What Are the Differences Between Bitcoin and Ethereum?
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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 Is There Ever a Safe Time to Invest in Bitcoin or Ethereum? Is There Ever a Safe Time to Invest in Bitcoin or Ethereum? There will always be a measure of risk when "investing" in Bitcoin, Ethereum, or any other form of cryptocurrency. However, that risk can be managed. Here's how to do it. Read More .

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.

Bitcoin

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.

Bitcoin

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 and Bitcoin

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.

Cryptocurrencies

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:

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 How Bitcoin's Blockchain Is Making the World More Secure How Bitcoin's Blockchain Is Making the World More Secure Bitcoin's greatest legacy will always be its blockchain, and this magnificent piece of technology is set to revolutionize the world in ways we always thought improbable... until now. Read More . If you want to get involved, we recommend Ethereum as of this writing. See our guide to building an energy-efficient Ethereum miner How to Build an Energy-Efficient Ethereum Mining Rig How to Build an Energy-Efficient Ethereum Mining Rig Ethereum is an up and coming cryptocurrency. In this article, we cover everything you need to know to build you own mining rig. Read More .

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 5 Common Cryptocurrency Scams and How to Avoid Them 5 Common Cryptocurrency Scams and How to Avoid Them If you're interested in investing in the somewhat risky world of cryptocurrency, there are a few common scams you should be aware of. Here's how to avoid being caught out. Read More !

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!

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  1. Gary
    January 8, 2018 at 6:38 pm

    Thank you for the explanation. Confirms my suspicion that Bitcoin is like the internet stock bubble of 2000, when valuations of internet startups with no business plans to make money were valued in the millions. When your barber and your dad starts asking about "investing" in bitcoins, it's time to get out. It's the classic don't be the "last one holding the bag" bubble. Everyone is chasing the rise in "value" but the bitcoin by itself creates no value unlike a stock or a bond so holding thousand of dollars in bitcoin is negative value since you give up other investments where you can earn a return. The only "value" it has is selling it someone at a higher price and that's where the greater fool comes in. When the number of greater fools start to slow, the bitcoin value will fall since the last fools will find few buyers and can't sell it without taking a discount. Once the value starts falling there will be a rush for the exits.

  2. ayy
    December 28, 2017 at 5:33 pm

    Informative. Thanks a lot!

  3. hans vles
    December 28, 2017 at 9:53 am

    Blockchain is the new penicillin in a world infected by bankmicrobes.