrinsic value increases or decreases, the stock tends to move in the same direction. By contrast, cryptocurrencies have zero intrinsic value -- they're just computer code. That makes future token prices hard to predict.

However, I believe there's a fundamental economic principle we can use to our advantage. It's the principle I used when deciding to buy bitcoin and Ether (the tokens for the Ethereum network) in 2018. And it's the same principle anyone can use today to guide their thinking about any cryptocurrency investment.

Supply and demand

In economics, few principles are as basic as the law of supply and demand. Price is determined by how much of something is available (supply) and how much people want or need it (demand). When it comes to cryptocurrencies, supply differs in each case. Bitcoin's supply is well-known, and bitcoin aficionados argue this proves its future value.

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However, supply is only half of the equation. Remember Beanie Babies? Ty, the company that made them, periodically "retired" certain Beanie Babies, limiting their supply forever. This limited supply motivated some collectors to buy the toys hand over fist, causing their value to soar in the '90s. Some even fetched thousands of dollars. However, Beanie Babies prices quickly plummeted after their brief heyday -- most still sell for a fraction of what they sold for in the '90s. But supply hasn't changed; they still don't make the discontinued ones. Demand changed. People don't want them as much anymore, so they're worthless.

Why I bought Ether

I bought Ether because the Ethereum blockchain has real-world utility. While tokens can be used for digital payments, more practical things like smart contracts and applications can be built on top of the Ethereum blockchain. Think of it as a tank of gas. Sure, the tank of gas has value. But it also has a practical use. Continuing this analogy, some cryptocurrencies are just tanks of gas in engine-less worlds. But Ethereum's blockchain is a gas-powered engine.

Ethereum isn't the only blockchain network like this, but it's arguably the best known. That's important because blockchain networks benefit from a network effect. In other words, the more people use one system, the more likely it is more people will use the system. To me, if people were going to build upon existing blockchain technology, Ethereum is surely among the top candidates.

Why I bought bitcoin

Bitcoin has less utility than Ethereum, but that hasn't stopped it from maintaining its title as the most valuable cryptocurrency in the world. Some believe it could become a one-world currency, creating extremely high demand. But to me, that sounds far-fetched. People don't seem to be using bitcoin for transactions but rather as a growth investment or as a digital store of value.

In my opinion, bitcoin's demand as a store of value is far less than what it would be as a currency or some other everyday utility. That said, bitcoin's upside could still be great given its supply is far more limited than that of Ether. Consider there can only ever be 21 million bitcoin tokens. By contrast, Ether and many others have no ultimate ceiling. Ether has annual mining limits, which keeps new supply somewhat in check. But bitcoin's mining process is even more limited.

Every time there's a transaction on the bitcoin network, decentralized computers process it and the fastest computer is rewarded with new bitcoin tokens. However, every few years the bitcoin reward is cut in half, most recently in May. This means miners are rewarded with 6.25 bitcoin tokens right now, as opposed to 12.5 earlier in the year.