Bitcoin and Ethereum are the two most prominent cryptocurrencies in the world, but they serve different purposes and have different goals. While Bitcoin was created primarily as a digital currency to function as a decentralized store of value, Ethereum was designed as a decentralized platform with broader applications, enabling developers to build decentralized applications and smart contracts. This article explores the key differences between Bitcoin and Ethereum, highlighting their unique features and what they mean for investors.
Key takeaways
- Bitcoin was designed to be money.
- Ethereum was designed to be a platform, with Ether being the native currency of that platform.
Bitcoin, the first cryptocurrency
The idea for Bitcoin (BTC) was written up by a pseudonymous computer programmer named Satoshi Nakamoto in a 2008 whitepaper. And the first Bitcoin went into circulation in 2009.
The idea was to have a peer-to-peer electronic cash system with a fixed supply (there will only ever be 21 million bitcoin) and devoid of a central authority regulating it. In place of a bank, payment processor or government, financial transactions are recorded on a distributed digital ledger stored in blocks known as a blockchain. People all over the world then verify these transactions independently to make sure no fraudulent activity has occurred.
As Bitcoin has matured as an asset, its practicality as digital cash has been tested. This is largely due to the slow speed of transactions that can currently be done on the Bitcoin network. However, a large and growing number of people and institutions view it as a digital version of gold—a place to store value that is not beholden to central bank manipulation or government interference. And it is largely under this narrative that Bitcoin has become the best-performing asset in the last decade. (1)
Ethereum, the world’s super computer
While Bitcoin’s main purpose was to use blockchain technology for monetary transactions, the Ethereum network was conceptualized to build, and greatly expand on, that core idea.
When Ethereum launched in 2015, its goal was not only to produce a decentralized currency, but also to decentralize almost everything on the internet. (2)
That is, the idea was to use the Ethereum network as a platform on which to build a wide array of decentralized products and services ranging from banking to art to crowd funding to music distribution. You can think of Ethereum as a digital main street or city where anybody who can code can set up a shop and ply their wares.
Smart contracts: endless possibilities
The key difference between the Bitcoin and Ethereum networks is the use of smart contracts by the latter. Smart contracts are pieces of programmable code that you can’t change after deployment. And they allow users of the Ethereum network to create trustless products. (2)
To conceptualize what smart contracts do, think of them as digital legal contracts. But instead of a lawyer and a court making sure things are done correctly, you use computer code.
Another way to look at how they work is by viewing them as a digital vending machine—with the right inputs, a certain output is guaranteed.
This technology allows Ethereum developers to create a wide array of decentralized applications (Dapps) that don’t rely on a broker or third party to facilitate transactions between users. If you want to learn more about Dapps, check out our Ether 101 Whitepaper.
Proof of work vs proof of stake
The idea of having trusted third parties replaced by an open-source digital ledger that is recorded on, maintained, and regulated by a decentralized global community obviously has some appeal.
But how do you prevent people who add to this ledger from recording fraudulent or erroneous transactions? Bitcoin developers came up with a solution called proof of work.
In short, proof of work requires people who want to add information to the blockchain to spend large amounts of money on hardware and electricity. They are then rewarded with Bitcoin when they correctly verify a transaction. This tug and pull of the high cost of adding to the blockchain and the rewards you get for doing so reduces the incentive to add fraudulent transactions.
Ethereum and Bitcoin both use proof of work to maintain the integrity of their blockchains. While proof of work has proven its mettle when securing blockchains, the nature of its design means it uses massive amounts of energy. As crypto adoption increases, the environmental impacts of assets like Ether and Bitcoin cannot be ignored by the environmental-conscious investor.
However, Ethereum's reliance on proof of work will soon be changing. 2022 will herald the Ethereum Network’s transition from proof of work to something called proof of stake to validate its blockchain. This switch will bring on a seismic divergence between the energy expenditure of Bitcoin and Ethereum. Some estimates suggest that Ether’s environmental impact could be reduced by as much as 99.9%. (3)
Token supply
Another key difference between these two assets comes down to supply—both in the total number that are in circulation and how they come into circulation.
There will only ever be 21 million bitcoins, with the last bitcoin estimated to into circulation around the year 2140. Every four years leading up to that end date, the amount of new bitcoins minted, is reduced by half. (4)
On the other hand, Ether does not have a fixed supply. Just like government-issued fiat currency, there is no definitive limit to how much Ether can be minted. Currently, the amount of Ether in circulation is about 120 million. (4)
For investors, this is an important distinction to note. Bitcoin’s value is engineered to go up over time. And its fixed supply plays heavily into the digital gold or hard money narrative that many of its advocates espouse. As stated above, this simple formula of reducing supply while demand increases has made Bitcoin the best-performing asset of the last decade.
While Ethereum developers are making strides towards reducing the inflationary nature of Ether, it has a way to go to appease people who look at Bitcoin as gold 2.0. (5)
What this all means
For investors looking at long-term plays in the cryptocurrency space, it’s important to understand that Ether and Bitcoin are not the same, nor, for the most part, are they trying to be the same thing. Understanding the differences will help inform educated investment decisions.
Sources
1.Bitcoin vs. Ethereum: What’s the Difference?, Investopedia: https://www.investopedia.com/articles/investing/031416/bitcoin-vs-ethereum-driven-different-purposes.asp
2.INTRODUCTION TO SMART CONTRACTS, Ethereum: https://ethereum.org/en/developers/docs/smart-contracts/
3.Bitcoin vs. Ethereum: Key differences between BTC and ETH, Coin Telegraph: https://cointelegraph.com/ethereum-for-beginners/bitcoin-vs-ethereum-key-differences-between-btc-and-eth
4.How Are Bitcoin and Ethereum Different? Gemini:https://www.gemini.com/cryptopedia/ethereum-vs-bitcoin-blockchain-differences#section-where-bitcoin-and-ethereum-meet
5.Ethereum poised for deflationary cycle as the merge approaches, Yahoo Finance: https://finance.yahoo.com/news/ether-burn-rate-plunges-seven-103429295.html
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