2017 was definitely the year of the cryptocurrencies, and even though their price has now dropped, the interest in them, especially in the leading currencies, hasn’t dropped. The two most popular currencies – Bitcoin and Ethereum – saw a drastic price increase during the year – from under $1,000 to close to $20,000 and from under $10 to over $1,300, respectively. If you are interested in investing in cryptocurrency, here is a brief explanation of the differences between Bitcoin and Ethereum.
1. Bitcoin Is Generation 1, While Ethereum Is Generation 2
Bitcoin was the first major cryptocurrency to draw public attention. In a sense, it is the first generation. Ethereum came to the scene a few years later and builds on Bitcoin, so you can call it the second generation. Both currencies are decentralized and use blockchain technology. While Bitcoin is mostly a means of payment (and investment, due to its high price recently), Ethereum is also a programming platform on which you can write applications (known as smart contracts).
A lot could be written about the different blockchain principles between Bitcoin and Ethereum, but in addition to smart contracts, another difference I want to point out is the cost per transaction. With Ethereum, transactions have a different cost (called gas) based on computational complexity, bandwidth use and storage space. In Bitcoin transaction costs are calculated based on their block size only.
2. Currency Capitalization and Issuance
Another difference between Bitcoin and Ethereum is in regards to their capitalization and issuance. Bitcoin is limited to 21 million bitcoins, about 17 million of which have already been issued. At present Ethereum doesn’t have a limit, meaning new coins are issued every year, but there are plans to stop issuance of new coins in the future. In theory, when there is no fresh supply of more coins, this should drive their price up.
3. Approach to Mining
One of the major differences between Bitcoin and Ethereum is their approach to mining. While both currencies are minable (unlike Ripple, for instance), Ethereum has learned from the mistakes of Bitcoin and has made major differences in its mining model to avoid miner concentration as much as possible.
Ethereum’s mining algorithm is not possible to run off ASICS, and that is to say you can’t get huge amounts of relatively cheap mining equipment and monopolize the mining process, as the situation with Bitcoin is right now. Ethereum can be mined on a GPU or a CPU, although at present this isn’t the most viable investment because there is a lot of competition and good GPU cards cost a fortune.
Second, Ethereum mining algorithm discourages pool mining, which is another step on the direction of lower mining concentration. In other words, you can mine solo and still make some profit, while with Bitcoin solo mining is next to worthless.
Third, while at present both Ethereum and Bitcoin use a PoW (Proof of Work) mechanism to reward miners, Ethereum is considering moving to PoS (Proof of Stake) later this year. Unlike PoW, which factors how many blocks a miner has processed, thus giving an advantage to individuals and companies with more and expensive mining equipment, PoS distributes awards based on the amount of coins (e.g. stakes) a node holds.
I could go into more details about how Bitcoin and Ethereum differ, but I think for a crypto newbie who is considering investment in either or both of the currencies, these explanations are a good start. Just to be clear, I am not going to make any investment recommendations – it’s up to you to decide what you do with your money. In any case, don’t forget the simple rule: don’t invest more than you can afford to lose! If you are keen to find out more, you can get the complete Cryptocurrency Investment Course (currently at 94% discount) and learn all you need to know about cryptocurrency investment.
Ethereum definitely has the potential to become the number one cryptocurrency, but the positions of Bitcoin remain stronger than ever. Even though Ethereum is much more advanced in terms of technology, it is still far behind Bitcoin in terms of market capitalization and popularity. If this will change, only the future will tell.