Making the decision between Bitcoin and Ethereum is challenging. There are several things to consider when it comes to investments. not only in the long run but also in terms of the fundamentals. Investors should keep the current entrance price in mind when determining whether or not their investment is a good deal. Let’s look at Ethereum and Bitcoin’s primary distinctions.
Bitcoin: The First Digital Currency
The original virtual currency was called Bitcoin (BTC). It was founded in 2008 and made its debut in January of 2009. The real identity of the person who invented Bitcoin, “Satoshi Nakamoto,” is still a mystery. Despite this, Bitcoin is the largest cryptocurrency based on market valuation. It is the most well-known cryptocurrency globally with the most wallet holders.
The Bitcoin whitepaper states that the platform was created to replace the global monetary system. It enables users to exchange, receive, and save digital content without the need for outside assistance. Traditional banks, on the other hand, do not have this power; they are able to stop transactions and freeze customer funds. Bitcoin, on the other hand, is decentralized.
This indicates that peer-to-peer Bitcoin transfers take place directly between senders and recipients. Furthermore, unlike conventional money, Bitcoin is not backed by a government or a central bank. Moreover, Bitcoin has a fixed supply due to immutable code. The total number of Bitcoins will never exceed 21 million. Up until this cap is reached, more Bitcoins are added to the market every ten minutes.
Considering all of this, it is better to consider Bitcoin to be a value store. Its finite quantity and predictable nature are similar to those of gold. Unlike gold, though, bitcoin is easily split, stored, and transferred. Bitcoin is also significantly more liquid than conventional value repositories. It trades in a market that is open around the clock and draws billions of dollars every day.
Ethereum: A Platform for Decentralized Applications
Ethereum (ETH) is the cryptocurrency with the largest market capitalization, while not being the first. With its founding in 2014, Ethereum brought smart contracts to the Bitcoin scene as a novel element. In other words, the Ethereum blockchain allows developers to oversee decentralized applications. Smart contracts do not require centralized mediators because they are self-governing.
Smart contracts are agreements between two or more parties that are not trusted. They are only executed when every requirement is met. As an example, consider Uniswap, a decentralized exchange that functions on the Ethereum network. In decentralized order books, buyers and sellers can trade tokens. Every time a swap request is sent, the user’s wallet is emptied via the smart contract.
The user’s wallet is then automatically updated with the new coin. The underlying code is immutable since the smart contract’s terms cannot be altered. Exchanges are among the many decentralized applications (dApps) that Ethereum can handle. Other examples include play-to-earn games, prediction markets, metaverses, staking, decentralized loans, and NFTs.
By 2025, Ethereum will host hundreds of dApps. Most importantly, when new dApps join Ethereum’s ecosystem, it benefits greatly. This is because dApps are based on the ERC-20 standard, which mandates that smart contract expenses be covered by ETH. Put another way, thousands of projects need ETH every time a transaction is finished. This will lead to long-term demand for ETH as long as Ethereum remains significant.
What Are The Principal Differentiators Between Bitcoin And Ethereum?
This section delves deeper into the Ethereum vs. Bitcoin dispute. Supply dynamics, scalability, and consensus validation are some of the key metrics we use to compare the two cryptocurrencies.
Proof of Work versus Proof of Stake in Transaction Validation,
First, let’s look at how “transaction validation” works with Bitcoin and Ethereum. This lays out the procedure via which the blockchain reaches a consensus before confirming and validating transactions. Most significantly, it ensures that Bitcoin and Ethereum keep their decentralized nature without compromising security. Having said that, each cryptocurrency project has an own validation method.
Bitcoin: Proof of Work
Bitcoin employs a proof-of-work (PoW) technique. “Miners” must figure out cryptographic equations in order to add a block of transactions to the blockchain. These equations require at least ten minutes to solve due to their intricacy. Advanced integrated circuits known as application-specific circuits (ASICs) are the hardware parts that enable this. Thousands of dollars could be spent on an ASIC purchase.
The PoW problem cannot be solved with just one ASIC.
- Furthermore, ASICs need a lot of electricity since PoW is so sophisticated.
- For this reason, Bitcoin is seen negatively by environmentalists.
- However, the competition for mining Bitcoin has never been higher.
- Ultimately, the individual who cracks the cryptographic riddle first gets to keep the freshly created Bitcoin.
That is more than $250,000 at the moment, or 6.25 BTC. Every ten minutes, this process is repeated. From April 2024 onwards, the mining incentive will drop by 50% to 3.125 BTC. Ultimately, the PoW mechanism of Bitcoin has the drawback of making the network very energy-intensive. It is also more expensive and less scalable when compared to alternative methods. PoW is still regarded as the safest and most decentralized option.
Proof of Stake for Ethereum
When Ethereum first launched in 2015, it utilized the Proof-of-Work method. Having said that, Ethereum used Ethash, a different PoW algorithm. SHA-256 is used by Bitcoin, however. The primary differentiation was that transactions could be finished in roughly 15 seconds because of Ethash. SHA-256 on Bitcoin, on the other hand, takes ten minutes.
Having said that, Ethereum updated its blockchain in 2022 to use the proof-of-stake (PoS) method. There were multiple explanations for this.
- PoS is first and foremost far more ecologically friendly.
- The PoS improvement for Ethereum, according to Bloomberg, lowers energy consumption by more than 99%.
- Furthermore, proof-of-work (PoS) provides a more equitable validation mechanism that isn’t controlled by massively resource-rich miners.
- This is so that everyone can participate in PoS and earn ETH rewards.
In short, Ethereum holders contribute to the security and stability of the network by placing their ETH into a staking pool. In return, users get paid in passive Ethereum. The amount of ETH that is being staked determines this rather than the amount of processing power generated.
Furthermore, PoS offers cheaper and more scalable transactions than PoW. However, Ethereum is currently not nearly where it needs to be. Even with PoS in place, the maximum number of transactions is still approximately 29 per second. The costs of Ethereum are also often very expensive. Typically, the cost is between $10 and $40 during peak hours. Similar to PoW on Bitcoin, PoS on Ethereum is believed to be less secure.
Scalability Comparison: Ethereum 2.0 vs. Lightning Network
Scalability is the measure of how many transactions a blockchain network can handle concurrently. Usually, this is measured in transactions per second (TPS). When comparing Ethereum with Bitcoin, it is important to consider this fact.
Ultimately, in the event that their networks are unable to satisfy demand, a series of unfavorable outcomes will ensue. This includes things like higher surcharges, longer wait times, and network congestion. Conversely, a network with sufficient scalability is smooth, efficient, and has cheap transaction times.
- Bitcoin has a 7 TPS limit. This is regarded as low, particularly given the growing popularity of Bitcoin.
- Ethereum has a 29 TPS limit. Even if this is four times more scalable than Bitcoin, there are still issues with it.
It is possible that other blockchain networks like as Cardano, Solana, and Binance Smart Chain might manage hundreds of TPS. It should be mentioned that scalability is significantly more important to Ethereum than it is to Bitcoin. As we previously mentioned, thousands of dApps are being developed on the Ethereum network. For a dApp to execute a smart contract, a fresh transaction is required each time.
For Ethereum to continue as the de facto smart contract network, it has to grow more scalable. Right now, Ethereum is working on this project. Over 100,000 TPS is the ultimate objective. But it’s not clear when or even if this will happen. But Ethereum needs to find a solution fast, considering the plethora of other smart contract ecosystems out there.
Going back to Bitcoin, we must not overlook the Bitcoin Lightning Network. In short, Bitcoin’s layer 2 answer is the Lightning Network. Transactions can be completed off-chain thanks to it. This reduces transaction durations from ten minutes to seconds. Moreover, the Bitcoin Lightning Network has the capacity to process up to one million TPS.
Nevertheless, the Lightning Network processes a very small percentage of all Bitcoin transactions. It won’t be possible for us to assess whether this is a viable approach until adoption rates increase. On the other hand, there are other layer 2 substitutes for Ethereum, like Polygon and Arbitrum. They offer quicker and more scalable transfers in addition to keeping transactions off-chain.
Supply Limit: 21 Million Sets, Rather Than a Strict Cap
Supply must also be considered when comparing Bitcoin and Ethereum in the long run. The answer is simple: fiat currencies, like the US dollar and the euro, are impacted by unfavorable central bank policies. This is true since “money printing” is the root source of inflation. The cost of living subsequently increases as a result of the currency’s devaluation. It also lessens the value of people’s savings.
However, there is a finite amount of Bitcoin—a maximum of 21 million BTC—available. This demonstrates that Bitcoin is a trustworthy medium of exchange. It is estimated that the maximum amount of bitcoin will be reached in 2140. Every ten minutes, a fixed number of brand-new Bitcoins are given till then. This might help bitcoin’s price grow naturally and gradually.
Ethereum, however, is available indefinitely. Every year, there is a rise in the total amount of Ethereum in circulation. This is the method used to finance staking rewards. In the short term, this might not be an issue, but if a cap isn’t set down later, investors might lose hope. After all, the holdings of current ETH are diminished by all new ETH releases.
Real-World Examples: Which is More Useful?
In this part, we will compare Ethereum vs. Bitcoin with a focus on application cases. This is an important measure for investors. Cryptocurrencies with a clear use case will attract more interest from investors than ones intended merely for trading.
This is the outcome of the strong justification for the acquisition, ownership, and usage of the currency. On the other hand, if a cryptocurrency has no use, people will just buy it in the hopes that its value will increase. It is impossible to achieve long-term sustainability, especially in fragile markets.
Bitcoin: Virtual Currency and Retail Store
Bitcoin was created primarily as a medium of trade. However, this is not the right usage for Bitcoin. In the end, a Bitcoin transaction takes ten minutes to finish. It would take a lot longer to pay for standard products and services than this. Even at $1, the transaction fees associated with Bitcoin make it unsuitable for use as a medium of exchange.
The reason for this is that microtransactions are not possible. Another is the question of scalability. Seven transactions may be processed by Bitcoin in a second, which is not enough to run a sizable global economy.
Nowadays, Bitcoin is instead viewed as a value store. As said before, Bitcoin is a finite digital asset since its supply is predictable and fixed. Bitcoin is also an excellent option for a store of value because it is so easy to retain, transfer, and fractionize. This is especially important in places where inflation has historically been high.
Ethereum: Decentralised Finance, NFTs, and more
Ethereum is not a store of money or a medium of trade. Instead, it offers a whole dApp ecosystem. Developers utilize Ethereum to host their coin projects so they may benefit from its secure and decentralized design. dApps can work autonomously thanks to smart contracts.
Numerous applications exist. For example, Ethereum supports metaverse projects like the Sandbox and Decentraland. Every time a user invests in metaverse land or makes a virtual product transaction, a smart contract is executed. This requires transaction fees, which are paid in ETH. As an extra example, Ethereum is the foundation of the finest decentralized exchanges.
A smart contract is required for each buy or sell order, regardless of whether it is on 1inch, Uniswap, or SushiSwap. Axie Infinity and other play-to-earn games are popular on Ethereum. Furthermore mentioned are decentralized finance services that offer loans and savings options. Additionally, developers can use Ethereum to build and issue non-fungible tokens (NFTs).
Unlike traditional cryptocurrencies, each NFT is unique from every other. NFTs can have their backing from both digital and tangible assets, hence enabling ownership on the blockchain. NFTs are very easy to carry. All NFT transactions also require an Ethereum smart contract, therefore ETH is used to cover the fees.
To Sum up, Should You Buy Bitcoin or Ethereum?
Weighing the benefits and drawbacks of Bitcoin vs Ethereum, we discover that both cryptocurrencies are prudent long-term investments. Similar to buying Apple and Google stocks, exposure to both endeavors can benefit your portfolio.
Bitcoin is the de facto cryptocurrency and global store of value. With unparalleled use cases, Ethereum, on the other hand, dominates the smart contract market. Just keep in mind that there are dangers involved; investing in Bitcoin or Ethereum does not guarantee financial success. On the other hand, you can lose money.