Bitcoin vs. Ethereum: What is the difference between the two biggest Cryptocurrencies?

21 days ago

Bitcoin vs. Ethereum: What is the difference between the two biggest Cryptocurrencies?

Bitcoin and Ethereum are the top two cryptocurrencies in the world and the choice of many investors. Bitcoin has seen enormous interest form institutional investors in the last 6 months, because they are looking for a store of value that offers even better features than gold. Ethereum has a very different use case and is powering decentralized finance and all leading platforms offering art that is connected to non-fungible tokens.

The reason why both cryptocurrencies are so different is rooted in the features and purpose of each blockchain. Many newcomers believe that cryptocurrencies are interchangeable or at least similar to each other. It is true that they share certain features, but they are very different, especially if one compares Bitcoin and Ethereum with each other. In today’s article we don’t trial or judge any of both cryptos, but we will take a close look at their differences and what kind of opportunity Ether and BTC have to offer.

Bitcoin-How it all started

There has been a lot of arguments in the Bitcoin community in the past 6 years about the intended use of BTC. Basically, because there were differences over the question of how to continue with its development. Many referred to Bitcoins creator Satoshi Nakamoto and the famous whitepaper to legitimize their view. One thing that cannot be argued with is that Bitcoin was intended to be a peer-to-peer electronic cash system. And as such it was perceived and developed in the last 12 years.

And this leads us directly onto the trail of what BTC is all about. Constructing a decentralized payment infrastructure that cuts out the middle men and empowers its users to absolutely control their own funds without any intervention possible by a third party. Bitcoin achieves this by the design of its protocol and the work of the miners. It was not the first attempt to create a digital currency, but the first one that managed to solve the double spending problem.

But it has one particular feature that is closely connected to the idea that Bitcoin is resistant to manipulation. Meaning that the currency’s supply is transparent and has is limited to roughly 21 million BTC. Nobody can fake or inflate Bitcoin and that leads to its second use case that has been discovered by institutional investors more recently. Bitcoin is also a store of value and because of the fact that its supply is absolutely limited, many analysts and investors argue that it is even better than gold. Its scarcity is unmatched by any other asset and therefore many refer to it as digital gold. But unlike gold, Bitcoin can be freely transacted and it is easier to store as well. With an increasing demand its price went through the roof.

Ethereum -a new idea is born

Ethereum introduced a new idea. After Bitcoin was invented, many altcoins were born. Most of them focused on the factor of speed or different mining algorithms. The most important altcoin in that sense was Litecoin. And the facts that everybody was busy to be better than Bitcoin shows that nobody came across with a new and ground-breaking idea. Instead every project was focused on the use cases already provided by Bitcoin and simply tried to do better.

But Ethereum was something new in every sense. The native currency on the Ethereum blockchain is Ether. And of course, it is possible to transact Ether freely and store it safely. Just like with Bitcoin, but that is not its major purpose. Instead, Ethereum introduced the idea that not only payments, but also more complex agreements could be settled on the blockchain. The idea of smart contracts was born. Ethereum would provide a framework that would allow to program any kind of agreement that could be safely executed and audited by any party in the world. This way, none of the parties in an agreement would have to argue about its terms and the execution. One major component that is missing in Bitcoin is the Ethereum virtual machine or EVM. It turns the whole network into one giant super computer that powers all the necessary calculations.

But there are more differences. Unlike Bitcoin Ethereum does not rely on a UTXO model. And the even more important difference is the fact that the maximum supply of Ether is not limited. Many Bitcoiners have argued that this is in fact very dangerous, because in their view Ethereum is not creating sound money. The only limitation to its supply is a supply cap of 18 million Ether per year. There is still a debate going on if the unlimited supply of Ether is creating a problem or not. While Ethereum is arguably not digital gold, it is still creating a very high demand through its DApps.

The smart contracts on Ethereum enable a variety of use cases, starting from decentralized exchanges over liquidity mining and yield farming. This is what makes Ethereum so unique and the fact that many other cryptocurrencies try to do same as Ethereum but better is a strong sign that itis a remarkable invention just like Bitcoin before.

Which one is better?

There is no correct answer to that question, because both have a unique selling point. Smart contracts and decentralized applications are not possible on-chain with Bitcoin. On the other hand, Ethereum cannot claim to be quite as scarce as Bitcoin ever will be. Each one has its strength as well as weaknesses.

Bitcoiners might argue that scarcity and security are more important than speed and that nothing should be held above the dogma of sound money. And they are completely right in every sense when it comes down to creating sound money. But on the other hand, Ethereum is not in need of scarcity, but it needs to offer a supply that meets the demand. It’s not meant to be primarily a store value. Ether is powering a tokenized economy on the decentralized Ethereum blockchain with thousands of applications and smart contracts running. Each execution, each interaction and each new contract requires Ether and therefore a supply that has a yearly cap is more suitable to its own goals.

It’s not the question which one is better when compared to each other, but which one can succeed with its intended purpose. Bitcoin was intended as hard money and its running so well and is fitting that role that it became not only the first, but the biggest cryptocurrency by market cap and network growth. And the fact that this has been achieved is tremendous, because there are literally thousands of other coins trying to do the exact same thing.

But the same can be said about Ethereum. Many ambitious competitors try to be the next “Ethereum killer”. And the fact that there are so many of them already out there makes it absolutely clear, why Ethereum became the second biggest cryptocurrency on the market.

Instead of engaging into tribalism investors should ask themselves what kind of asset is important to them. Are you looking for a store of value that cannot be corrupted and is widely accepted all around the world? Or are you more into the opportunities that are created by a wild, but vibrant decentralized market that is creating loans and interest to its users?

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