Bitcoin versus Ethereum

·7-min read
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United or City? Apple or Samsung? From the world of sport to major technology brands, rivalry comes in pairs. When it comes to the world of cryptocurrencies, you can throw Bitcoin versus Ethereum into the mix as well.

Being the two biggest names in the crypto space, Bitcoin and Ethereum are often compared with one another. But from the premise behind each name, to their day-to-day trading prices, the concepts actually differ quite markedly.

That’s not to say there aren’t some similarities. If you’re new to trading cryptocurrencies, it’s likely you’ll have considered adding each version to your ‘buy’ list.

So, here’s how the two systems weigh up.

The cryptocurrency market is currently unregulated in the UK. The City regulator, the Financial Conduct Authority, has issued repeated risk warnings to people thinking of investing in cryptocurrency, saying they should be prepared to lose their entire investment with no recourse to compensation.

Clear divisions

First of all, some crypto housekeeping.

Bitcoin and Ethereum are systems, whereas bitcoin (with a lower-case ‘b’) and Ether are the cryptocurrencies used by those systems. When looking at the two, it’s important to be clear whether we’re comparing the technology, the assets, or both.

For the purposes of this feature, we’ll refer to the systems by name and the currencies by their ticker - or stock - symbols, namely, BTC for bitcoin and ETH for Ether. Table 1 provides some general information about the pair.

Table 1: How Bitcoin and Ethereum compare (26 August 2022)

Bitcoin

Ethereum

Created

2009

2015

Market capitalisation

£352 billion

£177 billion

Price

£18,340

£1,443

Consensus mechanism

Proof of work

Proof of stake

Block time

10 minutes

12-14 seconds

Maximum supply

21 million

Unlimited

Bitcoin and Ethereum differ fundamentally from one another because the former was designed to enable decentralised finance (a counterpoint to the traditional financial systems that rely on intermediaries, say, to transact payments), while the latter was created also to enable apps and contracts.

Think of Bitcoin as a version of digital gold, while Ethereum as more akin to a digital universe. While Ethereum does enable payments using its internal ETH cryptocurrency, its scope - by design - is wider than Bitcoin’s.

Both systems use blockchain technology - a computerised ledger - to validate and record transactions. But a forthcoming change to how Ethereum works means the way it carries this out will be different, with consequences for speed, sustainability and accessibility.

The difference revolves around something known as a ‘consensus mechanism’.

What is a consensus mechanism?

Essentially, it’s a computer algorithm that makes a blockchain viable. Blockchain is the underlying technology on which cryptocurrencies operate and the algorithm does this by solving what’s known as the ‘double spend’ problem.

A £5 note, once spent, no longer belongs to you and therefore cannot be used a second time. But BTC is a string of computer code that could, in theory, be copied infinitely. By making copies of your BTC and spending it repeatedly you could make yourself rich.

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 recorded on a distributed ledger for all to see. And since everyone can see on their copies of the ledger that you’ve spent your BTC, you can’t attempt to spend a copied version of it - the consensus of ledger holders would understand that you’re trying to get something for nothing.

Altering one transaction is hard enough, but you’d actually also have to alter every subsequent transaction since each one references its predecessors.

This would take huge amounts of computing power and effort, plus you’d need to control 51% of the distributed ledgers on the network to get the consensus necessary to add your fake history of transactions onto the blockchain and take your freshly mined crypto as reward.

Bitcoin and Ethereum employ different consensus mechanisms.

Bitcoin’s is known as ‘proof of work’ while Ethereum is moving towards a proof of stake version.

Proof of work

This consensus mechanism asks participants to carry out complex computations for the chance to become the user who gets to validate a bunch of transactions and add them to the blockchain – earning a set amount of crypto in the process.

The ‘work’ involves guessing, as closely as possible, a unique alphanumeric string of 64 characters.

There are trillions of possible combinations to these strings. Those with the most powerful computers can make the most guesses per second within a 10-minute window of opportunity and have the best chance of being the chosen validator.

In order to get a doctored copy of the ledger validated and added to the block, you’d need to control at least 51% (a consensus) of the computing power of a network, which would be astronomical. This is how the consensus method prevents fraud.

This work used to be carried out by hobbyists at home, but the processing power required increases over time, so the ‘mining’ process is now the reserve of companies and specialist operators – those who can resource the hardware and pay for the power to run it.

Proof of work systems such as Bitcoin have drawn criticism for the amount of energy expended by the computer hardware concerned. A recent estimate put the amount at 19 terawatt hours of electricity per year, almost the total used by the country of Norway in its entirety.

Proof of stake

This consensus mechanism asks participants to stake their own money for the chance to validate transactions and add a block to the blockchain, rather than carry out complicated calculations.

The more crypto someone stakes, the greater their chances of being chosen to validate a block of transactions to a blockchain and earn a set amount of crypto. The system also discourages bad actors with financial penalties.

Proof of stake tilts the table in favour of people with more money, but protects against people adding fraudulent records to the blockchain because they’d need to stake at least 51% of the money in the network to gain a consensus.

Without the need for powerful computer hardware, proof of stake is considered a more environmentally friendly consensus mechanism compared with proof of work.

Decentralised payments vs decentralised software

Bitcoin was developed to facilitate decentralised payments, that is, to allow people to send and receive payments without an intermediary such as a bank. Ethereum, on the other hand, was designed to do more than just send and receive ETH.

Using blockchain, which provides an immutable record of transactions, Ethereum was built to enable decentralised software such as smart contracts and distributed apps or ‘dApps’.

A smart contract is a digital agreement between two or more parties that will execute itself once certain conditions are met.

For example, account A will release asset X once it has received asset Y from account B. This could be applied to make property sales and the transfer of ownership faster and less liable to fraud.

A dApp is an application that isn’t controlled by a central authority. The social media platform Twitter is an example of a centralised app, with users relying on it as an intermediary to send and receive messages. In this example, users play by the rules it enforces and the algorithm it uses to control content.

In contrast, a dApp is distributed on a blockchain, with users able 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 doesn’t optimise for advertising revenues, an issue from which it says users of centralised apps suffer.

Price volatility

From the table above, you can see that Bitcoin is larger (in terms of its market capitalisation) while Ethereum is faster. But the pair aren’t strictly in competition with each other because they’re designed to do different things.

When it comes to BTC and ETH, however, these are directly comparable.

BTC has been and remains more valuable than ETH, soaring to around £58,000 in November last year. In the same month, ETH peaked at about £3,800.

Despite the stark difference in their values, the two cryptocurrencies have historically shown a strong positive correlation to each other, according to coinmetrics.io data.

Regardless of this - and is the case with all cryptocurrencies – BTC and ETH can both behave in a volatile way. Prices are unpredictable and are prone to crashes.