More than ten years ago, cryptocurrencies came into being with Bitcoin. Since then, the market has exploded—there are more than 1,300 types of cryptocurrencies in existence, each with unique characteristics. But with so many options, how can you tell the differences between them?
In a crowded market, two are leading the pack—Bitcoin and Ethereum. By learning more about the technology behind the two cryptocurrencies, it may be easier to decide for yourself which one you’d like to purchase—if either.
Although Bitcoin (BTC) has now become a household name, only only 11% of Americans own any of the cryptocurrency. Many people have not purchased Bitcoins because they either don’t understand the technology, or they think it is too difficult to figure out.
At a very high level, Bitcoin is a virtual or digital currency that is created and secured using advanced cryptography—essentially, in this case, the making and solving of complex mathematical problems. Bitcoin can be stored, sent, and spent just like any other form of currency (with limitations), and it can now be used to buy many things from a coffee at Starbucks® to a mansion.
Bitcoins are created, stored, and transacted using blockchain technology. A blockchain is an unchangeable ledger of transactional information. In the case of Bitcoin and many other cryptocurrencies, this ledger is public, meaning anyone can look at it to see all past transactions.
Bitcoins are created through the process of keeping this ledger running and secured. Individuals around the world run a mining program that solves complex mathematical equations, and each time they solve one this proves that the Bitcoin blockchain is accurate and up to date.
As a reward for doing this work, the miners receive newly minted Bitcoins as well as transaction fees. This is called a proof of work blockchain.
Other types of cryptocurrencies use different methods to create coins and keep their blockchain running.
The total number of Bitcoins that can ever exist is 21 million, and as of Oct. 2019, about 18 million have been mined. Approximately three million to four million Bitcoins have been lost forever, due to people losing their private keys.
It is estimated that there are one million unique individuals mining Bitcoin around the world. After all the Bitcoins have been mined, miners will continue to receive transaction fees to incentivize them to keep the network running.
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How Bitcoins Are Used
Each Bitcoin is made up of 100 million Satoshis (named for Satoshi Nakamoto, the person or group of people who developed the cryptocurrency), the smallest unit recorded on the blockchain. To use Bitcoin for transactions, you’ll need to have a virtual wallet, which contains a private key made up of random numbers and letters. Your Bitcoin wallet doesn’t actually contain your Bitcoins—it holds your address—a virtual location made up of alphanumeric symbols that identifies you individually) and keeps track of all your transactions.
This key should never be shown to anyone and is only used when you are sending or selling your Bitcoins. Your wallet should also have a public key, which is where Bitcoins are sent when you buy or are gifted with them. If you tell someone your public key, they can go onto the Bitcoin blockchain ledger and view any past transactions you’ve made.
If you invest in Bitcoin through an exchange (a digital platform that puts buyers and sellers together to make a trade), you may not have access to your private key. This is why exchanges can be vulnerable to hacks. For this reason, it may not be a good idea to store large amounts of Bitcoin on exchanges. You can send and receive Bitcoins using your wallet, or your public and private addresses.
Who Controls the Bitcoin Blockchain?
In 2008, a person or group that went by Satoshi Nakamoto proposed the technology, and in 2009 he/they launched it. However, he/they doesn’t/don’t own Bitcoin. In fact, due to the way it’s designed, no individual or group entity owns or controls it.
Bitcoin isn’t controlled by a corporation, individual, or government. Instead, the blockchain continues to run through its network of miners. Changes and upgrades to the code can be proposed, and in order for them to be adopted, all of the miners need to implement them.
This is because the same software has to work consistently for all developers in order for Bitcoin to be maintained. The decentralized nature of Bitcoin is perhaps one of its most appealing features to many.
When it first launched, Bitcoin didn’t have a price. It wasn’t until someone was willing to purchase (transact) it that it began to establish a dollar value. In 2009, the first Bitcoins were sold, giving each bitcoin a price of $0.0009.
The first Bitcoin product transaction happened nearly ten years ago. In May of 2010, someone purchased two pizzas with 10,000 Bitcoins. Those bitcoins would be worth millions of dollars today. Since then, the price of Bitcoin has risen and fallen dramatically due to supply and demand, but overall the trend has been towards greater adoption and (mostly) higher value.
There have been a few major Bitcoin crashes, mostly sparked by hacking and illegal activities. The highest price to date was $20,089 in Dec. 2017.
The Future of Bitcoin
Although Bitcoin has become more widely used over the past decade, it has a long way to go before it becomes a mainstream currency. In the long run, it may become more of a financial asset than a means of purchase.
Its limited supply and decentralized nature make it more similar to gold than to a government-issued currency. Currently, some investors are wary of Bitcoin’s high transaction fees, volatility, and lack of regulation. While work is being done to improve these issues, what will ultimately become of Bitcoin is yet to be seen.
Launched in 2015 by Vitalik Buterin, Ethereum (ETH) is an open-sourced computing platform. The platform enables the formation of decentralized applications (ĐApps) and smart contracts—technology-enabled contracts. At a very high level, the details of an agreement can be programmed into a smart contract and enforced.
This contract transaction then appears on the Ethereum blockchain. And similar to the Bitcoin blockchain, the ethereum blockchain can also be used for payments and monetary transactions. Ethereum tokens are the cryptocurrency used for transacting on the Ethereum blockchain.
How Ethereum Is Made
Similar to Bitcoin mining, Ethereum uses a Proof of Work (PoW) algorithm—coded transactions for each new block made by miners—to keep its blockchain running and to create new tokens. However, the team is testing and considering changing to a Proof of Stake algorithm.
With Proof of Stake (PoS) mining, miners can validate block transactions based on how many coins they hold. The more Ethereum you hold as a miner, the greater your mining control. Although the Ethereum team had some doubts about whether moving to PoS was the best move, since they wanted to keep the Ethereum blockchain decentralized, but in the end they decided to make the switch—which should take place in the next year or two.
Unlike Bitcoin, the total amount of Ethereum is not stagnant. Instead, the amount mined grows and shrinks based on demand. Currently there is a limit of 18 million ETH that can be mined each year.
Last year, Vitalik Buterin proposed a total Ethereum limit of somewhere in the range of about 120 to 140 million. It has not yet been decided whether this limit will be implemented.
Buying and Using Ethereum
The process of using Ethereum is similar to Bitcoin. You hold an Ethereum wallet and transact using public and private keys.
The founder of Ethereum, Vitalik Buterin, first started working in the industry in 2011 when he founded Bitcoin Magazine. He published a paper proposing Ethereum in 2013 and launched the blockchain in 2015.
As an open-source blockchain, Ethereum welcomes input from contributors around the world. However, they do maintain a small team of developers within the Ethereum Foundation, which supports the project through research and education.
Although one BTC is much more expensive than one ETH, the two cryptocurrencies follow a very similar price trajectory. As one of the largest cryptocurrencies and nearly as famous as Bitcoin, when Bitcoin goes up or down in value, Ethereum tends to follow.
What Are the Key Differences Between BTC and ETH?
BTC and ETH have many similarities. Both blockchains offer anonymous transactions, and neither is controlled by a central authority. However, there are some key differences to note.
The main difference between BTC and ETH is their underlying technology and utility. Block times (how long it takes to produce a new block) are different, as are the programming languages. And although both BTC and ETH can be used for value transactions, the Ethereum blockchain was designed to have additional uses, such as contracts and applications.
Bitcoin is known for its slow and expensive transactions. It takes around 10 minutes to complete a Bitcoin transaction, while an Ethereum transaction only takes 12 seconds.
Another limitation that the Bitcoin blockchain has is its block limit—the amount of transactions that can take place on a single block. It takes about ten minutes to mine a new block on the Bitcoin blockchain, and each block can contain one MB of information.
As a result, the Bitcoin blockchain can handle three to four transactions per second. The Ethereum blockchain, however, does not have a block limit. The miners decide how many transactions are put into a block, and currently, it can handle about fifteen transactions per second.
Deciding which Cryptocurrency to Purchase
With first to market advantage, Bitcoin continues to hold the largest share of the cryptocurrency market. There is something to be said for brand recognition and reputation. However, that doesn’t mean that Bitcoin necessarily has the best technology, that it will prevail in the long run, or that it’s the only cryptocurrency you might purchase.
Most of the digital currency exchanges, wallets, and other products surrounding cryptocurrencies support both Bitcoin and Ethereum. Nobody knows which coin will grow more in value over time.
Ethereum has a few advantages over Bitcoin, with its quicker transaction times and smart contract abilities. However, debates over whether to cap the total amount of Ethereum and moving it to Proof of Stake mining may cause volatility in the coming years.
Getting Started with Your Portfolio
Maybe you are ready to start adding cryptocurrencies to your portfolio, or maybe you’re not. Either way, it may feel overwhelming when attempting to figure out what to invest in and how to keep track of your portfolio.
On SoFi Invest®, investors can trade their first cryptocurrency with as little as $10. Doing so will get them a bonus of $10 in Bitcoin. Unlike the stock market, investors can also trade cryptocurrencies like Bitcoin, Litecoin and Ethereum 24/7. Plus, SoFi takes security seriously and uses a number of tools to keep investors' crypto holdings secure.
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