Bitcoin vs. Ethereum: Understanding the Difference

More and more cryptocurrencies are coming to market, and they all possess different characteristics and capabilities. Even the two most well-known and popular cryptocurrencies — Bitcoin and Ether (the currency used on the Ethereum platform) — have some similarities, but are fundamentally different in their underlying design and the value propositions they pose to potential investors.

Here are some things to keep in mind when comparing Bitcoin and Ether as potential investments.

History and Development

Bitcoin, which emerged in 2009, is the world’s breakthrough cryptocurrency. Bitcoin (BTC) is a decentralized currency that was introduced as an electronic peer-to-peer cash system; due to its volatility, however, many crypto enthusiasts trade Bitcoin as a speculative asset or view it as a store of value (often referring to bitcoin as “digital gold”).

As an asset, Bitcoin is not secured by any underlying central authority, making it unlike any government-issued currency. It is produced through an energy-intensive digital “mining” process — in which computers solve complex computational puzzles to unlock a set amount of the cryptocurrency. Bitcoin miners also receive fees, in the form of small amounts of bitcoin, to confirm transactions on the Bitcoin network.

The maximum amount of bitcoin that will ever be produced is 21 million, making it a truly scarce resource. (There are currently more than 18 million Bitcoin in circulation.) Bitcoin balances are maintained on the network’s cryptographically secured public ledger, known as the blockchain.

Ethereum, which emerged in 2015, is a cryptocurrency network known as the “the world’s programmable blockchain.” The Ether (ETH) cryptocurrency — which is second in crypto market capitalization to Bitcoin — is not only held and traded by investors as an asset and store of value, but is also used by developers on the Ethereum network to create and run decentralized applications or “dapps.”

Like the Bitcoin blockchain, the Ethereum network operates without a centralized authority (with all Ether balances and activities maintained on a cryptographic ledger). However, Ethereum also operates as software running on a network of computers; Ethereum has its own coding language, and can support the programmatic execution of transactions through so-called smart contracts (which power dapps).

The ability to support smart contracts, dapps, and even other cryptocurrencies sets the Ethereum network apart from Bitcoin and many other blockchain networks. And while Ether is mined through Ethereum in a similar manner to mining the Bitcoin blockchain, there's no limit or cap on how much ETH can enter the market (as its supply increases every year). The mining process also consumes less electricity since Ethereum is faster than Bitcoin’s network.

What to Know

Today, both Bitcoin and Ether (among many other cryptocurrencies) are banned in China and a number of other countries. In addition, neither Bitcoin nor Ether are widely accepted as forms of payment — though El Salvador recently moved to accept Bitcoin as legal tender, and other nations may follow suit. Also, both Bitcoin and Ether see wild swings in value, with price volatility viewed as an inherent feature of both assets; Bitcoin’s price has waxed and waned in a range of more than $30,000 just this year, for example, with many of the fluctuations tied to news of its potential adoption as a payment mechanism.

With Ether, payment acceptance for the cryptocurrency is less of a day-to-day concern given that Ethereum as a programmable blockchain that supports a broad variety of apps and smart contracts.

Many holders of Ether, for example, are using it to pay fees for their activities on the platform: Ether is referred to as “gas” in some contexts, as it is the “fuel” for creating new tokens or decentralized apps on the network. Rising interest in the Ethereum network — and more specifically in the building of decentralized finance, or “DeFi,” applications — has required more and more developers to buy Ether for the applications, thus causing “gas” prices to go up.

DeFi is a collective term for financial products and services that are accessible to anyone with an internet connection. DeFi developers aim to reimagine traditional financial systems, such as banks and exchanges, using cryptocurrency as the foundation.

Regardless of price, investors are buying fundamentally different assets when purchasing Bitcoin compared to Ether. Bitcoin is the best-known and most established cryptocurrency, and it has the first-mover advantage for gaining widespread acceptance as a store of value (similar to gold) or payment mechanism. Ether, on the other hand, was purpose-built for use inside the Ethereum network of applications and services — including DeFi applications, which are a booming area of interest.

Ultimately, Bitcoin and Ether are not in competition with one another. To buy and hold either asset is to simply make a bet on its future: With Bitcoin, an investor is betting that the cryptocurrency will grow in value as an alternative asset (and possible payment method for digital transactions); with Ether, an investor is betting that continued growth and use of the Ethereum network will drive up the value of the cryptocurrency. Investors can bet on both futures, and explore the potential of other cryptocurrencies, as they incorporate crypto into their diversified portfolios.

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