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Cryptocurrency is coming into the investment spotlight once again as prices begin to soar. Two of the most popular cryptocurrencies are Ethereum and Bitcoin. While they are both digital coins, they have unique differences that investors should consider before they decide to buy.

Cryptocurrency speculation ran wild in 2017 with a surge in prices for digital coins like Bitcoin and Ethereum. But after bottoming out in 2018, we’re seeing the early stages of another cryptocurrency rally. This article will look at Bitcoin vs. Ethereum and explore the differences between these two popular cryptocurrencies.

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Bitcoin Basics

Bitcoin (BTC) is the most popular and widely held cryptocurrency, with a market cap of $221 billion and an average trading volume of $20 billion per day. It is a peer-to-peer digital currency where transactions are recorded on ledger technology known as a blockchain.

The idea of Bitcoin emerged from a 2009 white paper written by the mysterious Satoshi Nakamoto (whose identity remains to be confirmed). Bitcoin would be completely decentralized from any government or bank.

Instead of a central bank issuing new money as currency, new Bitcoins are “mined” using powerful computers to solve complex algorithms. A successful ‘mining’ adds a new block to the blockchain, and the miner is rewarded with a pre-determined number of new Bitcoins.

These coins can be stored in a digital wallet, either on a mobile device or a computer. These are known as hot or cold wallets, with the former being connected to the internet and easier to transact, and the latter being unplugged from the internet and more secure.

Around 18 million Bitcoins have been successfully mined to date, but there is a finite supply of just 21 million Bitcoins. Once all of the Bitcoins have been successfully mined there will be no more supply – even if some Bitcoins are lost forever.

Bitcoin is strictly used as a digital currency and a store of value, similar to that of gold. The primary goal is to establish itself as an alternative monetary system. Bitcoin “mania” reached a fever pitch in 2017 when the price of one coin traded at just under $20,000. Today, the price of one Bitcoin is worth just under $12,000.

Finally, Bitcoin trades on cryptocurrency exchanges like Wealthsimple Crypto for fiat money (i.e. Canadian or U.S. dollars), or for other digital coins like Ethereum or Litecoin.

Ethereum Basics

Ethereum (ETH) is safely in the number two position in terms of cryptocurrency popularity with a market cap of $42 billion and an average trading volume of $9 billion per day.

Unlike Bitcoin, which is simply a form of digital money, Ethereum is an entire network that exists on a blockchain and can be used to run decentralized applications, create and enforce smart contracts, and can even create additional cryptocurrencies.

Ether – the cryptocurrency of Ethereum – can be sent, received, and stored as digital money. It’s used to pay transaction fees on the Ethereum network.

Like Bitcoin, the idea of Ethereum was proposed in a white paper written in 2013 by Russian-Canadian programmer Vitalik Buterin. In it, he described Ethereum as a “decentralised mining network and software development platform rolled into one.”

Ether is also “mined” to create new tokens or coins, but it is preparing to launch Ethereum 2.0 in 2020 which will focus more on proof of stake rather than a proof of work concept (mining to solve complex puzzles). Ether will be awarded to “validators” who have an established history with the Ethereum network.

There is no limit to the number of Ether tokens that can be mined or awarded, although Ethereum 2.0 is expected to limit the creation of new supply to around 2% per year (instead of the current 10% per year inflation rate).

Ether trades on cryptocurrency exchanges like Wealthsimple Crypto and can be traded by currency brokers and other online digital wallets.

Bitcoin vs. Ethereum: Similarities

Both Bitcoin and Ether are digital currencies that can be sent, received, and held in storage. Each of these digital coins (BTC and ETH) can be traded on a cryptocurrency exchange. For instance, you can trade Bitcoin and Ethereum for free using Wealthsimple Crypto.

Ethereum was created as a complement to Bitcoin, not as a competitor, with Ethereum founder Vitalik Buterin arguing that Bitcoin needed a scripting language for application development. But today Ethereum is seen as Bitcoin’s main rival and the second most popular cryptocurrency in the world.

Because of this perception, the price of Bitcoin and Ethereum seem inextricably linked – meaning their price movements rise and fall together unlike any other digital coin.

That’s where the similarities end.

Bitcoin vs. Ethereum: Differences

Bitcoin only has two uses: as a digital currency and a store of value. It’s much like gold, where there’s no intrinsic value but its price increases or decreases with public sentiment and speculation. If investors believe that the demand for Bitcoin will increase, they will bid the price up. If investors believe the demand for Bitcoin will decrease, they’ll sell and drive the price down.

Ethereum is more than just a cryptocurrency, making it quite different than Bitcoin. In fact, you could argue that Ethereum isn’t really a cryptocurrency at all – it’s a type of blockchain technology that powers an entirely decentralized network that allows developers to create applications, smart contracts, and even games (CryptoKitties, anyone?).

Other key differences include:

  • Supply – Bitcoin has a finite supply of 21 million coins, while Ethereum has no limit to the amount of Ether that can be created.
  • Mining – Bitcoin miners must use powerful computers to solve the complex puzzles that reward them with new Bitcoins. Ethereum plans to move to a proof-of-stake concept that rewards loyal and trusted “Validators” with new Ether coins, reducing the energy required to produce new coins.
  • Block time – Ethereum takes 14 seconds to create a new block in the chain, versus 10 minutes for Bitcoin. Shorter block times mean faster transactions.
  • Purpose – Bitcoin wants to disrupt the centralized monetary system and establish itself as an alternative currency. Ethereum aims to grow its decentralized application platform and smart contracts.

Final Word

Bitcoin and Ethereum are the world’s number one and number two most popular cryptocurrencies. As an investment, their prices seem to rise and fall together as if they’re joined at the hip. That’s where the similarities end.

Ethereum has a much broader objective, built to operate as a decentralized network that powers applications and smart contracts. Bitcoin’s main objective is to establish itself as an alternative (and decentralized) currency.

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Article comments

Bill says:

Hi Robb,

What are thoughts on the ETF QBTC.TO? It seems like a decent way to get some bitcoin exposure for a small percentage of someone’s portfolio, as opposed to actually purchasing an entire share (currently $29,000+/share). Any thoughts are greatly appreciated!

Robb Engen says:

Hi Bill, you’re right that it’s not a bad way to get exposure through an ETF rather than trying to buy one entire coin. Or, you could go the Wealthsimple Crypto route since it allows you to buy tiny fractions of a coin (I bought $100 worth). Note the high MER on the QBTC ETF of 1.95%.