Most have heard of Bitcoin (BTC), the best-known cryptocurrency on the market. If you’ve started to research the tech behind cryptocurrency — or if you’ve considered investing in Bitcoin — you may have also seen that it’s not the only cryptocurrency out there.
The second-largest coin by market cap, Ethereum (ETH), is one of the most popular non-Bitcoin cryptocurrencies. While the two are both cryptocurrencies, there are some key differences between Bitcoin and Ethereum — especially in terms of how they are operated and the tech they use.
These are the main differences between the two currencies — as well as the advantages and disadvantages of investing in both.
The Tech Behind Bitcoin
Bitcoin was invented in 2008 by an enigmatic person — or group of people — known as Satoshi Nakamoto, based on a 2006 whitepaper that outlined the basic ideas behind the project.
The central idea is to use a kind of distributed ledger or database technology — called the blockchain — to create a decentralized currency that isn’t managed by a regulating body or central bank the way fiat currency is. There are no physical bitcoins. Instead, the blockchain records information on transactions and provides a currency and payment system that offers anonymity.
While not the first attempt at a decentralized, anonymous digital currency, Bitcoin was the first to see any kind of real success. The first-ever BTC transaction took place in 2009. Since then, the cryptocurrency’s user base and value have grown massively, providing major returns for early investors in bitcoin. The price of the currency is highly volatile. At the time of this article’s writing, October 2020, 1 BTC trades for around $10,000 to $12,000 USD.
However, despite this major growth, there’s been little institutional adoption of Bitcoin. Most banks and governments still don’t accept Bitcoin as a valid form of payment and few have major cryptocurrency investments. This is beginning to change slowly as views on cryptocurrency shift. In 2020, regulators announced that banks could offer crypto custody services, and a few different major U.S. banks have started to work with crypto companies.
For the moment, Bitcoin, like many cryptocurrencies, may seem more like an asset class than a currency. If you want to spend the Bitcoin you invest in, you will need to find a retailer that accepts Bitcoin or a buyer who can trade a fiat currency for your coins.
How Ethereum Works
Blockchain, as a digital ledger technology, can power almost any kind of project with transactions that need to be recorded permanently. Ethereum is a digital software platform, powered by Blockchain, that takes advantage of these possibilities.
Like Bitcoin, Ethereum is decentralized, meaning the platform is distributed across thousands of volunteers’ computers around the globe. Their computers (or “nodes”) run implementations of Ethereum, called “clients,” and each works to verify all the transactions in certain sections of the Ethereum blockchain. This keeps the data in the blockchain accurate and secure. It also ensures that there is no one point of failure for the platform.
Ethereum goes beyond the basic functionality of Bitcoin. The developers used Blockchain to create an entire software ecosystem complete with an Ethereum coding language, browser and payment system. Blockchain also enables users to create decentralized apps (dubbed DApps or dapps) with the Ethereum platform. The platform allows these apps to execute their code on Ethereum’s distributed peer-to-peer network.
Some DApps are also called Smart Contracts and are effectively Blockchain-based contracts between two or more parties.
In addition, the platform also has its own token or cryptocurrency, called Ethereum (ETH). Like Bitcoin, Ethereum has a highly volatile value but has hovered around $300 to $400 USD between August and October 2020.
Bitcoin vs. Ethereum
Ethereum, in addition to being a currency, also acts as a kind of payment token or energy source for the Ethereum platform itself.
If a user wants to change something within an Ethereum DApp or establish a Smart Contract, they’ll need to pay for the cost of the calculations involved with a small ETH fee, called “gas.” These payments are automatically calculated, and the more complex the request — the more computing power the change demands — the higher the fee.
Transactions between users on the Ethereum blockchain may also sometimes contain data related to those DApps.
Bitcoin, by comparison, is just a currency. Bitcoin transactions between users will just carry information about the transaction.
The two projects are fairly different, even though they both maintain their own cryptocurrencies. However, as an investor, you may be more interested in how the two coins differ as currencies and investments.
Ethereum transaction fees tend to be lower than those you’d see with Bitcoin transactions. Bitcoin transactions also typically take longer to verify — usually around 10 minutes in total. However, because Ethereum transactions are conducted via Smart Contracts, you may not be able to trade recently acquired Ethereum right away.
As assets, cryptocurrencies tend to gain and lose value much faster than other investments. Ethereum was worth around $3 USD when the coins first became available. Now, the coins are worth more than 100 times that. Bitcoin prices started as low as a few cents, and now a single coin is worth more than $10,000 USD. The markets for both coins, however, are similarly volatile.
In late 2017, Bitcoin prices surged to more than $20,000 USD — far above the current market value. The Ethereum market has seen similar ups and downs. In 2018, the cryptocurrency’s price hit an all-time-high value of more than $1,390 USD, about $1,000 USD more than the token’s current price.
The Essential Differences Between Ethereum and Bitcoin
In short, “better” isn’t really the right word to use when thinking about Bitcoin and Ethereum. Both projects are important to the overall crypto technology landscape, and they have very different aims.
While the two currency markets are also different, it’s hard to draw a definitive conclusion about either in terms of market patterns — or which one is a “safer” or more reliable investment.
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