Today on the crypto market, potential investors can find over 6,700 digital currencies, such as Ethereum (ETH), Bitcoin Cash (BCH), Litecoin (LTC), Ripple (XRP), and Bitcoin (BTC). Out of these, Bitcoin and Ethereum are considered the most popular cryptocurrencies among investors due to the fact that they have the biggest market cap.
Although Bitcoin and Ethereum are based on the principle of decentralized ledgers and cryptography, and you can buy Bitcoin or Ethereum on cryptocurrency exchanges like Coinbase or mine them, the similarities between these two cryptocurrencies more or less end up here. They technically are completely different cryptocurrencies, created for different reasons and with different internal dynamics.
Therefore, after we give a detailed and separate explanation of cryptocurrencies, Bitcoin, and Ethereum, we’ll explore the differences between these two cryptocurrencies, and see which coin appeals to which traders.
What Is Cryptocurrency?
Cryptocurrencies are decentralized and digital (virtual) currencies. These digital currencies can be used for selling and buying goods and services. They have the potential to grow and act as stores of value, which makes them very attractive for future investors. Digital coins serve different purposes – while some of them are optimized for use as a replacement for cash, others are envisioned as vehicles of the smart economy.
Since they’re completely digital, cryptocurrencies aren’t stored in a bank account. They’re kept in digital wallets and are mostly bought and sold on cryptocurrency exchanges. There are different types of crypto wallets that you can find on the crypto market, such as hot (online) wallets and cold (offline) wallets, such as hardware wallets that are similar to USB drives.
The basic principle behind digital currencies is decentralization. While fiat currencies are issued and regulated by a central bank or government, digital currencies are valued and managed by their users.
The digital currency transactions are recorded on a decentralized public ledger, known as the blockchain. Each time cryptocurrency is traded, the crypto transaction is attached to the blockchain; an open-source public database that contains all the confirmed transactions secured with strong cryptography.
What Is Bitcoin?
In October 2008 a programmer or a group of programmers known by the name Satoshi Nakamoto published the famous whitepaper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”. The paper described the first cryptocurrency based on blockchain technology, Bitcoin (BTC).
Each Bitcoin transaction is recorded on a distributed public ledger and copies of this ledger are stored on servers worldwide. Anyone who has the appropriate hardware can set up such servers, known as nodes. Consensus on the ownership of the coins or tokens is spread using cryptography across these nodes, instead of relying on a bank.
Each Bitcoin transaction is publicly broadcasted to the Bitcoin network and spread from node to node. The Bitcoin transaction has to be confirmed by so-called Bitcoin miners and then grouped into a block that will be attached permanently to the Bitcoin blockchain. This process is called mining, and for each mined block the miners receive a block reward paid in bitcoins.
Bitcoin can be split into smaller units to facilitate and ease smaller transactions. The smallest Bitcoin unit is called a satoshi and it’s equivalent to 100 millionth of a Bitcoin (1 satoshi = 0.00000001 BTC).
If you own Bitcoin, you need to store it in a suitable digital wallet. However, since you’re not dealing with physical coins, the wallet is more or less arbitrary and what matters is the unique private key that proves your ownership of the assets to the network and allows you to trade your digital currencies. This concept is called a “brain wallet”. But you have to remember one thing: if you forget or lose your private key, your bitcoins will be lost forever.
What Is Ethereum?
Ethereum is a decentralized network based on blockchain technology, the same as Bitcoin. The Ethereum whitepaper was written by the Ethereum co-founder Vitalik Buterin and published at the end of 2013, and the Ethereum project was launched at the beginning of 2014. Afterward, the Ethereum platform started an Initial Coin Offering (ICO), a type of fundraising auction.
While Bitcoin is only a cryptocurrency Ethereum is developed to be an entire platform. On the Ethereum platform, the programmers can build applications that will be based on blockchain technology, known as decentralized applications (dApps), and these apps can run on the Ethereum network. The Ethereum users can create and implement smart contracts; software code that automatically executes operations when particular conditions in the contract have been met, without the users’ intervention.
Ethereum platform has its own cryptocurrency known as Ether (ETH) that’s used to run apps on the Ethereum network, something similar to when you use gas to power your vehicle. Ether has two functions. The first one is that it can be treated as a regular cryptocurrency for digital payments, and the other one is that it can be utilized for monetizing work.
Like every digital currency, Ethereum can be mined by solving complex math problems and can be bought on cryptocurrency exchanges that support Ethereum.
Some of the advantages of Ethereum include the fact that it represents a robust network with a wide spectrum of different useful functions, it has room for constant innovation, and needs no help from third-party intermediaries.
On the other hand, the disadvantages of Ethereum are the slightly higher transaction fees and its potential for crypto inflation due to the fact that Ethereum doesn’t have a limited supply (unlike Bitcoin). Moreover, Ethereum can be a little bit difficult for developers to adjust to it, especially in terms of using its unique programming language, Solidity.
The Differences Between Ethereum and Bitcoin
This dispute of Bitcoin vs. Ethereum has been getting a great boost these days. Over time BTC has become the most popular and well-recognized crypto asset worldwide. Bitcoin also has the tidal of a cryptocurrency with the highest market capitalization in comparison to other digital assets on the crypto market. On the other hand, Ethereum might lack the initial revolutionary appeal of Bitcoin, however, its creator has developed more blockchain functionalities to make up for being a runner-up.
Bitcoin allows peer-to-peer transactions. It acts as a substitute for fiat currencies meaning it can be used as a store of value and a medium of exchange, but without the additional problems that fiat currencies have, such as central authority regulations and huge transaction fees.
Just like Bitcoin, Ethereum allows peer-to-peer transactions, however, it also offers a platform for developing and designing smart contracts and decentralized applications. These smart contracts allow users to trade almost anything that has value, such as money, real estate, or shares.
The Bitcoin mining process is based on a so-called Proof of Work (PoW) method that Bitcoin miners use for the validation of Bitcoin transactions. Using the Proof of Work method, Bitcoin miners are trying to solve a complex math problem using high computing power in order to attach a Bitcoin block to the blockchain.
Until recently, the Ethereum network used the same Proof of Work method, however, Ethereum miners recently moved to a new method called Proof of Stake (PoS). Using this method, Ethereum miners can confirm transactions or mine an Ethereum block based on the number of coins they stake. This means that the more crypto assets miners have, the more mining power they’ll have.
The block reward is different too. The block reward of the Bitcoin miners depends on an event known as Bitcoin halving. At the very beginning of Bitcoin mining, the block reward for the miners was 50 bitcoins per block, but it continued to get cut in half every four years. Ethereum miners, on the other hand, receive a fixed block reward of 3 ETH per block.
Although the fees for Bitcoin transactions are optional, if you want your transaction to be confirmed faster, you’ll have to pay the Bitcoin miner a higher transaction fee so that they give it priority over other transactions. In the case of Ethereum, transaction fees are mandatory.
When it comes to the transaction processing time, Ethereum has a real advantage because the average amount of time it takes to attach a Bitcoin block to the blockchain is 10 minutes, while Ethereum attaches a new block to its chain of data in 12-15 seconds.
A hashing algorithm is how the cryptocurrency ecosystem ensures its safety and maintains its privacy. Bitcoin and Ethereum use different hashing algorithms to verify transactions and secure the data. Bitcoin uses the so-called SHA-256 cryptographic algorithm, while Ethereum uses a hash algorithm known as Ethash.
Bitcoin has a limited supply set at 21 million coins. Up until September 2021, around 18.8 million BTC have already been mined and released in circulation according to CoinMarketCap. This strategy guarantees that BTC will retain scarcity in the crypto market.
On the other hand, Ether (ETH) has no cap limitation. The Ethereum network has to mine ETH for an unlimited period of time in order to cover the gas fees made by the programmers using the Ethereum Virtual Machines (EVMs). Just for reference, in September 2021, there was around 117 million ETH in circulation.
Bitcoin vs Ethereum: Which One Is Better?
When it comes right to it, the final debate between BTC and ETH as an investment choice comes down to the investor’s profile. Both coins perform well over time and have entered mass adoption compared to other cryptocurrencies. We can say that Bitcoin is more stable and more mainstream of the two, however, Ethereum allows for more blockchain use cases for those interested in designing their own apps, platforms, or simply conducting contracts without intermediaries.
A Few Words Before You Go…
Bitcoin and Ethereum have both been with us for almost a decade and survived the test of time. Their teams of experts continue to work on improving their networks in line with the needs of investors worldwide both in terms of adding new features and use cases and improving the scalability and transaction throughput of their blockchains.