Bitcoin and Ethereum are the Coca-Cola and Pepsi of the cryptocurrency space. As the number one and two biggest names in the market, they’re often compared with one another and on the surface they share many similarities.
However, from their premise to price differences, the two concepts are very different. Here’s a look at how they compare.
Before we begin…
Bitcoin and Ethereum are systems, whereas bitcoin (lower case b) and Ether are the cryptocurrencies used by those systems. When comparing the two ecosystems, we need to be clear whether we’re comparing the technology, the assets the technology produces or both.
In this article, we will refer to the systems by name and the currencies by their stock symbols. For bitcoin, that’s BTC. For Ether, it’s ETH.
How Bitcoin and Ethereum compare
Bitcoin and Ethereum are fundamentally different because the former was designed to enable decentralised finance while the latter was designed to also enable apps and contracts.
While Ethereum does enable payments using its internal ETH cryptocurrency, its scope is much broader than Bitcoin’s – by design.
Both systems use blockchain technology to validate and record transactions, but a forthcoming change to the way Ethereum works will mean the way in which they do it is different, with consequences for speed, sustainability and accessibility.
The difference lies in what’s known as a ‘consensus mechanism’.
What is a consensus mechanism?
A consensus mechanism is a computer algorithm that makes a blockchain viable. It does this by solving what’s known as the ‘double spend’ problem.
A $10 note, once spent, no longer belongs to you, so you can’t spend it again. A BTC is a string of computer code, and could be copied infinitely. In theory, this means you could make yourself as rich as you liked by simply making copies of your BTC and spending it over and over again.
However, when you send someone a BTC, your copy is destroyed and a new version of it is created in the recipient’s account.
This is all recorded on a distributed ledger for the world to see. Since everyone can see on their copies of the ledger that you’ve spent your BTC, you can’t attempt to spend a copied version of it – the consensus of ledger holders would be that you were trying to pull a fast one.
Doctoring one transaction is hard enough, but you’d actually also have to change every subsequent transaction since each one references its forerunners.
This would take an incredible amount of computing power and effort, plus you’d need to control 51% of the distributed ledgers on the network to get the consensus necessary to etch your fake history of transactions onto the blockchain and take your freshly mined crypto as reward.
Bitcoin and Ethereum use different consensus mechanisms.
Bitcoin’s is called proof of work while Ethereum is moving towards a proof of stake consensus mechanism.
Proof of work
This consensus mechanism asks participants to carry out complex computations for the chance to become the user who gets to validate a bunch of transactions and add them to the blockchain – earning a set amount of crypto in the process.
The ‘work’ involves guessing, as closely as possible, a unique, alphanumeric string of 64 characters.
There are trillions of possible combinations to these strings, so those with the most powerful computer hardware can make the most guesses per second within the 10-minute window of opportunity, and have the best chance of being the chosen validator.
In order to get a doctored copy of the ledger validated and added to the block, you’d need to control at least 51% (a consensus) of the computing power of a network, which would be astronomical. This is how the consensus method prevents fraud.
This work used to be done by hobbyists at home, but the processing power needed increases over time, so the ‘mining’ process is now the reserve of companies and specialist organisations – i.e. those who can afford the hardware and the power needed to run it.
Proof of work systems such as Bitcoin have drawn a lot of criticism for the amount of energy expended by the computer hardware involved. Bitcoin currently uses 19 terawatt hours (TWh) of electricity per year. That’s just under the amount used by the entire nation of Norway.
Proof of stake
This consensus mechanism asks participants to stake their own money for the chance to validate transactions and add a block to a blockchain, rather than carry out complex computations.
The more crypto someone stakes, the greater their chances of being chosen to validate a block of transactions to a blockchain and earning a set amount of crypto. The system also discourages bad actors with financial penalties.
Proof of stake stacks the deck in favour of people with more money, but protects against people adding fraudulent records to the blockchain because they’d need to stake at least 51% of the money in the network to control a consensus.
Without the need for powerful computer hardware, proof of stake is considered a more environmentally friendly consensus mechanism than proof of work.
Decentralised payments vs. decentralised software
Bitcoin was developed solely to facilitate decentralised payments, that is, to allow people to send and receive payments without an intermediary such as a bank. Ethereum, on the other hand, was designed to do more than just send and receive ETH.
Using blockchain, which provides an immutable record of transactions, Ethereum was designed to facilitate decentralised software such as smart contracts and distributed apps (dApps).
A smart contract is a digital agreement between two or more parties that will execute itself once certain conditions are met.
For example, Account A will release Asset X once it has received Asset Y from Account B. This could be used to make property sales and the transfer or ownership faster and less liable to fraud.
A dApp is an application that isn’t controlled by a central authority. Twitter is an example of a centralised app, with users relying on it as an intermediary to send and receive messages. As such, users play by the rules it enforces and the algorithm it uses to control content.
A dApp is distributed on a blockchain, with users able to send and receive data directly without the need for an intermediary. Peepeth is a Twitter-like dApp. It claims that as an app it doesn’t optimise for advertising revenues, an issue it says users of centralised apps suffer from.
So while you could say that Bitcoin is larger, but Ethereum is faster, the two aren’t strictly in competition with each other because they’re designed to do different things. BTC and ETH, on the other hand, are directly comparable.
BTC has certainly been more valuable than ETH, peaking at around $US68,000 in November 2021 (before plummeting to under $US20,000 in May, 2022). ETH on the other hand peaked at around $US4800 in November 2021..
Despite the stark difference in their values, the two cryptocurrencies’ values have historically shown strong positive correlation to each other, trending between 0.7 and 0.8 for much of that time (with 1.0 representing the strongest possible correlation), according to coinmetrics.io data.
Regardless, and as is the case with all cryptocurrencies, BTC and ETH are both volatile. Prices are unpredictable and prone to crashes, as we saw in May of this year when the market capitalisation of crypto assets fell to around $US900 billion — down from $US3 trillion.
The cryptocurrency market is unregulated in Australia, although consumer advocacy organisations, such as CHOICE, are lobbying for greater protections for those who fall victim to scams and huge losses. For now, the Australian Securities and Investments Commission (ASIC), through its Moneysmart website, advises crypto investors to be exceedingly cautious when dealing in this volatile asset.
This article is not an endorsement of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency as an investment class.
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