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 are often compared to each other, and on the surface they share many similarities.
But 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, while bitcoin (lower case b) and Ether are the cryptocurrencies used by these systems. When comparing the two ecosystems, we must be clear whether we are comparing the technology, the resources the technology produces, or both.
In this article we will refer to the systems by their names and the currencies by their stock symbols. For bitcoin, it’s BTC. For Ether it is ETH.
How Bitcoin and Ethereum Compare
Bitcoin and Ethereum are fundamentally different because the former was designed to enable decentralized finance, while the latter was designed to also enable apps and contracts.
While Ethereum enables 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 an upcoming change in the way Ethereum works will mean the way they do it is different, with implications for speed, sustainability and availability.
The difference lies in what is 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 is known as the “double spend” problem.
A $10 bill, once used, no longer belongs to you, so you cannot use it again. A BTC is a string of data code, and can be copied ad infinitum. In theory, this means you can make yourself as rich as you want by making copies of your BTC and spending it over and over again.
But when you send a BTC to someone, your copy is destroyed and a new version of it is created in the recipient’s account.
All of this is recorded on a distributed ledger for the world to see. Since anyone can see from the copies of the ledger that you spent your BTC, you can’t try to use a copied version of it – the consensus among ledgers would be that you were trying to make a quick one.
Processing one transaction is hard enough, but you actually have to modify each subsequent transaction as well since each one references its predecessors.
This would require an incredible amount of computing power and effort, plus you would need to control 51% of the distributed ledgers on the network to get consensus necessary to bury the fake history of transactions on the blockchain and take your newly mined crypto as a reward.
Bitcoin and Ethereum use different consensus mechanisms.
Bitcoins are called proof of work while Ethereum is moving towards a proof of stake consensus mechanism.
Proof of work
This consensus mechanism asks participants to perform complex calculations for the chance to be the user who gets to validate a bunch of transactions and add them to the blockchain – and earn a certain 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 for these strings, so those with the most powerful 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.
To get a validated copy of the ledger validated and added to the block, you would 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 organizations – ie those who can afford the hardware and power needed to run it.
Proof of work systems like Bitcoin have received a lot of criticism for the amount of energy used by the hardware involved. Bitcoin currently uses 19 terawatt hours (TWh) of electricity per year. That is just under the amount used by the entire nation of Norway.
Proof of effort
This consensus mechanism asks participants to stake their own money for the ability to validate transactions and add a block to a blockchain, instead of performing complex calculations.
The more crypto someone stakes, the greater their chances of being chosen to validate a block of transactions onto a blockchain and earn a certain amount of crypto. The system also discourages bad actors with financial fines.
Proof of Stake stacks the deck in favor of people with more money, but protects against people adding fake records to the blockchain because they have to stake at least 51% of the money in the network to control a consensus.
Without the need for powerful computing hardware, proof of stake is considered a more environmentally friendly consensus mechanism than proof of work.
Decentralized payments vs. decentralized software
Bitcoin was developed solely to facilitate decentralized 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 decentralized 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 when certain conditions are met.
For example, Account A will release Asset X when it has received Asset Y from Account B. This can be used to make property sales and transfers or ownership faster and less prone to fraud.
A dApp is an application that is not controlled by a central authority. Twitter is an example of a centralized 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 optimize for ad revenue, a problem it says users of centralized apps suffer from.
So while you can say that Bitcoin is bigger but Ethereum is faster, the two are not strictly in competition with each other because they are designed to do different things. BTC and ETH, on the other hand, are directly comparable.
Price volatility
BTC has certainly been more valuable than ETH, peaking at around $68,000 in November 2021 (before plunging below $20,000 in May 2022). ETH on the other hand peaked around $4,800 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 data from coinmetrics.io.
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 value of cryptoassets fell to around $900 billion – down from $3 trillion.
The cryptocurrency market is unregulated in Australia, although consumer organizations such as CHOICE are lobbying for greater protection for those who fall victim to fraud and large losses. For now, the Australian Securities and Investments Commission (ASIC), through the Moneysmart website, advises crypto investors to exercise extreme caution when trading 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.
