The debate of which of the two crypto giants deserves the crown seems to only be heating up with each passing year. In this article, we’ll compare Bitcoin vs Ethereum point by point and explain what’s the difference between Bitcoin and Ethereum.
- Bitcoin vs Ethereum debate stems from the fact that both currencies serve as cornerstones of the current crypto market;
- Bitcoin is seeing more retail use and is even recognised as legal tender. Ethereum is more popular with institutional adopters;
- Will Ethereum overtake Bitcoin? The proponents of the flippening say so but the opponents of this idea stick to Bitcoin rightfully being at the first place.
What is Bitcoin?
To compare Bitcoin vs Ethereum, a general overview of both is in order.
Bitcoin is a decentralized and distributed open-source peer-to-peer ledger. It’s maintained by a network of nodes and miners, who add blocks to the blockchain and produce new bitcoins in a process called “mining”.
To make it work, it uses a network of independent nodes which keep a copy of the ledger.
Bitcoin was designed by a pseudonymous cypherpunk known as Satoshi Nakamoto. In late 2008 they published a whitepaper in the community’s newsletter, and in early 2009 the Bitcoin’s blockchain was launched.
Bitcoin was developed as a solution to the debasement of national fiat currencies and an alternative to a centralized permissioned financial system.
What is Ethereum?
Bitcoin served as a basis for many altcoins but they all had their limitations. For example, it was challenging to transfer data or execute conditional transactions on Bitcoin as it was.
In 2014, several members of the crypto community came together to develop the concept of a blockchain that would solve this. The people who were contributing to the novel “decentralized computer” were Vitalik Buterin, Gavin Wood, Anthony Di Iorio, Charles Hoskinson, Joseph Lubin and others.
So how does Ethereum work? In addition to being able to execute transactions on the blockchain like Bitcoin does, it supports smart contracts.
Smart contracts can be thought of as programs that utilize the Ethereum virtual machine (EVM) for computing. Instead of centralized servers, there are independent nodes across the world which perform these computations.
Bitcoin vs Ethereum
What is the difference between Bitcoin and Ethereum? The first thing to come to mind would be their use cases.
Bitcoin originally was meant to become a digital currency for daily use, and definitely is used as such even today. The reason that this use case went to the background is because in the current state the Bitcoin throughput is just 7 transactions per second.
Ethereum can also be used as a means of payment and is arguably better than BTC for that purpose. Its TPS is around 15, which is definitely higher than in Bitcoin, but unlike BTC, ETH was not designed for daily transactions.
Instead, the primary use for ETH is so called gas, transaction and call fees for using the EVM. It acts as an incentive for node operators and miners to keep the network secured, while means of payment is delegated to tokens.
Tokens are only a single example of utilizing smart contracts. These days there are a plethora of protocols built for lending and borrowing, exchanging and market-making — in other words, decentralized finance (DeFi).
When it comes to scaling the network, Bitcoin vs Ethereum are not that different. Since both networks have a relatively low throughput by default, there have been many attempts to solve this problem.
Bitcoin Core opted for a layer-two solution, Lightning Network (LN) for quick transactions.
In Lightning Network, transactions are performed almost instantaneously, and the record on the main blockchain is made only when the channel is closed. The main downsides to LN is it requires a degree of trust in the LN node operator and requires liquidity to work.
Ethereum faces a similar problem with layer-one throughput but it is even more acute, given that hundreds of apps use the main chain. Solutions like sharding or optimistic rollups exist today in the form of layer-two protocols and are only planned for Ethereum 2.0.
Ethereum 2.0 will take years of development, testing and implementation. Until then, layer-two solutions are the best way to bypass congestion and high fees.
As they are today, both Ethereum and Bitcoin use Proof-of-Work consensus algorithm. It means miners, who solve cryptographic hashes to propagate the chain, secure the network.
Why is Bitcoin better than Ethereum? There is one case which is often used to illustrate the immutability and decentralization of the Bitcoin blockchain.
If there is a consensus among miners, there can be changes made to the network. When the DAO was drained of funds, the Ethereum community decided to roll the network back to the state before the hack.
This action was widely regarded as controversial because it showed how the code can be overwritten on a whim of a part of the community. It even led to a contentious fork in Ethereum, called Ethereum Classic.
A very important facet of adoption is building a narrative around the currency, which outlines the use cases and the future. Since there is no common knowledge about these currencies on a mass scale, narrative acts as its substitute and an introduction.
The dominant narrative surrounding Bitcoin these days is “digital gold”: it is an asset with only 21 million units in existence. This immutable scarcity is what makes it attractive for storing value long-term, especially when the fiat currency emission can change.
Ethereum today is an inflationary currency but this can change: in August, the London hardfork will introduce new fee mechanics. Instead of going to the miner, the extra fee which pushes the priority of a transaction higher, will be burned.
Since Bitcoin was also described as “sound money” due to predictable emission, Ethereum pushed for an “ultra-sound money” narrative. While the name came about as a half-joke, the deflation itself is taken very seriously by the proponents.
Even Goldman Sachs seems to be backing Ethereum in this matter: “Given the importance of real uses in determining store of value, ether has a high chance of overtaking bitcoin as the dominant digital store of value”.
Finally, there is a “flippening” narrative driving the Bitcoin vs Ethereum debate. It refers to the possibility of Ethereum taking over Bitcoin’s position as the #1 cryptocurrency.
When it comes to adoption, Bitcoin is definitely in the lead in comparison to Ethereum. It has historically dominated the peer-to-peer market, and even became legal tender in El Salvador this year.
According to UsefulTulips.org, peer-to-peer markets are seeing more than $60 million trading volumes weekly worldwide. As for merchants, the Cryptwerk registry has more than 6,800 points of purchase that accept Bitcoin worldwide.
Ethereum has an edge in being adopted with users of the DeFi sector. Right now they are mostly retail investors but institutions are reportedly increasingly interested in DeFi, too.
For example, European Investment Bank uses Ethereum blockchain to issue two-year digital bonds. Bank of America, JPMorgan Chase and St.Louis Fed have all been on record stating they are researching DeFi instruments.
No matter which side of the Bitcoin vs Ethereum debate you are taking, everyone is equally concerned about future-proofing the tech. One of the topics of debate is the environmental impact of these currencies.
Proof-of-Work requires real electricity so the mining machines can compute hashes, and the hash rate directly corresponds to the amount of miners online. The higher it is, the more electricity is required to mine the next block, so when it grows, it’s exponential.
Bitcoin miners are moving to renewable and sustainable energy sources. In America, there is the Bitcoin Mining Council which provides public reports on the process of transition.
Ethereum is aiming to resolve this issue more fundamentally, by changing the consensus algorithm to Proof-of-Stake. The Beacon chain is already online, and the groundwork for PoW ETH and ETH 2.0 merger is being laid out.
Proof-of-Stake is often criticized for defeating the point of decentralization: the minimal amount to stake is 32 ETH ($56,509.44 at the time of writing). The rewards will be distributed on the basis of the stake size, accelerating the centralization of wealth.
Should I buy Bitcoin or Ethereum?
To compare the price dynamics of both currencies, let’s refer to the Bitcoin vs Ethereum price chart.
When it comes to volatility, Ethereum outperformed Bitcoin in both bull runs. It is understandable, given that its market capitalization is lower than Bitcoin’s, which makes it easier to move.
Higher volatility means both higher returns and losses, so proceed with this understanding if you are going to trade BTC or ETH. As for the long term, fundamental metrics which we described before have more weight than price difference between Bitcoin and Ethereum.
At the end of the day, both of the top currencies have their advantages and prospects, so allocation to both is the best option. No matter which you choose, don’t forget both Bitcoin and Ethereum can be bought and exchanged on ChangeHero!