While bitcoin and ether are both market-leading digital assets, they have important differences that … [+]
Ether and bitcoin are highly visible cryptocurrencies that might interest investors. They have both experienced significant gains during their respective lifetimes, so they can potentially provide interested parties with substantial upside.
This article will explore the key differences between ether, sometimes described as Ethereum, and bitcoin, so that investors can differentiate these digital assets and make well-informed decisions for their respective portfolios.
Understanding Bitcoin and Ether
Bitcoin (BTC)
Bitcoin is the digital currency of the Bitcoin network, which was designed to be a global peer-to-peer (P2P) payment system that could function independently of financial institutions or governments. The whole idea was to create a “trustless” network, meaning that it does not depend on trusting a third party like a bank or other financial institution. As a result, bitcoin was meant to function as a global digital currency.
While bitcoin was not the first-ever digital currency, it was the first digital currency to scale, meaning that it managed to achieve widespread adoption. As the cryptocurrency space has obtained ever-growing visibility, bitcoin has obtained increasing acceptance. Bitcoin’s total market value was roughly $1.75 trillion at the time of this writing, according to figures from Forbes Digital Assets.
Ether (ETH)
Ether is the native digital currency of the Ethereum platform, which is a blockchain network for decentralized apps (dapps). Basically, it is a platform that allows users to develop software applications that can function without a central authority. Decentralization is important because it means that there is no central authority that can shut down a dapp.
Ether is the second-largest cryptocurrency by total market capitalization after bitcoin, with a total market value of over $300 billion at the time of this writing, according to data provided by Forbes Digital Assets.
Key Differences Between Bitcoin and Ether
Purpose
Bitcoin and ether have completely different purposes. Bitcoin was designed to be a global P2P payment system, enabling direct transactions between users without requiring the use of trusted third parties like banks.
Ether, on the other hand, was designed to be the native digital asset of the Ethereum platform, providing users a way to pay transaction fees needed to use dapps based on the platform.
Smart Contracts
One major difference between ether and bitcoin is Ethereum, the network of the former, uses smart contracts, which are basically software programs that execute (follow through with specific actions) when specific requirements are met. The whole idea behind this is enabling automated processes that take place once certain conditions are met.
These smart contracts can automate processes with a wide range of applications, eliminating the need for a trusted intermediary to interpret the contract and follow through once its conditions are met.
Consensus Mechanism
Another major difference between the Bitcoin and Ethereum networks is the consensus mechanism they use. Since these networks are decentralized, they need some method to arrive at a consensus that a transaction took place. Bitcoin uses a consensus mechanism called proof-of-work (POW), where users confirm transactions and incorporate them into blocks so they can be added to the network’s blockchain. POW requires significant resources in terms of electricity and computing power, a characteristic that makes it very hard for users to cheat the Bitcoin network.
Ethereum uses a consensus mechanism called proof-of-stake (POS), whereby users “stake” (or devote) their ether so that it can be used to confirm transactions. In order to run a validator, a node used in verifying these transactions, a user must be willing to commit 32 units of ether. POS helps maintain the security of the network. In order to act in a malicious way, a user would need to obtain control of the majority of validators on the Ethereum network, which would be prohibitively costly.
Staking Income
Users can earn income (also known as rewards) by taking part in staking. Committing units of ether for this purpose helps the network to run effectively and increases its security. At the time of this writing, the estimated annual reward for staking was roughly 2%, according to Coinbase data. It is important to keep in mind that if units of ether are involved in staking, a user cannot buy, sell or transfer them.
Bitcoin: Pros And Cons
An innovative technology, bitcoin certainly comes with its costs and benefits. The digital currency has generated substantial visibility since coming into existence more than 15 years ago, giving many the hope that it will become a global payment network that replaces fiat currencies (currencies printed by governments). However, critics have not hesitated to point out its flaws.
Bitcoin Pros
Compelling gains: Bitcoin is highly volatile and has experienced some very impressive upside over the years. This has resulted in the digital currency skyrocketing in value since coming into existence in 2009.
Visibility: As the first digital currency to scale, bitcoin has generated widespread visibility and adoption. Retail investors, governments and financial institutions have all purchased the cryptocurrency.
Diversification: Bitcoin has served as a potent diversifier at some points, meaning that its price did not move in tandem with asset classes like stocks and bonds. However, the digital currency has correlated tightly with stocks at some points.
Bitcoin Cons
Volatility: Bitcoin’s sharp price fluctuations have led some critics to claim that it is not useful as a currency since its value can change so rapidly.
Lack of fundamentals: Many critics would argue that bitcoin does not have fundamentals like stocks and bonds do. Shares of stock represent ownership rights in a company, and investors can look at fundamentals like the revenue and earnings of the business issuing these shares.
Illicit activity: A large number of critics have pointed to bitcoin’s use in illicit activities. However, they should keep in mind that bitcoin transactions are recorded on a blockchain and can be traced by interested parties.
Ether: Pros and Cons
Ether is another innovative digital currency whose network Ethereum has taken the basics of the Bitcoin network and built upon them. The digital asset has benefited from sharp upside since it became available for trade.
Ether Pros
Multiple applications: The fact that the Ethereum network offers smart contracts means that there is a wide range of applications for the platform, including decentralized finance (DeFi), the creation of other tokens and gaming.
Compelling gains: Like bitcoin, ether is highly volatile and has experienced some very impressive gains since its inception. Coinbase, a major exchange, offered ether trading starting in 2016.
Staking Income: Users have the ability to passively generate income by staking their ether so that the network can use it to confirm transactions.
Ether Cons
Uncertainty surrounding altcoins: Many alternative protocol assets, also known as altcoins, have managed to generate significant visibility for a time but then fell from grace, meaning they lost a significant amount of visibility, declined in total market value or both.
Stiff competition: Ethereum has encountered significant competition from other blockchain platforms. Solana, Polkadot and Binance Smart Chain have all vied for market share.
Scalability challenges: The Ethereum network has faced significant challenges keeping up with user demand during bull markets. Sharp increases in demand can result in high transaction fees and long wait times.
Bitcoin Vs. Ether: The Long-Term Outlook
Bitcoin was the first digital currency to scale, so it has a first-mover advantage. As a result, the cryptocurrency has better name recognition than any of its peers. Past that, while bitcoin has its critics, it also has a community of devoted followers, many of whom are fully sold on the vision of creating a global P2P payment system that can function independently of financial institutions or governments.
Ether, on the other hand, derives its value from having actual utility. The digital currency can be used in the thousands of dapps that exist on the Ethereum network, and these software programs can be used for a wide range of applications. On the other hand, Ethereum has several notable competitors.
Long-term, it is impossible to know what the future will hold. If the coming years look like the brief market history we have thus far, bitcoin will continue to be the world’s most valuable digital currency (both per unit and in terms of total market value) and ether will be the second-most valuable.
Bottom Line
Investors should keep in mind that bitcoin and ether have experienced significant gains during their relatively brief market histories. At the same time, they should remember that these cryptocurrencies are notoriously volatile, meaning their values can fluctuate quite a bit over time. While some may consider these digital assets a fad, bitcoin has been around for more than 15 years and ether has been around for close to 10 years.
While these are both market-leading digital assets, they have important differences that separate them. These two have varying purposes and consensus mechanisms. Past that, ether’s platform offers users smart contracts and potential rewards for those interested in taking part in staking, which involves devoting one’s tokens to the network in exchange for income.
