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Ethereum vs Bitcoin: The Difference

robertstevens

Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.

Ethereum and Bitcoin are the two largest cryptocurrenciesin the world by market capitalization. Which is better? It’s complicated. It all depends on how you expect to use it.

What are Cryptocurrencies?

Cryptocurrencies are digital cash that runs on a ledger distributed across thousands of computers scattered across the world. Cryptocurrencies are revolutionary because they are entirely digital, and the production of new coins is not controlled by any central authority. Compare that to a central bank, which controls the supply of a country’s currency.

In addition, transfers of value on blockchain network are anonymous (or at least pseudonymous). Cryptocurrencies let their users trade digital assets outside of the purview of the state. That’s why most people associate them with illegal narcotics and weapons markets.

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What is Bitcoin?

There are several thousand cryptocurrencies. And Bitcoin, or BTC, is the largest of them by market capitalization. At the end of 2019, the total value of all Bitcoin in existence was well over $ 130 billion, and over $25 billion of the cryptocurrency is traded each day.

Bitcoin is also the first cryptocurrency. On October 11, 2008, “Satoshi Nakamoto” published the Bitcoin whitepaper, titled " Bitcoin: A Peer-to-Peer Electronic Cash System." In it, Nakamoto, whose identity still remains unconfirmed, despite numerous individuals claiming his name to fame as their own, described a system that lets “online payments to be sent directly from one party to another without going through a financial institution.” The first Bitcoin was mined on 9 January 2009.

Interestingly, a month prior to the whitepaper’s release, one of the largest investment banks in the US, Lehman Brothers, folded. The 2008 financial crash set the stage for the rise of cryptocurrencies. Since the creation of the first Bitcoin in 2009, the price of Bitcoin has increased considerably in value with a remarkable spike in price in 2017, when the price of Bitcoin hit close to $20,000.

What is Ethereum?

Ethereum, like Bitcoin, is a blockchain network. The Ethereum whitepaper, written by “Vitalk Buterin,” was published in late 2013, and the project launched in January 2014. In July 2014, Ethereum launched an Initial Coin Offering, a big sale where members of the public can buy tokens of an upcoming blockchain network .

So what’s the difference between Bitcoin and Ethereum? Well, Bitcoin is a cryptocurrency, intended as an alternative to the fiat currency that is printed by banks. And that’s the whole shebang: Bitcoin doesn’t really do anything else. Ethereum, on the other hand, is an entire platform.

With Ethereum—and unlike Bitcoin—developers can build their own blockchain-based programs, called dapps (decentralized applications), and have them run on the network. With dapps, developers can build and implement smart contracts—computer code that automatically carries out tasks when certain conditions in the contract are met and without the need for human intervention.

Much like regular apps on a computer or mobile phone, dapps can do a bunch of interesting things. On the Ethereum network there are social networks, advertising systems, and payments services that facilitate billions of dollars in cross-border payments. Board game companiesstock exchanges and investment banks have all started building on Ethereum.

Ether, or ETH, is the cryptocurrency used to pay to run programs on the Ethereum network, a little like using gas to power a car. Just like Bitcoin, ETH can also trade against other cryptocurrencies, (including Bitcoin). ETH’s market cap is less than a tenth of Bitcoin, at around $ 14 billion. But it only trades around two and a half times less than Bitcoin; Bitcoin trades around $25 billion each day, and ETH’s current daily transaction volume is around $9 billion.

Featured snippet: Santander’s blockchain bond

Not convinced by the power of Ethereum? Consider the retail banking giant Santander, which this year announced it had processed the first end-to-end blockchain bond, worth $20 million. Santander used smart contracts to process the bond. The company then bought the bond and transferred funds through the blockchain back to Ethereum. What’s important is that Santander used the public version of the Ethereum blockchain, meaning it used the same infrastructure you would use.

Under the hood of Bitcoin and Ethereum

How is Bitcoin minted?

New Bitcoins are minted by a process called “bitcoin mining". Bitcoin mining is based upon a concept called "proof of work,“ which involves computers solving difficult cryptographic puzzles that verify transactions made using Bitcoin. These verified transactions are subsequently added to the Bitcoin blockchain as a part of a “block” (a blockchain is just a chain of these blocks).

Bitcoin mining is integral to the Bitcoin network because it means that the transactions its users make on the network can be verified by other users on the network. In other words, it doesn’t need a centralized party, like a bank, to maintain the ledger. Since the blockchain’s ledger is distributed across all of the “nodes” in its network, anyone can verify that a transaction has occurred. This prevents scammers from making up transactions, as each user has an accurate version of the ledger.

Changing the data in any one block in the ledger would be really difficult—you’d have to alter the ledger in over half of the computers in the network (or control over half of the computing power in the network) and do so within the block verification time, which is around ten minutes. Given how expensive it would be to get so much computing power, the ledger is pretty safe.

Verifying each of these blocks rewards the miners with a certain amount of Bitcoin. The reward for the first block was 50 BTC, and the reward halves every four years or so. At the end of 2019, the reward is 12.5 BTC. This process is very computationally intensive, which is why most Bitcoin mining is done by specialized “mining rigs”—computers specifically designed to be efficient at mining Bitcoin.

Bitcoin has a hard-cap of 21 million Bitcoin. Once this cap is reached, no more will be produced. It’s estimated that the last Bitcoin will be mined in 2140.

How is Ether minted?

Ether, like Bitcoin, is also produced by mining, although the blocks are added every 15 seconds rather than every ten minutes. And, like Bitcoin, it runs on a proof of work system.

But the issue with proof of work is that it’s very expensive to pay for all of the mining computers, and it requires a great deal of energy. In addition, the mining process itself has become centralized, with mining “pools”—companies who control thousands of miners—controlling the bulk of the network.

That’s why Ethereum has been in a process of transition toward a different mining mechanism, called “proof of stake” since 2017. While proof of work relies on high-powered computers to solve very difficult puzzles, proof of stake avoids such an energy intensive process. “Validators” put up a certain amount of their cryptocurrency as a “stake. (Staking, essentially, means to hold cryptocurrency on the network.)

The algorithm then selects a validator to create a block—those who hold more cryptocurrency on the network are more likely to be selected to produce the next block. The block is then processed as normal and added to the blockchain. As miners no longer compete for blocks with their computing power, the process is far less energy-intensive, and could make Ether a greener alternative to Bitcoin in the future.

Still, the technology remains under development and hasn’t been implemented. For the purposes of trading and mining, Ethereum and Bitcoin are more alike than different.

Comparing Price

Bitcoin is about ten times larger than Ether by market cap. An individual Bitcoin is also worth considerably more. One Bitcoin costs around $7,200, and one ETH costs around $125. But despite the difference in price, research by cryptocurrency exchange Binance has shown that the prices of the two are correlated. Both currencies peaked in price in late 2017, with Bitcoin peaking at almost $20,000 and ETH at around $1,350.

Still, nothing’s certain in crypto-land. When Bitcoin fell toward the end of 2018, Ethereum fell even further. But when the cryptocurrency market briefly picked back up in 2019, Ethereum’s price started to become correlated with Bitcoin’s once again. Since then, the prices have remained highly correlated.

Most crypto indexes, such as the Galaxy Crypto Index Fund, still include Bitcoin and Ether as their primary components.

Summary Table

FeatureBitcoinEthereum
Consensus mechanismProof of workProof of work, to be supplemented or replaced by Proof of Stake.
ScopeDigital currency as an alternative to fiat currencyPlatform to build decentralized apps, one of which is a cryptocurrency
Market Cap as of December 2019$131,097,849,952$13,713,163,211

Why you might choose Ethereum over Bitcoin, and vice versa

Choosing Ethereum over Bitcoin is a little like choosing an apple over an orange: It depends on your taste.

If you’re into crypto solely to trade it, there’s little practical difference between Bitcoin and Ethereum, and it’s up to you to speculate on the price. Who knows what’ll happen: Ethereum is moving to a proof of stake chain, and that could affect the price. But, simultaneously, the mining difficulty of Bitcoin is due to halve in 2020 (the result of a rule hardcoded onto the Bitcoin protocol), and pundits say that’s supposed to pump up the price, too. Nobody can predict the future, or, more to the point, the future worth of these two technologies.

If you’re a developer, looking to build your business on the blockchain, then the Ethereum network is certainly a popular choice. Of course, this doesn’t mean that you’ll necessarily buy huge swaths of the platform’s native cryptocurrency.

If you still can not pick between these two coins as an investor: you do not have to. In fact, you might be interested in a recent development in Canada; Canada’s first registered cryptocurrency investing firm, First Block Capital, has crypto funds that contain both Ethereum and Bitcoin. It’s created a diversified portfolio called the Global Cryptoasset Fund. This fund is established as a mutual trust fund. The fund is composed of Bitcoin, Ethereum and Litecoin (another popular cryptocurrency). Specifically, its assets are divided into 51 percent BTC, 37 percent Ether and 12 percent Litecoin.

Still, diversifying your investments does not necessarily negate risk. Remember that investments are risky, and that cryptocurrency investments could be even riskier, if historically volatile prices are anything to go by. Never invest more than you’re willing to lose.

Last Updated July 1, 2020

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