Note: Ethereum is currently in the process of transitioning to proof-of-stake, which will eventually replace proof-of-work mining.
Bitcoin vs Ethereum
Learn why these two networks continue to be compared despite being so different.
Don't invest unless you're prepared to lose all the money you invest. This is a high-risk investment and you should not expect to be protected if something goes wrong. Take 2 mins to learn more.
Estimated reading time: 2 min
Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
What are the key risks?
1. You could lose all the money you invest
- The performance of most cryptoassets can be highly volatile, with their value dropping as quickly as it can rise. You should be prepared to lose all the money you invest in cryptoassets.
- The cryptoasset market is largely unregulated. There is a risk of losing money or any cryptoassets you purchase due to risks such as cyber-attacks, financial crime and firm failure.
2. You should not expect to be protected if something goes wrong
- The Financial Services Compensation Scheme (FSCS) doesn't protect this type of investment because it's not a 'specified investment' under the UK regulatory regime – in other words, this type of investment isn't recognised as the sort of investment that the FSCS can protect. Learn more by using the FSCS investment protection checker.
- The Financial Ombudsman Service (FOS) will not be able to consider complaints related to this firm or Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
3. You may not be able to sell your investment when you want to
- There is no guarantee that investments in cryptoassets can be easily sold at any given time. The ability to sell a cryptoasset depends on various factors, including the supply and demand in the market at that time.
- Operational failings such as technology outages, cyber-attacks and comingling of funds could cause unwanted delay and you may be unable to sell your cryptoassets at the time you want.
4. Cryptoasset investments can be complex
- Investments in cryptoassets can be complex, making it difficult to understand the risks associated with the investment.
- You should do your own research before investing. If something sounds too good to be true, it probably is.
5. Don't put all your eggs in one basket
- Putting all your money into a single type of investment is risky. Spreading your money across different investments makes you less dependent on any one to do well.
- A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
If you are interested in learning more about how to protect yourself, visit the FCA's website here.
For further information about cryptoassets, visit the FCA's website here.
Bitcoin and Ethereum are the two largest cryptocurrencies in the world. While Bitcoin and Ethereum both hold the lion’s share of cryptocurrency market value, respectively holding the number 1 and number 2 spots in market cap rankings, their purposes are widely different.
Bitcoin, the first ever cryptocurrency, was designed as a method for transferring wealth. In comparison, Ethereum was designed as a network for the construction of decentralised computer applications (dapps). While offering different functions, it’s the use of blockchains that forms the strongest connection between these two cryptocurrency protocols.
Understanding the similarities and differences between these two giants is key to a wider understanding and appreciation of cryptocurrency technology.
Bitcoin vs Ethereum at a glance
While they share some similarities, Bitcoin and Ethereum are two very different blockchains with distinctly different goals.
Bitcoin is the world’s first cryptocurrency and blockchain, which exists primarily to serve as a decentralised, unrestricted, borderless digital currency. Created in 2009, it led to the evolution of what we now know as the cryptocurrency industry.
As far as modern blockchain technology goes, Bitcoin is rather old and clunky, but that’s all it needs to get the job done. When people talk about Bitcoin (BTC), they are either talking about the coin itself or the network on which Bitcoin transactions are made and recorded. As cryptocurrency adoption has increased, Bitcoin has moved to a “store of value” for many investors.
Ethereum on the other hand is a network built for the development of decentralised applications (dapps). The network, or blockchain, is powered by its native cryptocurrency Ether (ETH). Launched in 2015, the blockchain allows the deployment of smart contracts that operate the decentralised applications.
Thousands of dapps have been created over the years, offering a wide array of services, including exchanges, insurance, games and investments. These dapps look similar to websites on the Internet, but instead of being hosted on a physical server owned by a company, they are hosted on Ethereum’s blockchain.
Most decentralised applications have a native cryptocurrency token, so Ethereum has facilitated a significant proportion of the cryptocurrency market that we see today. In 2020, Ethereum began the transition from proof-of-work mining (like Bitcoin) to proof-of-stake to drastically speed up the network and reduce its carbon footprint.
How smart contracts differentiate Bitcoin from Ethereum
A smart contract is a type of autonomous decentralised application.
- Autonomous: It’s automatic and can run itself.
- Decentralised: It’s not held in any one place or owned by any one person. Instead, it’s part of the blockchain. This implies that it’s tamper-proof and very reliable.
- Application: A computer program.
Smart contracts are one of the reasons why everyone has been so excited about cryptocurrencies and the blockchain. They’re like having a robot that can do things automatically and which theoretically can’t be hacked or tampered with.
For example, someone could put $500 into an account guarded by a smart contract and set it up to send $5 to someone each year for their birthday for the next 100 years.
Smart contracts can theoretically do this with 100% certainty that the money will be sent exactly as programmed and 100% certainty that no one can ever tamper with that program or steal the money.
Without a smart contract, you’d have to give the money to someone else and then trust them to send it onwards, even after you’re gone.
The use of a blockchain network is common to both Bitcoin, Ethereum and (almost) all cryptocurrencies. The decentralisation of the blockchain system is what makes it 100% reliable and tamper-proof. But being able to program various functions into the blockchain, like sending $5 a year for 100 years, is the smart contract in action. That’s what Ethereum added.
While Bitcoin also allows for simple programmable actions similar to smart contracts, Ethereum was specifically designed to allow an extremely flexible range of smart contracts. This promoted the use of the Ethereum blockchain as a platform for building decentralised applications.
As you can imagine, smart contracts have enormous implications for businesses in almost any industry. A lot of the new cryptocurrencies being created these days offer built-in smart contract technology.
What makes Bitcoin and Ethereum similar?
There are a lot of similarities between these two cryptocurrencies other than the programming:
- Both coins are valuable. At the time of writing, Bitcoin and Ethereum are the number one and two coins respectively in terms of market cap. They’re the world’s biggest and most valuable cryptocurrencies.
- Both coins are popular. Even with hundreds of other cryptocurrencies now in existence, Bitcoin and Ethereum remain widely used.
- Both coins are old. Some of the newer coins outperform Bitcoin and Ethereum in various ways. Other coins are quicker to transfer, have lower fees or have extra features.
Proof-of-work is required to make sure a blockchain runs smoothly and to prevent the misrepresentation of data, such as using the same cryptocurrency for two different payments.
As Bitcoin and Ethereum are two of the oldest and most trusted cryptocurrencies, they have both become extremely popular. However, too many people using them has led to a few scaling problems for the proof-of-work protocol.
Having more users requires more computational power to maintain the blockchain, which can result in slower transactions and higher transaction costs. To solve this, Bitcoin and Ethereum are implementing different solutions.
The Bitcoin solution to the scaling problem
Over the years, Bitcoin has had offshoots that were specifically designed to solve its scaling problem. Litecoin and Bitcoin Cash are two well-known examples.
Bitcoin as we know it today resisted those hard forks and remained unchanged. Instead, it introduced two solutions called “SegWit” and the “Lightning Network”.
- SegWit: A way of arranging data to make transfers faster and easier. The downside is that it requires specifically compatible address types, so you can only use SegWit with certain wallets and certain exchanges. This basically means that Bitcoin users often have to turn SegWit on and off to use it properly. For this reason, most people seem to just keep it turned off.
- The Lightning Network: A layer-2 system that sets up secondary payment channels to go around the blockchain. The idea is to keep smaller transactions off the main Bitcoin network to alleviate congestion. As of December 2020 it’s operational, but in limited use and with a range of issues.
The Ethereum solution to the scaling problem
Ethereum’s smart contracts are extremely useful, but can also slow down the network. This is especially prevalent when there are interconnected smart contracts.
To accommodate this, Ethereum is undergoing a major upgrade to its protocol called ETH 2.0. This upgrade includes:
- Proof-of-stake. This is a major change. It involves switching from the old proof-of-work mining system to a new and more efficient proof-of-stake algorithm. Rather than having computers solve problems to verify blocks, it will instead have people verify transactions simply by holding ETH in their wallets. It’s an increasingly common mining method for new coins, but modifying an old blockchain like Ethereum is a lot more difficult and it may introduce some security risks.
- Beacon chain. The beacon chain is the central data layer of ETH 2.0 responsible for creating new blocks, reaching consensus and rewarding validator nodes with freshly minted Ether.
- Shard chains. Shards are designed to support the beacon chain by processing certain transactions on shards instead of the beacon chain. This frees up space and makes the network more scalable.
Similarities and differences between mining Bitcoin and Ethereum
Those that complete the proof-of-work protocols on the Bitcoin and Ethereum blockchains are often referred to as “miners”. Mining is the act of adding a new block to the blockchain, which is usually rewarded with the associated cryptocurrency token. Bitcoin and Ethereum mining operations are similar in terms of process, but the algorithm they employ is different. The algorithm used in Bitcoin mining is SHA-256. The algorithm used in Ethereum mining is Ethash.
For each algorithm both sets of miners compete against one another to solve mathematical problems. While a new block is added to the Bitcoin blockchain every ~10 minutes, a new block is added to the Ethereum blockchain every ~15 seconds.
| Bitcoin | Ethereum | |
|---|---|---|
| Block time | 10 minutes | 15 seconds |
| Block reward | 6.25 BTC | 2 ETH |
| Hardware | ASICs | Graphics cards |
| Algorithm | SHA-256 | Ethash |
Mining hardware
Due to lower memory requirements, Bitcoin mining is compatible with ASIC (Application Specific Integrated Circuit) devices, rather than standard computer hardware. ASICs are specialised hardware devices which are tailored to mining Bitcoin and other cryptocurrencies. ASIC devices are expensive, which limits them to larger centralised organisations. This reduces the amount of economically viable participants on the network and means the centralisation of Bitcoin mining is a constant risk. As ASIC circuits have advanced, Bitcoin mining difficulty has increased to ensure that the time taken to add a new block to the chain remains consistent.
To ensure Ethereum remains ASIC resistant, the Ethash Proof-of-Work algorithm was developed. To achieve ASIC resistance the Ethash mechanism requires significantly larger amounts of computer memory. Unlike Bitcoin, which sends digital signatures, Ethereum sends the cryptocurrency tokens. This makes it far harder to develop ASIC mining equipment. The mining process is best completed by GPUs, which allows for far more participants within the Ethereum network. However, ASIC developers are constantly working on a solution to the Ethash algorithm.
The profitability of the two mining options is difficult to compare, as too many variables come into play. Mining is completed to acquire more BTC or ETH. Both require a significant upfront investment in computational power but the future profitability of each is fully dependent on the future price of the digital assets.
How to decide whether to invest in Bitcoin or Ether
Bitcoin and Ether are two of the most trusted cryptocurrencies currently in existence. They would represent a reasonable starting point for any cryptocurrency investor.
Bitcoin
Bitcoin has dominated the cryptocurrency markets since its inception in 2009 and was for a while the only option for cryptocurrency investors. Thanks to its market leading origins, the token has remained number one. At the time of writing, Bitcoin’s market cap has grown to over $1 trillion and has outpaced the growth of all other coins.
Over the decade, the cryptocurrency has moved from a transactional token to a store of value for many investors due to its “tried and tested” track record. Bitcoin’s strongest advantage over Ether as an investment lies with scarcity. There will only ever be 21 million Bitcoin in existence. This gives the coin strong fundamentals from a supply and demand point of view, and led to some likening it to “digital gold”.
With further technical upgrades, applications may be built to run on the Bitcoin blockchain giving it some of the functionality that smart contracts bring to Ethereum.
Ether
Ether is the fuel of the Ethereum blockchain. Investing in Ether is seen by most as an investment and a belief in the development of the Ethereum network. Traditionally, as Ethereum has grown, so has Ether.
The Ethereum network is utilised by both dapps and centralised organisations such as Microsoft. A flexibility for development and appetite for innovation has been the backbone of its success. Many investors view Ether as a proxy investment for all of the protocols and businesses that utilise the Ethereum blockchain. The more protocols that are added, the better. Future upgrades to the network, such as ETH 2.0, will make the network even more accessible.
Note: Cryptocurrency markets can be volatile, with significant daily price swings. While both cryptocurrencies offer strong fundamentals, investors should only risk what they are willing to lose.
What makes Bitcoin and Ethereum different?
One of the main differences between Bitcoin and Ethereum lies with each of the respective cryptocurrencies’ tokenomics. Bitcoin is capped at a supply of 21 million. There will never be more than 21 million Bitcoin in existence and it’s expected to reach this limit by 2140.
In comparison, ETH has an unlimited supply. Although unlimited, the creation of new coins is very tightly controlled to keep inflation from ruining the coin’s value.
Bitcoin and Ethereum have developed differently over the years and have partnered with different protocols to improve accessibility.
For example, a system called Rootstock is being developed as an “attachment” for the Bitcoin blockchain, which allows smart contract operations to occur off-chain. This could one day allow for dapps to be built that are backed by the Bitcoin network, very similar to what we’ve seen develop with Ethereum.
The developments on Ethereum have led to an industry standard for cryptocurrency tokens called ERC20. This is a set of measurements for a cryptocurrency to allow for greater compatibility between multiple digital assets.
These standards are very useful. Just like a train needs to be exactly wide enough to ride on its rails, cryptocurrencies need to have exactly the right programming to fit into wallets and be easily transferred.
By creating the ERC20 standard, coins are more accessible and transferable, which leads to a wider user base and increased popularity. So far, countless ERC20 tokens have been built on Ethereum.
Where to buy BTC and ETH
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Prices: Bitcoin vs Ethereum
Bitcoin
Ethereum
Bottom line: The same but different
Bitcoin vs Ethereum is a comparison that has always been hard to make due to the two cryptocurrencies’ wildly different purposes. However, comparisons of these two cryptocurrency giants may become easier in the future.
There are many “cross-chain” developments in the pipeline for Bitcoin and Ethereum, which are designed to allow users to connect different blockchains together and transfer coins more freely. Users can already “import” Bitcoin onto the Ethereum blockchain to be used in dapps.
Although launching with similar intentions, Bitcoin and Ethereum have progressed down very different development paths. After many years apart, cross-chain developments could now hold the key to connecting these two titans of the cryptocurrency industry and reinforcing their top market cap positions.
*Cryptocurrencies aren't regulated in the UK and there's no protection from the Financial Ombudsman or the Financial Services Compensation Scheme. Your capital is at risk. Capital gains tax on profits may apply.
Cryptocurrencies are speculative and investing in them involves significant risks - they're highly volatile, vulnerable to hacking and sensitive to secondary activity. The value of investments can fall as well as rise and you may get back less than you invested. Past performance is no guarantee of future results. This content shouldn't be interpreted as a recommendation to invest. Before you invest, you should get advice and decide whether the potential return outweighs the risks. Finder, or the author, may have holdings in the cryptocurrencies discussed.
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