Bitcoin vs. Ethereum: An Overview 

Ethereum (ETH) has received a lot of attention since its announcement at the North American Bitcoin Conference in early 2014 by Vitalik Buterin. As a natural consequence of its rising popularity, Ethereum has constantly been compared to Bitcoin (BTC), the first decentralized, digital currency. It is important for investors to understand the similarities and differences between Bitcoin and Ethereum.

Key Takeaways

  • Bitcoin signaled the emergence of a radically new form of digital money that operates outside the control of any government or corporation.
  • With time, people began to realize that one of the underlying innovations of Bitcoin, the blockchain, could be utilized for other purposes. 
  • Ethereum proposed to utilize blockchain technology not only for maintaining a decentralized payment network but also for storing computer code which can be used to power tamper-proof decentralized financial contracts and applications.
  • Ethereum applications and contracts are powered by Ether, the Ethereum network’s currency.
  • Ether was intended to complement rather than compete with Bitcoin, but it has nonetheless emerged as a competitor on cryptocurrency exchanges.

Bitcoin

Bitcoin was launched in January of 2009. It introduced a novel idea set out in a white paper by the mysterious Satoshi Nakamoto—Bitcoin offers the promise of an online currency that is secured without any central authority, unlike government-issued currencies. There are no physical Bitcoins, only balances associated with a cryptographically secured public ledger.

Over the years, the concept of a virtual, decentralized currency has gained some acceptance among regulators and government bodies. Although it isn’t a formally recognized medium of payment or store of value, it has managed to carve out a niche for itself and continues to coexist with the financial system despite being regularly scrutinized and debated.

At the start of 2017, Bitcoin’s market value accounted for close to 87% of the total cryptocurrency market. Ether then exploded from 4% of the total market to almost 32%, while Bitcoin’s market share dropped to 38% in mid-2017, but since then Bitcoin’s share has recovered to nearly 70% of the market, while Ethereum has dropped to 8%.

Ethereum

Blockchain technology is being used to create applications that go beyond just enabling a digital currency. Launched in July of 2015, Ethereum is the largest and most well-established, open-ended decentralized software platform.

Ethereum enables the deployment of smart contracts and decentralized applications (dapps) to be built and run without any downtime, fraud, control or interference from a third party. Ethereum comes complete with its own programming language which runs on a blockchain, enabling developers to build and run distributed applications.

The potential applications of Ethereum are wide-ranging and are powered by its native cryptographic token, Ether. In 2014, Ethereum launched a presale for Ether, which received an overwhelming response. Ether is like the fuel for running commands on the Ethereum platform and is used by developers to build and run applications on the platform.

Ether is used mainly for two purposes—it is traded as a digital currency on exchanges like other cryptocurrencies, and is used on the Ethereum network to run applications. According to Ethereum, it can be used to “codify, decentralize, secure and trade just about anything.” One major project in the Ethereum ecosystem is Microsoft’s partnership with ConsenSys which offers “Ethereum Blockchain as a Service (EBaaS) on Microsoft Azure so Enterprise clients and developers can have a single click cloud-based blockchain developer environment.”

Key Differences

While both Bitcoin and Ethereum are powered by the principle of distributed ledgers and cryptography, the two differ technically in many ways. For example, Ethereum transactions may contain executable code, while data affixed to Bitcoin transactions are generally only for keeping notes. Other differences include block time (Ethereum transaction is confirmed in seconds compared to minutes for Bitcoin) and the algorithms that they run on (Ethereum uses ethash while Bitcoin uses SHA-256). 

Bitcoin and Ethereum differ, however, in their overall aim. While Bitcoin was created as an alternative to national currencies and is thus a medium of exchange and a store of value, Ethereum was intended as a platform to facilitate immutable, programmatic contracts, and applications via its own currency. 

Bitcoin and Ether are both digital currencies, but the primary purpose of Ether is not to establish itself as an alternative monetary system (unlike Bitcoin) but to facilitate and monetize the operation of the Ethereum smart contract and decentralized application (dapp) platform.

Ethereum is another use-case for a blockchain that supports Bitcoin, and theoretically should not really compete with Bitcoin. However, the popularity and rising market capitalization of Ether brings it in competition with all cryptocurrencies, especially from the trading perspective. Currently, the market cap of Ether is more than XRP and Litecoin, although it’s still far behind Bitcoin. On the whole, Bitcoin and Ethereum are different applications of blockchain technology that are both gaining traction, although the intent behind the projects is distinct.

Special Considerations

The attempts to understand Bitcoin more closely resulted in an increasing focus on the blockchain—the technology that powers it. Blockchain is not just the hottest topic in the fintech world, with many industries racing to implement it in order to achieve the efficiency gains that it enables.

A blockchain is a public ledger of all transactions that have ever been executed in a given system. It grows constantly as new blocks of transactions are added to it. The blocks are added to the blockchain in linear, chronological order through cryptographic functions which prevent changing the data stored inside the blocks. The blockchain thus stands as a tamper-proof record of all transactions on the network and is accessible to all participants. The blockchain offers a chance to work at lower costs with greater security, transparency, and efficiency.