Making headlines for recently breaking all-time highs, these crypto-giants continue to provide investors with exceptional returns, and endless chatter for the virtual water cooler.
While many seasoned investors know the ins and outs of BTC and ETH, the everyday investor may not be able to pick the two apart on a lineup.
How are bitcoin and ethereum similar?
Bitcoin and ethereum are homogeneous in many ways: each has a digital token traded via online exchanges, and stored in various types of cryptoasset ‘wallets’.
Both are decentralised, meaning that they are not issued or regulated by a central bank, financial institution, or other authority.
And both make use of their own distributed ledger technology known as a blockchain.
What’s the difference between bitcoin and ethereum?
Bitcoin is the world’s first and leading cryptoasset, which exists primarily to serve as a borderless, peer-to-peer digital currency used for financial transactions.
When people talk about Bitcoin, they are either talking about the coin itself, or the network as a whole, on which bitcoin transactions are made and recorded.
Ethereum, on the other hand, is an open-source software platform that developers can use to build decentralised applications (dApps), powered by its native cryptocurrency ether (ETH). With decentralised (dApps), developers can build and implement smart contracts.
Smart contracts are computer code that runs according to predetermined instructions and play host to a whole ecosystem of tokens, which are additional cryptoassets hosted on the Ethereum network.
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Ethereum’s crypto token ether is also vastly different from bitcoin. Instead of being used like a normal currency, ether is bought and sold by businesses, governments, or individuals to allow them to tap into the distributed resources of the Ethereum network to run their own apps.
Ethereum can host a whole range of services, such as decentralised streaming applications, web browsers, video games, shared computing power services, and many Decentralised Finance (DeFi) applications.
In 2020, the Ethereum Foundation, the non-profit organisation that oversees Ethereum’s development, announced an upgrade of the platform to a more secure, decentralised, and efficient network, called “Ethereum 2.0”, which will move to a proof-of-stake consensus mechanism to mine ETH coins.
Proof-of-stake (PoS) allows people to stake a digital asset, such as a coin or token, in order to have the chance to be chosen as a validator of a new block on the underlying blockchain network. The validator collects the transaction fees from the block as a reward.
This makes the network operations more decentralised compared to a proof-of-work blockchain, as the network is not dependent on mining operations or pools.
Some other key differences include:
- Age: Bitcoin is six years older than Ethereum.
- Speed: Ethereum’s block time (transactional speed) is seconds, while Bitcoin’s block time is minutes.
- Supply: Bitcoin is capped at a finite supply of 21 million bitcoin. The production of ether is endless.
- Market cap: Bitcoin is about ten times larger than ethereum by market capitalisation.
The price gap between bitcoin and ethereum
At the time of writing, one bitcoin costs around $46K USD, while one ether costs around $1,793 USD.
For years, there has been a statistically significant correlation between the performance of bitcoin, and other alt-coins. When bitcoin rises or falls in price, most altcoins tend to do the same.
Why? Bitcoin is the original cryptoasset, ergo it’s been set as the industry standard. The demand for bitcoin also makes it more valuable than other altcoins such as litecoin, Cardano’s ADA, or XRP.
Bitcoin’s value can be influenced by the following factors:
- limited supply of bitcoin
- cost of producing a bitcoin through the mining process
- rewards issues to bitcoin miners for verifying transactions to the blockchain
- number of competing cryptoassets
- regulations governing its sale and custody
- its internal governance
- market speculation
- quantitative easing
Bitcoin remains a strong cryptoasset
Bitcoin has dominated the market since the first bitcoins were mined in January 2009, but that doesn’t mean it has always been smooth sailing.
Bitcoin prices hit a high of around $20K USD in December 2017 before collapsing in 2018, reaching a bottom at $3,234 USD by the end of that year.
Since then, bitcoin has enjoyed a resurgence as prices swelled to more than $46K USD in January 2021, for a market cap of more than $600 billion USD.
While alt-coins have grown in popularity among investors, bitcoin has generally enjoyed over 60 per cent of the total market share. And this dominance is showing no signs of slowing down any time soon, especially with big names like Paypal and Tesla making certain announcements that directly affect the cryptoasset.
Bitcoin has its fair share of volatility. Prices have pulled back since hitting highs over $40,000, but as the biggest name in crypto, it has more recognition globally than lesser-known assets don’t. However, for those who feel they missed the window to invest in bitcoin, ethereum is the next in line.
Will bitcoin always remain the top cryptocasset?
It’s hard to say, as many cryptoassets have diverse use cases. All tokens fall under the umbrella of “crypto” but they provide exposure to different sectors, much like companies in the stock market. For example, while bitcoin is a digital store of value, ethereum is a digital finance network, and other tokens such as Chainlink (LINK) are providing real-world data to the blockchain.
All in all, investors could benefit from the rewards that the world’s top two cryptoassets offer by including them in a diversified portfolio made up of a range of cryptoassets, stocks, and other instruments.
Main image source: Shutterstock.com (Oleg Znamenskiy)
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About Simon Peters
Simon Peters is a cryptoasset analyst at eToro, with a detailed knowledge of crypto markets and the crypto industry. In his role at eToro, he also helps HNW clients with their investments in cryptoassets. Simon has a degree from Brunel University London in Mechanical Engineering, and has a CFA UK Level 4 Certificate in Investment Management.