Bitcoin Loan vs. Ethereum Loan: Which is best?

Oct 31, 2020
bitcoin vs. ethereum logos

Both Bitcoin as Ethereum are popular assets for taking out a loan. They are the two most significant assets in the crypto space. Bitcoin claims around 60% of today’s total market capitalization, whereas Ethereum claims 11%. 

If you are looking to take out a crypto loan, you probably doubt which asset to pick. This article compares Bitcoin and Ethereum for various parameters that determine which type of loan you should take on YouHodler. Let’s first discuss why you would take a Bitcoin or Ethereum loan.

Reasons to Take a Bitcoin or Ethereum Backed Loan on YouHodler 

Most people don’t want to sell their Bitcoin holdings as they believe that Bitcoin’s value will increase long-term. However, they often require additional money to fund investments such as a car or house. 

If they sell their Bitcoin holdings, they lose out on potential future profits. Bitcoin lending provides an excellent alternative for users who want to hold onto their Bitcoin assets but still access cash on demand. We can use our Bitcoin holdings to take out a loan to fund essential investments. 

You can apply the above arguments for Ethereum as well. However, crypto investors believe Bitcoin is a better store of value than Ethereum. Ethereum brands itself as programmable money and allows for very complex use cases through their smart contract functionality. Just look at the recent exploits caused by flash loans

Therefore, Bitcoin feels more robust for many crypto investors. In other words, Bitcoin sounds like a more appealing collateral option to take out a loan. 

Next, let’s compare Bitcoin vs. Ethereum for volatility, stability, and fee cost.

Volatility - Bitcoin Loan vs. Ethereum Loan

You might wonder why volatility matters? A high-volatility asset is much riskier to hold. The higher the volatility is for a given crypto asset, the fewer people will want to add the asset to their portfolio. Traders perceive a low volatility asset as a more stable and steady-growth asset which they can safely include in their portfolio.

However, volatility also matters for taking out a crypto loan. When you take out a loan backed by Bitcoin, you need to make sure that your collateral covers the loan amount. If Bitcoin suddenly becomes very volatile, you risk that your collateral value drops below the required value to ensure your loan. 

If this happens, you need to add more collateral. If you fail to add more collateral, you might experience a loan default. A loan default means that the loan platform automatically sells your collateral to prevent any further losses. We want to avoid this scenario as we don’t want to lose our Bitcoin or Ethereum holdings.

Let’s take a look at some numbers. Luckily, you can track the volatility of different crypto assets against their price in US dollars.

Currently, the Ethereum volatility index shows a 30-day volatility estimate of 5.26%. If we take a closer look at the volatility chart from 2015 up to 2020, we see a clear downtrend in the volatility for Ethereum. The highest volatility ever recorded for Ethereum amounts to 13.11%. 

(Source: CoinDiligent.com Ethereum volatility index)

Further, let’s compare Ethereum’s volatility index to Bitcoin’s. Currently, the 30-day Bitcoin volatility estimate comes in very low with a value of 1.67%. On the 29th of April 2013, Bitcoin recorded its highest volatility with a whopping 19%. 

We can find the same downtrend pattern for Bitcoin’s volatility. When comparing both graphs, notice that Ethereum experiences more sudden volatility changes than Bitcoin. Volatility changes are a dangerous property for taking out crypto-collateralized loans.

With this example, I want to stress the importance of picking a low-volatile crypto asset to back your loan.

Stability - Bitcoin Loan vs. Ethereum Loan

When we evaluate the stability of Bitcoin compared to Ethereum, we will pick Bitcoin. Ethereum puts itself in a more dangerous position through its smart contract functionality. For example, the recent DeFi hype can be a potential threat to the stability of Ethereum. On top of that, Ethereum frequently sees hacks or protocol exploits that affect the project’s stability.

However, we should not forget about the different Bitcoin hard forks that affected Bitcoin’s stability. 

  1. 1 August 2017 - Bitcoin Cash
  2. 24 October 2017 - Bitcoin Gold
  3. 15 November 2018 - Bitcoin SV forked from Bitcoin Cash

In short, Bitcoin has survived for more than ten years and has proven to be a stable solution. Although Ethereum sounds like a stable variant, we believe that the complex smart contract functionality opens up more doors for potential stability threats that can affect the Ethereum network.

Fee cost - Bitcoin Loan vs. Ethereum Loan

Lastly, let’s compare Bitcoin and Ethereum’s fee cost. When transacting value on the Ethereum network, you have to pay a transaction fee expressed in Gwei. Until April 2020, you paid an average transaction fee of 11-12 Gwei. 

However, the recent DeFi hype caused the average gas price users paid to spike! In August, the average transaction fee sat well-above 100 Gwei. On September 17, 2020, Etherscan recorded an exorbitant transaction fee of 538 Gwei on average for that day.

Again, high transaction fees and network congestion negatively affect the stability of Ethereum. Imagine a situation where you want to quickly add some collateral to your loan to avoid a default. However, you have to pay a high transaction fee to get your transaction included in a block. These extra costs can eat up your potential profits, especially for smaller loan amounts.

It’s important to note that you pay a higher transaction fee when using the Bitcoin network. However, you’ll experience less congestion compared to the Ethereum network.

Can We Pick a Winner?

It’s hard to pick a winner. However, when looking at the network’s volatility spikes and stability, we prefer Bitcoin backed loans over Ethereum backed loans. Of course, this is a personal choice. You might have many other arguments than those listed in this article that make you pick an Ethereum backed loan or any other crypto-backed loan.

The most important piece of advice we can learn from this article is that you should pick an asset with a low volatility index percentage. 

Want to take out a loan? YouHolder provides both Bitcoin loans as Ethereum loans with the highest loan to value ratio in the industry (90%).

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