In the world of cryptocurrencies, Bitcoin is still the undisputed leader, but Ethereum follows closely behind and is by far the most prominent competitor in terms of market cap. Both digital currencies have their place on the balance sheets of reputable institutions. However, the fundamental differences between these two projects are significant, and this is precisely what reinforces their existence.
The primary application of Bitcoin and Ethereum
The use case of a cryptocurrency is not the same for every currency. Bitcoin and Ethereum also have differences in this regard. We could write an entire book about the differences and use cases, but these are the two main use cases of both:
Bitcoin acts as a form of "digital gold," with individuals, businesses, and governments purchasing BTC to protect their assets from inflation and government confiscation.
Ethereum, on the other hand, serves as a software development platform on which various financial applications and decentralized trading platforms are built. For these applications to work, the cryptocurrency Ether (ETH) is required.
Of course, some investors hold ETH as an investment or leverage against inflation. But with Ethereum, for many, the focus is on development.
You may wonder why we need Bitcoin and Ethereum since we already have money and software. The answer lies in the fact that both Bitcoin and Ethereum are based on cryptography and blockchain technology. As a result, ownership of digital assets is determined by whoever holds the private keys, with no (or minimal) involvement of external parties such as banks or governments. All transactions are externally verifiable, making it a transparent system of money.
Differences between Bitcoin and Ethereum
Without getting into too much detail, we would like to highlight some key differences between Ethereum and Bitcoin.
Bitcoin started in 2009 as an experimental peer-to-peer payment system with no value in circulation in its initial stages. It was a volunteer project that was idealistic in nature. Ethereum, on the other hand, began in 2014 with a pre-mine and the sale of Ether on the market to fund the project. This difference in financial approach led to different expectations and legal classifications.
Power and control
Bitcoin has no central authority or CEO and is managed by a decentralized network of developers, miners, and node operators. Bitcoin's founder is unknown and has only been named under the pseudonym Satoshi Nakamoto. Major changes are often made slowly, which promotes stability.
Ethereum has founder Vitalik Buterin and his team spearheading important updates. Decision-making can seem more centralized, as seen in the decision to roll back the blockchain after a 2016 hack.
Protocol and consensus
A protocol is a set of rules that determines how the blockchain works. Bitcoin has a protocol with a maximum of 21 million Bitcoins that will ever be in circulation, ensuring predictability and scarcity. A halving takes place every four years, halving the amount of BTC a miner receives as a reward. Bitcoin works with the consensus mechanism called Proof-of-Work (POW).
Ethereum has moved from POW to the newer Proof-of-Stake (POS), which requires less energy consumption. Ethereum continues to experiment a lot with its protocols and has an unlimited amount of Ether. However, that quantity is continuously reduced through a burn mechanism that destroys ETH to create more scarcity.
Bitcoin and Ethereum represent different niches in the world of cryptocurrencies. Both have their unique characteristics, strengths, and risks. The choice between the two depends on personal beliefs, investment strategies, and the role one sees for cryptocurrencies in the future. Many crypto investors choose to hold both Bitcoin and Ethereum as part of their portfolio.
The information provided in our articles is intended solely for general informational purposes and does not constitute (financial) advice.