More than 13 years ago, Bitcoin emerged as the first blockchain-based cryptocurrency — and Ethereum wasn’t far behind. While Bitcoin (BTC) was created as a store of value, Ethereum (ETH) was established as a more innovative platform aimed at revolutionizing the finance world through the use of smart contracts and DeFi apps.
Although the crypto market has since exploded — with thousands of different cryptocurrencies to choose from — Bitcoin and Ethereum are still the two market leaders. So it can be valuable to understand how they started, and what these two crypto greats each bring to the table for investors.
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What Are the Key Differences Between Bitcoin and Ethereum?
BTC and ETH have many similarities. Both blockchains offer anonymous transactions, and neither is controlled by a central authority like a bank or government. However, there are some key differences to note. The primary purpose of ETH is not to create an alternative monetary system but to facilitate and monetize the operation of Ethereum’s DeFi capabilities, including smart contracts, dApps, NFTs, and even the creation of new coins via ICOs.
Blockchain Design
The main difference between BTC and ETH is their underlying technology and utility. Block times (how long it takes to produce a new block on the blockchain) are different, as are the programming languages.
And although both BTC and ETH can be used for value transactions, the Ethereum blockchain is programmable and was designed to have additional DeFi uses, such as contracts and applications.
Transaction Times
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.
Block Limit
Another limitation is Bitcoin’s block size — the amount of transactions that can take place on a single block. It takes about 10 minutes to mine a new block on the Bitcoin blockchain, and each block can contain 1 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 15 transactions per second.
Bitcoin Fundamentals
Although Bitcoin (BTC) has now become a household name, 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 (BTC) is a virtual or digital currency that is created and secured using advanced cryptography — essentially, in this case, the 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.
Bitcoin is based on blockchain technology. A blockchain is a a transparent, digital ledger of transactions. In the case of Bitcoin and many other cryptocurrencies, this ledger is public, meaning anyone can look at it to see past transactions. It’s also considered a distributed ledger, because it’s maintained by a global network of nodes, or miners, who compete to verify Bitcoin transactions and earn rewards.
Bitcoin is created through the process of keeping this ledger running and secured. Individuals around the world, or miners, solve complex mathematical equations, to ensure that the Bitcoin blockchain is accurate and up to date. As a reward for doing this work, the miners receive newly minted Bitcoin as well as transaction fees. This is called a proof-of-work (PoW) consensus mechanism.
PoW has been widely criticized as being unsustainable because it requires vast amounts of energy to run computer networks — known as mining rigs — to validate transactions and mint new BTC.
Other types of cryptocurrencies use different methods to create coins and keep their blockchains running.
The total number of Bitcoin that can ever exist is 21 million, and as of March 2022, nearly 19 million have been mined. Approximately three to four million Bitcoin have been lost forever, due to people losing their private keys.
It is estimated that there are over 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, a pseudonym that reflects the person or group of people who developed Bitcoin in 2009). To use Bitcoin for transactions, you’ll need to have a crypto wallet, which allows you to safely store your crypto.
A crypto wallet doesn’t actually contain your Bitcoin or other cryptocurrencies. These digital wallets are simply where you store and secure your proof of ownership using pairs of public and private keys that give you, and only you, access to your crypto.
The private key should never be shared with anyone and is only used when you are sending or selling your Bitcoin. 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, but you can decide based on which type of exchange or app you use to trade BTC. 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 the name Satoshi Nakamoto proposed the idea of blockchain technology, and in early 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 the Bitcoin blockchain because it’s decentralized.
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, and it helped set the stage for the emergence of decentralized finance or DeFi, which is disrupting the models and institutions of traditional finance as we speak.
Historical Highlights
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 in May of 2010, when someone purchased two pizzas with 10,000 BTC. 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 over $68,000 in November 2021.
As of March 16, 2022, one BTC was worth about $39,615.
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 fiat 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.
Ethereum Fundamentals
Launched in 2015 by Vitalik Buterin, Ethereum (ETH) is also built using blockchain technology, but as an open-sourced computing platform. Ether (ETH) is the native token.
The platform enables the formation of decentralized applications (dApps) and smart contracts — a digitally facilitated agreement between two parties that’s written in code into the blockchain technology. The code automatically executes the terms of the contract when specific conditions are met by all parties. The chief innovation of smart contracts is that there is no third-party required to enforce the terms of the agreement.
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 of data confirmed by miners — to keep its blockchain running and to create new tokens. However, Ethereum has announced a plan to migrate to a proof-of-stake (PoS) algorithm.
With PoS, users can validate blocks of transactions based on how many coins they hold. The more ETH you hold as a miner, the greater your mining control.
Unlike Bitcoin, the total number of ETH is not fixed. Instead, the amount mined grows and shrinks based on demand. Currently there is a limit of about 18 million ETH that can be mined each year, simply based on the amount of time it takes for miners to confirm transactions.
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.
One key difference between BTC vs. ETH is that you need to hold ETH in order to execute transactions on the Ethereum blockchain. Because every Ethereum transaction consumes computational resources, transactions come with a cost. Gas is the fee needed to conduct an Ethereum transaction.
Ethereum fees can only be paid in Ether (ETH), the native currency of Ethereum. ETH Gas prices are denominated in a unit known as gwei, which is a term used to refer to an amount of ETH equal to 0.000000001 ETH.
Ethereum’s Team
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, programmable 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.
Pricing
As of March 16, 2022, one BTC was worth $39,615 and one ETH was worth $2,679. Although BTC is worth more than 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.
Which to Buy? Bitcoin or Ethereum?
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.
With its quicker transaction times and smart contract abilities, the Ethereum network may have some DeFi advantages over Bitcoin. However, debates about whether to cap the total amount of Ethereum, and the merits of moving Ethereum to a PoS protocol, may cause volatility in the coming years.
The bottom line is that investors may find BTC or ETH equally appealing (or not), depending on their own goals and views of the future of crypto.
The Takeaway
When comparing Ethereum vs. Bitcoin, the question is not which of these two leading cryptocurrencies is better, but rather what are the strengths and differences they each may offer investors? While ETH and BTC are both digital currencies, i.e. both are decentralized and operate using distributed ledger technology (a.k.a. blockchain), the underlying architecture and the goals of each project are completely different.
While Bitcoin (BTC) was created as a means of payment and a store of value, the main purpose of ETH was to support and monetize the operation of Ethereum’s DeFi capabilities, including smart contracts, dApps, NFTs, and more. Could the evolution of the Ethereum platform to a proof-of-stake system — sometimes called Ethereum 2.0 – shift its long-held position as the #2 crypto on the market? It’s hard to say, but something that investors and crypto analysts will be watching closely.
Photo credit: iStock/Ridofranz
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