Over the course of 2017, the price of 1 Bitcoin shot up from $963 to $19,694. Similarly, the price of 1 Ethereum shot up from $8 to $747. People are going crazy over these two cryptocurrencies, and you may be tempted to join in yourself.
But aren’t cryptocurrencies just virtual money? What’s the difference between these two?
This article will bring you up to speed enough to understand why Bitcoin and Ethereum are such hot topics right now and why people are so excited about them. This article will not equip you to do any serious Bitcoin- or Ethereum-related development.
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 your current Bitcoin balance isn’t determined by some value in a database. 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.
In order 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 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 can be expanded to areas outside of financial technology. Because of this, Ethereum is often called “programmable money” — yes, it is a digital currency, but that money can execute code.
Bitcoin vs. Ethereum in a Nutshell
In short: whereas Bitcoin is just a digital currency, Ethereum is far more than that. Not only are they fundamentally different in what they aim to achieve, here are some of the key differences as far as their values as currencies are concerned:
- Bitcoin’s average block time is 10 minutes whereas Ethereum’s average block time is 15 seconds, which means transactions can be confirmed faster.
- The amount of Bitcoins earnable through mining is cut in half every four years, meaning the total supply of Bitcoins will eventually reach 21 million and stop. The amount of Ether earnable through mining is capped at 18 million per year, so there will always be new Ether entering circulation.
- Bitcoin is best mined using ASICs, dedicated machines that are better at mining than regular computers, which tends to consolidate mining rewards to “mining cartels” and pushes out everyone else. Ethereum is best mined using GPUs, which are more readily available and arguably more equal. Learn more about ASIC mining and the effects of Ethereum on GPU prices.
- Bitcoin is more often seen as “digital gold” because it has holding value. Ethereum is more often seen as “digital currency” because it has spending value.
The main difference between the two cryptocurrencies is that Ethereum is programmable. It applies blockchain technology to more than just money, and that potential is why Ethereum supporters see it as the future. Bitcoin is very slow to implement changes and, in many people’s eyes, is only still around because it was the first cryptocurrency.
While the cryptocurrency industry is still in an infant stage, there’s no doubt that blockchain technology is transforming the world. If you want to get involved, we recommend Ethereum as of this writing. See our guide to building an energy-efficient Ethereum miner.
But hundreds of other cryptocurrencies exist, so feel free to research them and see what else is happening. Regardless of which cryptocurrency you back, keep in mind that some of them may not be as reputable as they seem. See our article on avoiding cryptocurrency scams!
How do you feel about Bitcoin, Ethereum, and cryptocurrencies? Is it all just one big fad waiting to bust? Or are they really the future? Share with us down in the comments below!