Throughout 2017, the price of 1 BTC shot up from $963 to $19,694. Similarly, the price of 1 ETH rocketed from $8 to $747. Since that time, the price of Bitcoin and Ethereum has dropped significantly—but at the time, would-be investors and enthusiasts were going crazy for crypto.
But aren’t cryptocurrencies just virtual money? What’s the difference between these two? And why is there still so much interest even after the massive price drops? This article will answer all of those questions and more.
How Bitcoin Works
Bitcoin is a digital currency that aims to be:
- Decentralized (no organization controls the creation or flow of the currency)
- Anonymous (one’s ability to make transactions isn’t tied to identity)
- Transparent (all transactions can be viewed by anyone at any time)
All of this is possible through the blockchain and peer-to-peer networking.
The Bitcoin blockchain is just a file that keeps tracks of all valid Bitcoin transactions ever made. Every 10 minutes, all new transactions are recorded together in a block and then added to the end of the file. Hence, blockchain.
This means some database value doesn’t determine your current Bitcoin balance. Instead, your current balance is simply the tracing of all past transactions to the present time. Currency never actually trades hands.
Bitcoin doesn’t reside on a single server or cluster of servers. Rather, it’s distributed across thousands and thousands of computers around the world (called nodes) and anyone can join that network whenever they want.
Whenever a transaction is made, it gets distributed to all the nodes on the Bitcoin network, and each node exists to verify that the transaction is valid. This is what Bitcoin mining is: you dedicate your machine’s computational power to help keep the blockchain validated and in return, you can earn some Bitcoins.
To send or receive transactions, you need a Bitcoin wallet. A wallet is just a public key (the address that others use to send you Bitcoins) and a private key (basically a signature that authenticates transactions made from your wallet). Anyone can create a new wallet at any time, which is what makes Bitcoin an anonymous currency.
Since the blockchain is distributed across all nodes, it’s entirely public and transparent. Anyone can view the entire blockchain and see every single transaction ever made.
How Ethereum Works
Ethereum is a massive worldwide network that’s distributed across thousands of computers around the world in peer-to-peer fashion. The Ethereum platform incorporates blockchain technology in much the same way that Bitcoin does, but expands upon it in several ways.
The key component of Ethereum is the smart contract.
The Ethereum platform comes with its own special programming language—called Solidity—that allows people to write Ethereum scripts, and these scripts are called smart contracts. Smart contracts are distributed to the network and, when requested, are executed on all Ethereum nodes.
Ethereum also involves a digital currency called Ether. Since executing smart contracts costs computational resources, node owners are compensated with Ether. The more computation-heavy the smart contract, the more it costs to execute. If it costs too much, it won’t be allowed to complete. This encourages the creation of efficient smart contracts.
The Ethereum blockchain is similar to Bitcoin’s blockchain, but instead of only containing Ether transactions, it also contains the results of executed smart contracts.
Every node on the Ethereum network maintains a copy of the blockchain just like Bitcoin does, and the process of verification is similarly called Ethereum mining. Miners spend computational resources to verify that every Ether transaction and smart contract result is valid. In return for their efforts, they earn Ether.
You can also directly send and receive Ether from wallet to wallet.
Ethereum is proof that the blockchain concept is expandable to areas outside of financial technology. Because of this, Ethereum is often called “programmable money.” Yes, it is a digital currency, but money that can execute code.
Bitcoin vs. Ethereum in a Nutshell
In short: whereas Bitcoin is just a digital currency, Ethereum is far more than that. Bitcoin and Ethereum have fundamental differences in their long-term aims, as well as differences in their underlying technology that influences their value and perceived use in the wider world. For instance:
- Bitcoin’s average block time is 10 minutes, whereas Ethereum’s average block time is 15 seconds. Ethereum transactions can be confirmed much faster.
- The amount of Bitcoin earnable as a mining reward is cut in half every four years. The total number of minable Bitcoin is set at 21 million. When miners reach that number, mining for new Bitcoin will cease. The amount of Ether earnable through mining is capped at 18 million per year, so there is always new Ether entering circulation.
- Bitcoin is best mined using ASICs, dedicated hardware that is vastly superior to regular hardware. The need for specialized hardware pushes miners into large mining pools that consolidate mining power, while simultaneously consolidating Bitcoin mining rewards to “mining cartels” that dominate the market. Ethereum, however, is best mined using GPUs, which are more readily available and arguably more equal, even with the rises to GPU prices because of Ethereum mining.
- Bitcoin is often referred to as “digital gold” because it has a holding value and many other cryptocurrencies are “pegged” to the Bitcoin price. Ethereum is more often seen as “digital currency” because it has a spending value and lower entry point.
However, the main difference between the two cryptocurrencies is the ease of making programmable smart contracts on the Ethereum blockchain. Initially, the Bitcoin network was unable to process smart contracts. As Bitcoin and its blockchain evolved, support for smart contracts was added, though Bitcoin continues to play second-fiddle to Ethereum in this regard.
Ethereum advocates point to this ease of use as one of the main reasons Ethereum is the future of cryptocurrency. Also, Bitcoin has traditionally been slow to implement new changes and, in many people’s eyes, is only still around because it was the first cryptocurrency.
While the cryptocurrency industry is still in its infancy, there’s no doubt that blockchain technology is slowly transforming the world. There are hundreds more cryptocurrencies, too, each attempting to decentralize and disrupt the status quo within their given industry (like a completely decentralized internet).
But remember: not all cryptocurrencies are what they seem. Many are straight-up scams, as evidenced on multiple occasions. Need help deciding? Check out our article on avoiding cryptocurrency scams—it’s a great starting point.