Bitcoin and Ethereum are the Coca-Cola and Pepsi of the cryptocurrency space. As number one and two of the biggest names out there, they are often compared and on the surface they have a lot in common.
However, from their premise to price differences, the two concepts are very different. Here’s a look at how they compare.
Before we start…
Bitcoin and Ethereum are systems, while Bitcoin (lowercase b) and Ether are the cryptocurrencies used by these systems. When comparing the two ecosystems, we need to be clear about whether we are comparing the technology, the assets generated by the technology, or both.
In this article we will refer to the systems by name and the currencies by their stock symbols. With Bitcoin, that is BTC. For Ether it is ETH.
This is how Bitcoin and Ethereum compare
Bitcoin and Ethereum are fundamentally different as the former was built to enable decentralized finance while the latter was built to also enable apps and contracts.
While Ethereum allows payments with its internal ETH cryptocurrency, its scope is much broader than Bitcoin’s – inherently.
Both systems use blockchain technology to validate and record transactions, but an upcoming change in how Ethereum works will mean the way they do it will be different, with implications for speed, sustainability, and accessibility.
The difference lies in a so-called “consensus mechanism”.
What is a consensus mechanism?
A consensus mechanism is a computer algorithm that makes a blockchain viable. This is done by solving the so-called “double spend” problem.
Once a $10 bill is spent, it is no longer yours, so you cannot spend it again. A BTC is a string of computer code and could be copied an infinite number of times. In theory, this means you could make yourself as rich as you want just by making copies of your BTC and spending them over and over again.
However, when you send someone a BTC, your copy is destroyed and a new version of it is created in the recipient’s account.
This is all recorded in a distributed ledger for the world to see. Since anyone can see on their copies of the ledger that you spent your BTC, you cannot attempt to spend a copied version of it – the consensus of ledger holders would be that you tried to pull a quick one.
Manipulating a transaction is hard enough, but you would actually need to modify each subsequent transaction as well, since each one references its ancestors.
This would require an incredible amount of processing power and effort, plus you would have to control 51% of the distributed ledgers on the network to get it consensus necessary to etch your fake transaction history into the blockchain and take your freshly mined cryptos as a reward.
Bitcoin and Ethereum use different consensus mechanisms.
Bitcoin is 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 in order to become the user who can validate a set of transactions and add them to the blockchain – and earn a certain amount of crypto in the process.
The “work” is to guess a unique, alphanumeric string of 64 characters as accurately as possible.
There are trillions of possible combinations for these strings, so those with the most powerful computer hardware can make the most guesses per second within the 10-minute window and have the best chance of being the chosen validator.
To validate a spoofed copy of the ledger and add it to the block, you would need to control at least 51% (a consensus) of a network’s processing power, which would be astronomical. This is how the consensus method prevents fraud.
This work used to be done by hobbyists at home, but the computing power required increases over time, so the ‘mining’ process is now the preserve of companies and specialized organizations – ie those who can afford the hardware and the power to do it.
Proof-of-work systems like Bitcoin have drawn much criticism for the power consumption of the computer hardware involved. Bitcoin currently consumes 19 terawatt hours (TWh) of electricity per year. That is just under the amount consumed by the entire nation of Norway.
Proof of Involvement
This consensus mechanism asks participants to use their own money to validate transactions and add a block to a blockchain instead of performing complex calculations.
The more crypto someone uses, the greater their chances of being selected to validate a block of transactions for a blockchain and earning a set amount of crypto. The system also discourages bad actors with fines.
Proof of Stake stacks the deck in favor of people with more money, but protects people from adding fraudulent records to the blockchain because they would need to stake at least 51% of the money on the network to control consensus.
Without the need for powerful computer hardware, Proof of Stake is considered a greener consensus mechanism than Proof of Work.
Decentralized payments vs. decentralized software
Bitcoin was designed solely to enable decentralized payments, meaning to allow people to send and receive payments without an intermediary like a bank. Ethereum, on the other hand, was designed to do more than just send and receive ETH.
Using blockchain that 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 executes itself once certain conditions are met.
For example, account A releases asset X once it has received asset Y from account B. This could be used to make real estate sales and transfer 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 that users rely on as an intermediary to send and receive messages. Hence, users play by the rules it enforces and the algorithm it uses to control content.
A dApp is distributed on a blockchain, allowing users 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 is not optimized for ad revenue, a problem that users of centralized apps suffer from.
So you could say that Bitcoin is bigger but Ethereum is faster, but the two are not in strict competition with each other because they were designed for different tasks. BTC and ETH, on the other hand, are directly comparable.
BTC has certainly been more valuable than ETH, peaking around $68,000 in November 2021 (before crashing below $20,000 in May 2022). ETH, on the other hand, peaked around $4800 in November 2021.
Despite the stark difference in their values, the values of the two cryptocurrencies have historically shown a strong positive correlation to each other, trending between 0.7 and 0.8 (with 1.0 being the represents the strongest possible correlation).
Regardless, and as with all cryptocurrencies, both BTC and ETH are volatile. Prices are unpredictable and prone to crashes, as we saw in May this year when the market cap of crypto assets fell from $3 trillion to around $900 billion.
The cryptocurrency market is unregulated in Australia, although consumer organizations such as CHOICE are campaigning for better protection for those who fall victim to fraud and big losses. For now, the Australian Securities and Investments Commission (ASIC), through its Moneysmart website, is advising 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 is it a recommendation of cryptocurrency as an asset class.