Ethereum vs. Bitcoin

Have you ever wondered which is better: Ethereum vs. bitcoin?  Much like the question who reigns supreme: Microsoft vs. Apple, or Batman vs. Superman, this may be a question that has been keeping you up at night. If that is the case, we are here to help you.  After all, getting a good night’s sleep is very important!

With the rising popularity of cryptocurrencies, this age-old question (actually not that old) has been on the minds of many.  Whether or not we are familiar with cryptocurrencies, we have all heard of Bitcoin. But what about Ethereum vs bitcoin? Though not as well-known, Ethereum has long been number two in terms of market capitalization.  What makes it so popular, and is it a good alternative to Bitcoin?  Before we answer those questions, let’s look into the background of both.

Bitcoin’s Background

We won’t go into a long detailed explanation of the inner workings of bitcoin.  After all, we have already covered that in our How to Explain Bitcoin to Your Family article. But here are some if the basics.  Bitcoin was launched in 2009 by someone or a group of someones by the name of Satoshi Nakamoto. It was the first cryptocurrency ever created and the first use of blockchain technology.  

It was meant to be a digital currency that would act as an alternative to fiat currencies.  Unlike fiat, which is backed by a government or central bank, bitcoin is secured without the need for any central authority. 

Transactions using bitcoin are recorded on a transparent ledger, which means that at any point in time anyone can see all of the transactions that are taking place using bitcoin.  This differs from a bank where we do not have access to the ledgers being kept behind the scenes.  

While the ledger does record all transactions taking place using bitcoin, it offers anonymity because it doesn’t say who owns these balances and who are behind these transactions.  

The transactions recorded on the ledger are stored on a decentralized network. Every computer participating in this system keeps a copy of this ledger, also known as the blockchain.  This means that the money is secure because the database is spread out over a network of thousands of computers, so it cannot be easily hacked or corrupted.

Bitcoin’s Popularity

So just to recap.  Why is bitcoin so popular? It is a viable alternative to fiat currency because it is a form of money that no government or bank can control.  You have complete control of your money because only you alone can access your money.  This means the bank can’t freeze funds and the government cannot confiscate it. It cuts out the middleman in the transfer of money, making it cheaper to use than traditional wire transfers or money orders. Its digital nature means that you can add layers of programming on top of it and turn it into smart money.  It opens up digital commerce to billions of people around the world who may not have access to a banking system.

How so? The only requirement to get started is a mobile device.

Ethereum’s Background

So now, what about Ethereum?  Well, a little bit about its background.  When it comes to the Ethereum vs bitcoin debate, Ethereum is actually more than just a digital currency.  It is a decentralized platform that is used by developers to write applications that use blockchain technology.  Ethereum was launched in 2015. 

Ethereum was actually born from bitcoin.  A young programmer by the name of Vitalik Buterin came up with the idea.  While trying to build applications on the bitcoin blockchain, he faced various shortcomings, but saw that the blockchain technology had more potential than just financial applications.  As a result, he set out to create a blockchain that could support more computations.  

So you see, the byproduct of the invention of bitcoin was blockchain technology.  Bitcoin is actually just an application built on the blockchain system.  However, bitcoin is only able to understand a limited number of commands. The commands consist of transferring money securely from one party to another.  Essentially, it is a digital payment system.

The Power of Ethereum

Ethereum takes this one step further by creating a decentralized platform by which developers can write their own more complex applications.  These can then be executed by smart contracts on the Ethereum network. You could call Ethereum, Blockchain 2.0.  

Unlike bitcoin, which uses a restrictive programming language designed to understand only a few commands, Ethereum uses its own programming language called Solidity.  Solidity is more complex and can support a broader set of computational instructions.  With its own complex programming language, Ethereum makes it possible for blockchain technology to be many applications. Yes, that means applications that aren’t money-related.  And it allows for more complex smart contracts to be implemented. 

Ether (ETH) As A Digital Currency

Ethereum does have its own currency as well.  We know this currency as Ether or ETH.  When people talk about the price of Ethereum, they are really talking about Ether.  Ether is a digital currency that trades on exchanges like other cryptocurrencies. You can use the currency to pay for goods and services. We can also transfer the currency from one user to another of exchange it for fiat currency or bitcoin.  And as we mentioned at the outset, it currently has the second-highest market cap after bitcoin.  

Ether also serves a second purpose.  It is the ‘fuel’ that is used to create and run applications on the Ethereum network.  Ether is used to pay for transaction fees and computational services associated with enforcing a smart contract on the Ethereum platform.  

So now that we have given a little bit of background on each of these cryptocurrencies, let’s talk about their similarities and differences.

Ethereum vs Bitcoin:  How are they similar?

Bitcoin and Ethereum are similar in a number of ways. Both are digital currencies that we can trade on online exchanges and store in digital wallets.  They are also both decentralized. This means that neither are controlled by a government or central authority. Transactions are recorded on a distributed ledger by means of blockchain technology.  Both use miners to verify the transactions and provide ‘proof of work’ for the network.

Ethereum vs Bitcoin – Key Differences

To break it down, we have also included some of the key differences between Ethereum and Bitcoin.

Concept

In terms of concept, Bitcoin was conceived to be a digital form of currency. This currency could not be controlled by any government or any corporation.  It was meant to act as a store of value and a medium of exchange.  

Ethereum, on the other hand, was meant to be more than just a digital currency.  It was created to be an open-source platform that builds on the blockchain technology of bitcoin by allowing smart contracts and decentralized applications (dApps) to be created.  

Uses

Because Ethereum utilizes smart contracts in its transactions,  it has found uses in a number of areas. Some of these include financial agreements such as options contracts or coupon-paying bonds, as a platform to execute bets and wagers, to fulfill employment contracts, or to act as a trusted escrow in the purchase of big-ticket items.  These are just a few examples. With smart contracts, the potential is there to replace legal agreements, financial agreements, and even social agreements.

Unlike bitcoin, which has limited use and scope and is static in nature, Ethereum has the potential to improve in its capability and expand in its uses as computational power increases, and the system evolves.  Already, Ethereum has plans to switch from Solidity to the even more complex programming language of Viper.  

Transactions

A key way in which Ethereum differs from bitcoin is in how transactions are handled.  Ethereum was the one to introduce smart contracts which added another layer of complexity and programmability to transactions.  By means of a smart contract, users can set the conditions by which a transaction will occur.   

Whereas transactions on bitcoin are manual, transactions on Ethereum are programmable and automatic.  The following example illustrates the difference.

A transaction using bitcoin might look like this:

Alex sends 5 bitcoins to Bob.

A transaction on Ethereum using a smart contract would look like this:

Send 5 ETH from Alex to Bob if the date is 05.01.2020 and the balance is 10 ETH

With a smart contract, every payment is always guaranteed as long as conditions are met. This is because they are immutable.

Speed

It currently takes, on average, about 10 minutes to verify and mine a block of bitcoin transactions.  Transactions on Ethereum average about 13 s. There is a strict limit on the block size of bitcoin. This limit is 1MB. In comparison, Ethereum has no strict limits. The miners can set the limit. The result? Faster processing times.

Transactions Fees

In bitcoin, transaction fees are based on a number of factors including the size in kilobytes of the data in your transaction.  In addition to earning the reward for mining the block of transactions, miners receive the fees attached to the transactions.  So miners will tend to prioritize those transactions with the highest fees attached.  The fee acts as an incentive to include the transaction in the block, so paying the highest possible fee will push the transaction to the front of the queue.  The amount of congestion on the network as well as network capacity also affects the fees.

We call transaction fees on Ethereum ‘gas’. This is because they power every operation on the network.  We can calculate the gas by looking at the storage needs, the complexity of the action, and the bandwidth required.  It is the fee required to complete a transaction or execute a contract on the Ethereum platform. The fees are used to compensate for the computing power necessary to process and validate transactions and are paid to the miners for their services.  

It is important to note that the fees paid for both networks are not consistent. They vary according to market demand and network capacity.  And in both cases, attaching higher fees to the transaction will help to prioritize it in the queue.  

In comparing Ethereum vs bitcoin in terms of transaction fees, bitcoin fees are higher.  Current fees average around $1.19 for bitcoin vs. $.20 for Ethereum.  This is again due to bitcoin’s strict limit on block size, it’s popularity and its limited network capacity due to its proof of work mining algorithm.

bitcoin vs. ethereum

Currency

Bitcoin was created specifically to be a currency to be used as a store of value and a medium of exchange.  Ether was created to fuel the Ethereum network but has also emerged as a digital currency.  Like bitcoin, it trades on exchanges, and its price goes up and down with market conditions.

But as a store of value, the Ethereum vs bitcoin debate favors bitcoin, because it is more valued by investors due to its limited supply.  The creator of bitcoin has set a cap on the supply which is 21 million coins. In comparison, the supply of ETH is unlimited. But we can still expect it to slow down over time.   

However, those who buy bitcoin tend to be “hodlers”, in that they are looking to buy and hold for the long term, believing that bitcoin’s value will only go up as its supply dwindles in the future.  In fact, bitcoin is unique in that it has halving events that occur periodically and means that the number of new bitcoins released is reduced.  Its static nature makes it valuable and helps it earn its reputation as “digital gold”.  Those who buy bitcoin tend to use it, not so much as a medium of exchange, but as an investment for the future.  This is something that Ether cannot, and is not, trying to emulate.

Price history

As of May 7, 2020, bitcoin sits at a price of $ 9,835 USD with a market cap of about $180 B.  This compares to the Ethereum price of $212 USD with a market cap of $23.5 B.  So in terms of market cap, bitcoin is clearly the leader.

Bitcoin’s price reached an all-time high of $20,089.00 USD on Dec 17, 2017, whereas Ethereum’s all-time high was $1432.88 USD on Jan 13, 2018.  Looking at recent price history charts, both have followed a similar pattern, peaking at its all-time highs in late 2017 to early 2018.  This was then followed by a steady fall in 2018. Both continue on the road to recovery in 2019 and 2020, though not yet returning to former highs.  The total circulating supply of bitcoin is 18,367,612 BTC. We can compare this to the circulating supply of ETH which is 110,833,176.

And the winner is …

So as we can see from our discussion of Ethereum vs bitcoin, comparing the two can be like comparing apples to oranges.  Yes, they are both digital currencies. However, each currency has been created to serve a different purpose.  Bitcoin was only created to be a form of money, whereas Ethereum is more of a platform for writing apps.  While bitcoin can only do manual transactions, Ethereum can run programmable transactions via smart contracts.  

Surprisingly, Ethereum was meant to be a complement to bitcoin. Ethereum builds off the blockchain technology of bitcoin, in order to increase its functionality and to fix its inefficiencies.  But it has also emerged as a popular form of digital currency.  In terms of technology, it is more advanced than Bitcoin and has far more uses, so in that respect, Ethereum is superior.  But as a digital currency, bitcoin has the advantage. As of right now, it is more widely accepted and is a better store of value because of its scarcity.  So which is better?  We guess that depends on what your needs are.  

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