Bitcoin vs Ethereum: What’s the Difference?

Bitcoin vs Ethereum: What’s the Difference?

As an educated crypto investor it’s crucial you understand the differences between Bitcoin vs Ethereum. Both of these coins are titans in the market, albeit for different reasons. Both coins are vital for the market’s development at this point. Here’s what makes these coins so different but, yet so important in the market.

Bitcoin

Bitcoin was the world’s first successful cryptocurrency. Satoshi Nakamoto changed the world when he introduced his revolutionary protocol. His goal was to create a “peer-to-peer electronic cash system” that was both censorship-resistant and decentralized.

He succeeded in his mission when he launched Bitcoin officially in 2009. Since that time, Bitcoin has seen tremendous growth both financially and technologically. However, at its core, it still remains accessible to anyone. Bitcoin changed the world forever and inspired a new industry. For these reasons, you can consider Bitcoin the first generation of cryptocurrencies.

Notably, Bitcoin is not stagnant and the protocol continually develops. However, it was built to serve its particular purpose. Consequently, it’s not the best option for features such as smart contracts or other next-gen blockchain functionalities. Notably, the introduction of second layer protocols such as the Lightning Network expands Bitcoins functionality considerably.

The Second Generation – Bitcoin vs Ethereum

Ethereum is a distributed, public blockchain. This decentralized network introduced the world to smart contract scripting functionality. These protocols allowed anyone to build decentralized applications and expand the use cases for cryptocurrencies. Today, there are thousands of different cryptos and blockchain projects. However, most utilize some forms of smart contracts to streamline network activities.

Not Exactly A Cryptocurrency

It’s important you understand that Ethereum isn’t a cryptocurrency. Ethereum is the platform that the cryptocurrency Ether functions within. This network functions as a programmable decentralized network for Dapp developers primarily. Additionally, Ether’s primary role is to compensate miners for performing EVM (Ethereum Virtual Machine) computations.

Ethereum was the first cryptocurrency network built specifically to support Dapp development. Dapps are applications designed to run on decentralized networks. The first Dapps ran on decentralized networks such as Tor networks. These networks are censorship-resistant due to their decentralized nature.

Dapps that run on blockchain networks are at the core of the blockchain revolution. In this way, Ethereum represented a fundamental shift in the development and functionality of cryptocurrencies moving forward. For these reasons, Ethereum is considered a second-generation cryptocurrency

Smart Contracts

To execute smart contracts, Ethereum introduces a unique protocol known as the EVM – the Ethereum Virtual Machine. Each full Ethereum node runs an instant of these virtual stacks. The main advantage of EVMs is that they improve on the process of building decentralized applications by improving the programmability and efficiency that the network executes contract byte code.

History of Ethereum

One of Bitcoin’s early followers was a computer developer by the name of Vitalik Buterin. In 2013, this advantageous individual decided to build a new cryptocurrency. This new project would share many technical characteristics with Bitcoin. For example, both coins utilize a Proof-of-Work (PoW) algorithm to validate the state of the network.

Consensus

Bitcoin utilizes the SHA-256 algorithm. This mathematical equation requires miners to prove their work through advanced calculations. The network automatically adjusts its difficulty to ensure that blocks of transactions only get approved in ten-minute intervals. This approach ensures a predictive monetary issuance strategy until the last Bitcoin gets mined sometime in 2140.

Ethereum, like Bitcoin, currently uses a proof-of-work (PoW) consensus protocol. However, Ethereum uses the Ethash algorithm. Buterin decided on this mechanism to help reduce the advantage of specialized ASIC (Application Specific Integrated Circuit) mining rigs. ASIC mining rigs are built from the ground up to solve the SHA-256 algorithm Bitcoin uses. Critics of ASIC miners argue that these high-priced rigs cause centralization in the Bitcoin network.

Block Times

When comparing the transaction thru put of the networks, Ethereum comes out far ahead of Bitcoin. Bitcoin approves blocks every 10 minutes. These blocks hold no more than 1MB of data. Consequently, Bitcoin is only capable of around 7 transactions per second. This low data rate was built into Bitcoin’s core coding to ensure that anyone could use the network.

The Ethereum network is capable of approximately 15 transactions per second. These capabilities are set to improve significantly following the upcoming Ethereum 2.0 update. This upgrade would push Ethereum’s capabilities closer to 100,000 transactions per second according to developers.

Mining Rewards – Bitcoin vs Ethereum

There are different mining rewards paid out to nodes on each network. Bitcoin miners receive a reward of 6.5 BTC if they are the node that completes the SHA-256 equation first and adds the next block to the blockchain. Comparingly, Ethereum miners receive a reward of 2 ETH for their participation in validating blocks of transactions.

Total Supply – Bitcoin vs Ethereum

Bitcoin caps its supply of 21,000,000 coins. This strategy ensures that Bitcoin retains scarcity in the market. Reversely, there is no cap on the amount of Ether (ETH). The network must continue to produce ETH indefinitely to cover gas fees created by developers executing EVMs. Currently, there are 114,467,625.91 ETH in circulation today.

Ethereum to go to PoS

Interestingly, Ethereum is set to do a major upgrade this year to Ethereum 2.0. This hard fork would place ETH on a new blockchain that runs on a Proof-of-Stake (PoS) algorithm. PoS networks remove miners and rely on coin holders staking their tokens to validate the network’s state.

PoS networks are far more energy-efficient and cheaper to maintain. They also provide faster transaction times compared to PoW networks. Best of all, there is no need to purchase expensive mining equipment because all you need is a network wallet to stake your coins on a PoS system.

The ETH ICO vs Bitcoin’s Launch

Bitcoin had a quiet launch that was celebrated by only a select few in the cypherpunk and development community taking any notice of this monumental invention. Interestingly, Bitcoin’s journey officially began with the genesis block. This the first block of Bitcoin’s blockchain. While no one knows for sure how many Bitcoin’s Nakamoto mined, estimates put his rewards at 1 million Bitcoin.

In comparison, Ethereum entered the market with much more fanfare. The Ethereum ICO (Initial Coin Offering) raised $18 million. Ethereum continued this momentum into the launch of the first DAO (Decentralized Autonomous Organization). This event took place in April 2016. The launch of the DAO boosted Ethereum’s status and helped the network to secure $150 million in its public ICO. At the time, the DAO was the largest crowdfunding event to take place in the blockchain industry.

Bitcoin vs Ethereum – Apples vs Oranges

Now that you have a better understanding of the differences between Bitcoin vs Ethereum, it’s easy to see why both projects have longevity in the sector. As such, most crypto investors hold both of these coins in their portfolio.

Where to buy Bitcoin (BTC) & Ethereum (ETH)

These are two of the most popular cryptocurrencies in the world. The exchanges below enable the purchase of both of these digital assets.

Ethereum: what is it and why has the price gone parabolic?

The price of the world’s second largest cryptocurrency, ether, hit a new all-time high of US$1,440 (£1,050) on January 19. This breached a previous high set three years ago and gave ether a total value (market capitalisation) of US$160 billion, although it has since fallen back to around US$140 billion.

Ether, which runs on a technology system known as the ethereum blockchain, is worth over ten times the price it was when it bottomed during the COVID market panic of March 2020. And the cryptocurrency is still only five years old. In part, this remarkable rise in the value is due to excess money flowing into all the leading cryptocurrencies, which are now seen as relatively safe store-of-value assets and a good speculative investment.

Ether/US$ price

But ether’s price rise has even outstripped that of the number one cryptocurrency, bitcoin, which “only” had a seven-fold increase since March. Ether has outperformed partly due to several improvements and new features being rolled out over the next few months. So what are ether and ethereum and why is this cryptocurrency now worth more than corporate giants such as Starbucks and AstraZeneca?

Ether and bitcoin

Blockchains are online ledgers that keep permanent tamper-proof records of information. These records are continually verified by a network of computer nodes similar to servers, which are not centrally controlled by anyone. Ether is just one of over 8,000 cryptocurrencies that use some form of this technology, which was invented by the anonymous “Satoshi Nakamoto” when he released bitcoin over a decade ago.

The ethereum blockchain was first outlined in 2013 by Vitalik Buterin, a 19-year old prodigy who was born in Russia but mostly grew up in Canada. After crowdfunding and development in 2014, the platform was launched in July 2015.

As with the bitcoin blockchain, each ethereum transaction is confirmed when the nodes on the network reach a consensus that it took place – these verifiers are rewarded in ether for their work, in a process known as mining.

But the bitcoin blockchain is confined to enabling digital, decentralised money – meaning money that is not issued from any central institution unlike, say, dollars. Ethereum’s blockchain is categorically different in that it can host both other digital tokens or coins, and decentralised applications.

Decentralised applications or “dapps” are open-source programs developed by communities of coders not attached to any company. Any changes to the software are voted on by the community using a consensus mechanism.

Perhaps the best known applications running on the ethereum blockchain are “smart contracts”, which are programs that automatically execute all or parts of an agreement when certain conditions are met. For instance, a smart contract could automatically reimburse a customer if, say, a flight was delayed more than a prescribed amount of time.

Many of the dapp communities are also operating what is known as decentralised autonomous organisations or DAOs. These are essentially alternatives to companies and seen by many as the building blocks of the next phase of the internet or “web 3.0”. A good example is the burgeoning trading exchange Sushiswap.

Ethereum has evolved and developed since its launch six years ago. In 2016, a set of smart contracts known as “The DAO” raised a record US$150 million in a crowdsale but was quickly exploited by a hacker who siphoned off one- third of the funds. However, since then, the ethereum ecosystem has matured considerably. While hacks and scams remain common, the overall level of professionalism appears to have improved dramatically.

Why the price explosion

Financial interest in ether tends to follow in the wake of bitcoin rallies because it is the second-largest cryptocurrency and, as such, quickly draws the attention of the novice investor. All the same, there are other factors behind its recent rally.

The first is the pace of innovation on the platform. Most activity in the cryptocurrency space happens on ethereum. In 2020, we saw the emergence of decentralised finance (DeFi). DeFi is analogous to the mainstream financial world, but with the middleman banks cut out.

Users can borrow, trade, lend and invest through autonomous smart contracts via protocols like Compound, Aave and Yearn Finance. It sounds like science fiction, but this is no hypothetical market – approximately US$24 billion is locked into various DeFi projects right now. Importantly, DeFi allows users to generate income on their cryptocurrency holdings, especially their ether tokens.

The second factor behind the ether surge is the launch of ethereum 2.0. This upgrade addresses major concerns impacting the current version of ethereum. In particular, it will reduce transaction fees – especially useful in DeFi trading, where each transaction can end up costing the equivalent of tens of US dollars.

Ethereum 2.0 will also eliminate the environmentally wasteful mining currently required to make the ethereum blockchain function (the same is true of many other cryptocurrencies, including bitcoin). Within the year, ethereum should be able to drop the need for vast industrial mining warehouses that consume huge amounts of energy.

Instead, transactions will be validated using a different system known as “proof-of-stake”. The sense that ethereum addresses problems like these quickly rather than letting them sit could prove a major differential from the sometimes sluggish and conservative pace of the bitcoin development culture.

A final factor is the launch of ethereum futures trading on February 8. This means that traders will be able to speculate on what ether will be worth at a given date in the future for the first time – a hallmark of any mature financial asset. Some analysts have said the recent bitcoin rally has been fuelled by traditional investment firms, and the launch of ethereum futures is often touted as opening the doors for the same price action.

However, as every seasoned cryptocurrency user knows, both currencies are extremely volatile and are as liable to crash by extremes as rise by them. Bitcoin’s price fell 85% in the year after the last bull market in 2017, while ether was down by 95% at one stage from its previous high of US$1,428.

Whatever the valuation, the future of ethereum as a platform looks bright. Its challenge is ultimately external: projects such as Cardano and Polkadot, created by individuals who helped launch ethereum itself, are attempting to steal ethereum’s crown.

But as bitcoin has shown, first-mover advantage matters in cryptocurrency, and despite bitcoin’s relative lack of features it is unlikely to be moved from its dominant position for some time. The same is most likely true for the foreseeable future with ethereum.

The Rise of Ethereum: Could it Rival Bitcoin’s Success? - CityAM

The growth of Bitcoin in recent months has been noted across mainstream media, ushering in a host of investors from all backgrounds. However, it’s not just Bitcoin that’s caught everyone’s attention, as Ethereum makes it move as the next big cryptocurrency.

The Ether price (ETH/USD) is currently at $1,274, recording a 73% Year-To-Date (YTD) performance. The price of the second cryptocurrency by market capitalisation finally exceeded its previous all-time-high (ATH) at $1,420 as it moved to a high of $1,440 on Tuesday. The peak was short-lived as the correction that ensued sent the price back below $1,300.

The Growth of Altcoins

Since Q4 of 2020, the Bitcoin (BTC) market capitalization’s dominance grew from a low 57% to levels above 70% on January 2nd. However, the main cryptocurrency started to lose ground in favor of altcoins this year. In other words, the buying interest was shifting from Bitcoin to altcoins.

Among the latter, the Ether cryptocurrency is certainly one of the best performers this year. Its performance is only comparable to that of cryptocurrencies involved in the Decentralized Finance (DeFi) economy. Among the best performing DeFi projects/tokens, we have:

– The lending platform Aave and its native token: AAVE/USD is up 2-fold YTD

– The Decentralized Exchange (DEX) Uniswap and its native token: UNI/USD is up 90% YTD

– The price Oracle Chainlink and its native token: LINK/USD is up 70% YTD

– The cross-chain interoperability project Polkadot and its governance token: DOT/USD is up 66% YTD

The DeFi Craze

The price momentum observed is not specific to Ether, but to most tokens of the DeFi economy. The number of ETHs and BTCs locked in DeFi, respectively 6.89 million ETHs and 37.48 millon BTCs, are still far from their ATHs observed in October last year. Nevertheless, as a result of the BTC and ETH market price appreciations, the total value locked in DeFi reached a new high on Wednesday at $24.53 billion.

Since the start of the DeFi craze in June 2020, the number of transactions on the Ethereum blockchain has been flirting with the highest levels reached with the CryptoKitties craze in December 2017: around 1,250k transactions per day. Although the level is a clear indication of success for Ethereum, it highlighted serious weaknesses in the blockchain’s scalability. The average daily transaction fee reached a new high at $16.5 on January 11th, which is more than 180 times higher than the levels seen a year ago.

Scaling up Ethereum

To answer this challenge, Layer 2 (L2) protocols have been developed to accommodate the limited processing capacity of the main blockchain network (aka Mainnet), which are built on top of the Ethereum base protocol which is Layer 1 (L1). L2 protocols allow more throughput (50 to 100-fold), instant confirmation of transactions on L2, and mitigate network congestion such as the one observed during the CryptoKitties craze. In other words, L2s are managing transaction data details efficiently, and very little data is written to the Ethereum blockchain (the base L1 layer).

Several private L2s emerged since CryptoKitties, and are now used by the most successful DeFi projects. DeFi projects have been structuring their L2 contracts to enforce many of the risk and legal controls needed to safeguard their ecosystem. So much progress has been made that the most advanced projects could hope one day to compete with their peers in the traditional economy, on a similar legal level… The undeniable success of these projects did put Ethereum back in the spotlight.

Eth 2.0 Upgrade

In the meantime, in addition to existing operational L2 protocols (e.g. Plasma used by Polkadot), the ETH 2.0 ongoing upgrades are bringing even more scalability to the ecosystem. These upgrades started with the launch of the Beacon Chain on December 1st. The Beacon chain introduced the Proof-Of-Stake mechanism (PoS) that will eventually replace the current Proof-Of-Work (PoW) mechanism. In a PoW system similar to the Bitcoin blockchain, transactions are verified by “miners”. They use computer hardware to mine the new blocks, verify, write transactions to each block and then add the completed block to the chain. In a PoS system, transactions are verified by validators. Agents can stake tokens for the right to validate transactions, and the larger the stake, the higher the number of transactions allocated to the agent for validation and the higher their potential reward.

2.1 million ETHs (or $2.7 billion) have already been staked in the Beacon chain. It is still a fraction of the 114 million total supply estimated by etherscan, but it represents already 30% of the total ETHs staked in the DeFi economy. Apart from the slight drop in the total available ETH supply resulting from these staked amounts, the positive price momentum is built partially on the hope of nothing less than an Ethereum resurrection.

Institutional Interest

Still, it takes more than the success of the Beacon chain and the DeFI economy to explain why the ETH value doubled since its launch on December 1st. As always in the cryptocurrency world, the strongest rallies are the consequence of a set of material circumstances that draw interest from both the decentralized and traditional economies. For reference, the rally that sent the BTC price to new ATHs in Q3-Q4 2020 was partially triggered by both the amount of Wrapped Bitcoins (WBTC) generated and locked in DeFi, as well as the exceptional rising interest from institution-grade investors, including Square, Paypal and MassMutual.

Like a Bitcoin investment, an Ether investment essentially diversifies a portfolio. Ether is already associated with Bitcoin in several funds or ETPs. The recently launched Bitwise 10 Crypto Index Fund invests ~13% of its $538 million assets (AUMs) in Ethereum, whilst Grayscale’s Digital Large Cap Fund has already 338.4million AUMs with at least 13% invested in ETH. According to Michael Sonnenshein, newly appointed CEO of Grayscale Investments LLC, the Ethereum-only trusts are now gaining traction.

The reason for this increased interest is that Ether is very liquid. It is also the second most popular cryptocurrency after Bitcoin, making it a natural choice for institution-grade investors or High Net Worth Individuals (HNWIs) looking for diversification in the crypto space. A strong indication of institutional interest would be confirmed with the CME launch of ETH futures on 8th February. Already, the open interest (OI) of existing derivative markets, operated by online exchanges, has hit record highs. The OI was close to $50 billion on 11th January (versus $170bio for BTC).

The Potential to Follow in BTC’s Footsteps

There is no doubt that the high leverage associated with the high OI is contributing to the ETH price volatility. Recent downside shocks have been exacerbated by derivative contracts liquidations: $228 million of ETH-based long contracts and their collateral were liquidated on the 19th, preceded by $550 million on January 10th. Such high liquidation events typically involve the panic sale of collateral (ETH) that drives the market further down.

Despite the high volatility, assuming a level of market access and regulation for ETH and its derivatives that is comparable to Bitcoin, it is difficult to believe that Ether would not experience the same dynamic as Bitcoin over the next two years.

Certainly, the tokenomics of Ether are substantially different than Bitcoin’s, starting with Ether’s infinite potential supply. Furthermore, there is still uncertainty with respect to the role and economics of ETH in the new ETH2.0 framework. Nonetheless, now is the time for increased scrutiny – and one could assume that there is no better way to track a cryptocurrency than to own at least a few.

Yves Renno, CFA

Yves is currently Head of Trading at digital payments platform, Wirex, and has extensive experience in in-depth market and risk analysis, which he applies to the burgeoning crypto space at the company.

He is a statistician economist from the ENSAE in Paris, with an MSc in Statistics and Financial Modelling from Paris VII and La Sorbonne in Paris, an MSc in Financial Mathematics from the University of Chicago, and is a CFA charter holder and member of the French Association of Actuaries.

He has a wealth of experience starting as a trader on a single-stock exotic derivatives trading portfolio, and previously headed the derivatives sales trading team at Commerzbank, and was a Partner and Portfolio manager on a volatility-driven forex, equity, and commodities-based global macro fund for a few years.