Bitcoin and Ethereum are even more than before.
Bitcoin and Ethereum (ETH) command a huge part of the attention in the crypto space. But what’s the difference between Bitcoin and Ethereum and what do their differences imply for people looking to buy, hold, or trade crypto? And why have their creators pursued differing strategies in shaping how their cryptos function?
In this article, we’ll dig into some key similarities and differences between these two most popular cryptocurrencies. Along the way, you’ll also learn the fundamentals of foundational technologies that enable cryptocurrencies.
Table of Contents
- The Similarities Between Bitcoin and Ethereum
- The Difference Between Bitcoin and Ethereum: Bitcoin
- The Difference Between Bitcoin and Ethereum: Ethereum
The Similarities Between Bitcoin and Ethereum
One major similarity between them is that both have tokens, “bitcoin” and “ether,” respectively, that can be used as digital currency and forms of payment in selected regions.
Unlike the U.S. dollar and other central bank-based currencies, however, the Bitcoin and Ethereum networks, and their respective tokens, aren’t centrally controlled by governments or banks.
Additionally, Bitcoin and Ethereum both rely on blockchain technology that records every blockchain transaction, whether that be to create, distribute, trade, or store the currencies.
Blockchain technology stores information on a ledger — similar to how a spreadsheet stores information. However, blockchain enables many people to hold copies of that ledger at the same time (often referred to as a “distributed ledger”), whereas a spreadsheet stored on one computer is far more limited and under the control of one or a few people.
Many people believe that the reliance of Bitcoin and Ethereum on blockchain lends a stronger sense of security because blockchain technology is generally thought to be more hacker-resistant than centrally stored computer ledgers. Additionally, the information relating to every transaction is available for everybody to see — providing visibility and transparency.
Now that we’ve seen some basic ways the two cryptocurrencies and their underlying blockchains are similar, let’s dive into what makes each distinct.
The Difference Between Bitcoin and Ethereum: Bitcoin
Launched in 2009 by an unknown person or group known as “Satoshi Nakamoto,” Bitcoin is the granddaddy of cryptocurrencies. As measured by market value at the time of writing, Bitcoin ranks as the world’s biggest cryptocurrency.
Bitcoin transactions are verified and recorded in the public blockchain ledger by Bitcoin users. This helps keep the blockchain hacker-resistant.
As compensation for their efforts, these users who verify transactions — miners — are awarded bitcoin whenever they add a new block of transactions to the blockchain.
Miners must prove their work, but in blockchains, there is no one central oversight authority to do this. Instead, participants in a blockchain reach an agreement — or consensus — on the next block to be added. The way they do this is the prime aspect of proof-of-work: There’s a contest to see who earns the reward.
Miners who want to vie for the crypto reward must first solve an intentionally difficult math puzzle that requires lots of computing resources to decipher. This intense and expensive computing power is the deterrent to keep hackers and other bad actors from trying to subvert the integrity of the blockchain.
The first miner to solve the puzzle in a way that is accepted by blockchain participants gets the right to add its version of the new transaction block — and collect the crypto reward for doing so.
Mining takes resources, speed, and persistence. Add to this another challenge for miners: the amount they can earn for validating and adding blocks to the blockchain is regularly being decreased by a process known as “halving.”
According to the current Bitcoin protocol, the number of bitcoins produced will be capped at 21 million. Currently, the production of bitcoin slows down every four years through halving.
A Bitcoin halving event is when the reward for mining Bitcoin transactions is cut in half. This event cuts in half the rate at which new bitcoins enter circulation. This halving process is designed to make the supply of bitcoin relatively stable and predictable.
In 2020, the number of bitcoins generated about every 10 minutes (a new block of transactions is verified about every 10 minutes) fell from 12.5 to 6.25. The next halving is currently scheduled to happen in 2024.
The ceiling on how many bitcoin will be created sets up a market structure that some Bitcoin proponents believe boosts the currency’s value over the long term, though others disagree with this assertion.
In terms of cost, bitcoin is among the most expensive cryptocurrencies, with the price surpassing $50,000 in mid-May 2021, though as of the time of writing in late August 2022, the price is slightly over $20,000, which highlights the historical volatility of this asset.
The Difference Between Bitcoin and Ethereum: Ethereum
While the current Bitcoin protocol will stop the production of bitcoins once the supply reaches 21 million, the potential supply on the Ethereum network is larger.
As of late August 2022, the supply of ether stood at about 122 million. As of the time of writing, the price of Ethereum was hovering a little under $2,000.
The Merge — Ethereum’s Move to a New Consensus Mechanism
Since its introduction in 2015, Ethereum has used the same validation and consensus mechanism as Bitcoin, proof-of-work (PoW). But on September 15, 2022 “The Merge” was completed, moving the Ethereum network to proof-of-stake (PoS).
Why the change?
One of the largest criticisms of cryptocurrency has been its overall negative impact on the environment. Since proof-of-work intentionally demands enormous computing resources to solve its puzzles it consumes large amounts of electricity.
One 2018 estimate put the Bitcoin blockchain’s energy usage at 1% of that of the entire United States. A more recent estimate put it on par with the energy usage of the entire nation of Sweden.
Whatever estimate is used, there’s general agreement that the resulting carbon footprint of cryptocurrency is unacceptably large and must change. Another implication of proof-of-work’s intense energy consumption: scaling the network is problematic.
Proof-of-stake is a validation and consensus approach designed to avoid the limitations and liabilities of proof-of-work, which is why Ethereum adopted the method during “The Merge.”
Instead of having miners (as Bitcoin does) that must invest in energy-consuming computing equipment to solve a puzzle, proof-of-stake has “validators” who put up a stake of crypto to earn the right to verify transactions and record blocks.
The base concept is similar: have enough skin in the game to discourage bad actors from trying to either alter transactions (introducing fraud into the blockchain) or worse, gain control of the network itself.
Proof-of-work accomplishes this “skin” by using computers; proof-of-stake skips the equipment part and goes straight to currency: the crypto of the blockchain. In the case of Ethereum, validators must stake ETH — 32 ETH to be exact.
Instead of there being a competition — multiple miners all using energy to solve the same problem — validators get selected from a pool of participants who have staked the 32 ETH.
When there is an agreement by sufficient network validators that the job was done correctly, the validator gets to add that block to the chain. In lieu of crypto coins, the validator earns network fees for the work.
But will this method work as well as the proven proof-of-work? While there are other smaller cryptocurrencies that use proof-of-stake, The Ethereum Merge is a huge test of its efficacy.
Some worry about security. It is possible, theoretically, that a nefarious group could stake enough crypto to control 51% or more of the blockchain validation and then use its position to validate altered or fraudulent transactions.
In practice, though, the amount of crypto that would have to be risked to pull this off is enormous. And it’s a one-shot deal. Once the alteration is seen by others on the blockchain, the bad actors would lose their staked crypto and be banished from the blockchain.
Staking provides a strong disincentive for bad behavior, as well as a strong incentive for validators to act in the best interests of the blockchain. It helps foster strong community ties since all participants depend on the blockchain’s health. A strong sense of community is the most compelling aspect of Ethereum.
More than a Cryptocurrency — The Ethereum Ecosystem
Ethereum offers some features that Bitcoin currently does not. It was originally designed to be used as more than “digital cash,” and the Ethereum community has built many apps on top of the Ethereum network, some of which have their own tokens that can be bought, sold, or used on the Ethereum network.
You’ll see a lot of services, such as lending, borrowing, online gaming, and insurance apps built on Ethereum. Note that anyone can build an app on Ethereum, so caution should be used whenever investigating a new app or token built on Ethereum.
This flexibility and the vibrant community that’s convened around it are giving rise to many innovations. Two, in particular, stand out: smart contracts and non-fungible tokens, better known as “NFTs.”
Smart contracts tap the intelligence developers can embed in software code to automate agreements beyond just the simple price paid, item bought, and date of transaction. A simple illustration helps make smart contracts easily understood.
If you use a modern vending machine, you’ll find lots of logic built into its operations. You have the option of using cash or a credit card to make a purchase. If cash, the machine can give you change if needed.
If a credit card, it knows how to check the card to see if it’s valid and authorize the proposed transaction. If the machine is out of the item you select, it knows how to return your cash or nullify the credit card transaction. These are all automated aspects of a kind of “contract.”
Similarly, a smart contract can be set up to automate contingencies in an agreement. They can be used in transactions across a supply chain, in real estate deals, by governments for registration and compliance processes — the list gets longer every day.
Their most important advantage is that they preserve trust. Both parties to a smart contract know that its parameters are set and aspects of them will play out if and only if the right set of predefined conditions are met.
NFTs, on the other hand, aim for a different type of functionality. Or maybe not so much functionality as identity. They can facilitate functions, and can even contain smart contracts. But their appeal and attendant buzz is their uniqueness.
The “non-fungible” part of the name implies they aren’t equivalent to other tokens. This is quite different from crypto coins (and many crypto tokens) which, by definition, are meant to be fungible. They can easily replace one another and have similar or the same value.
A nickel is a nickel is a nickel and is worth 5 cents. A Bitcoin or ETH is the same as any other and each has a set value at a moment in time. You won’t find one ETH worth $2,200 and another worth $5,000 at the same time.
NFTs resemble works of art. Original paintings by the same artist may fetch different prices and are inherently different, even if they depict similar scenes. In fact, many NFTs have been designed around digital art and are subject to similar market forces spurred by collectors.
In addition to digital art, they’ve been used for gaming, music, and film assets. NFTs have attracted all kinds of speculation and innovation and continue to be an area to watch. And the Ethereum ecosystem continues to be a locus for much of this creativity.
Which Crypto Is Right for You?
So what’s the difference between Bitcoin versus Ethereum? They may both be cryptocurrencies, but they’re clearly charting very different paths. And, many would argue, they both have unique values and roles to play.
To determine which is right for you, it depends on why you want to buy or trade crypto and what your personal goals are. Bitcoin has been around for a while, while Ethereum has grown to a solid number two spot and attracted a devoted community of supporters and creators.
Some feel the upcoming Ethereum Merge may help bolster its overall value by slowing the rate of new coin minting and making it a deflationary crypto more akin to Bitcoin. But that remains to be seen. There are clearly too many variables for any crypto to make predictions.
What is predictable, though, is the value of having a solid crypto partner to help you on your journey. Whether you’re looking for diversification, reasonable fees, or lots of insight, a true partner like Binance.US will help you all along the way.
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