Thanks to incredibly high rises in value last year, many people got to know about the existence of bitcoin and Ethereum, which has been a top performer in 2017 with daily gains exceeding in excess of 3000%.
As of the time of writing, these two are the most valuable cryptocurrencies by market cap (please bear in mind that these numbers fluctuate quite a lot), as all the Bitcoins currently in circulation have a total value $143 billion, and that of Ethereum is $43 billion.
To give some perspective, that implies Bitcoin is currently held at almost the same value as Unilever, whereas Ethereum has approximately the same market value as Walgreens Boots Alliance or Starbucks. Be reminded that this is just to give some perspective, as you can’t really compare a digital currency to a company.
While Bitcoin and Ethereum are both just examples of cryptocurrencies (digital money transfer systems which use blockchain technology and encryption) to most people, there are definite distinctions in how they function and what they can be used for.
If you are contemplating an investment for speculative motives, or even more so if you are looking to use either platform for business, it’s critical to understand those differences. Reason being that these differences could be deciding factor in which goes on to become a generally accepted medium of exchange, and which will fade into obscurity and worthlessness.
What is a cryptocurrency?
So, starting right from the basics, cryptocurrency is a word that has come to be used to classify a newly developing asset class. For some reason, this word is a slight misnomer, as currencies are stores of value which can be used to buy goods or services, and a majority of cryptocurrencies cannot yet be exchanged for anything else apart from other cryptocurrencies.
So, while cryptocurrencies are not currencies in the real sense, they are indeed assets, as they have value and can be sold for fiat currencies like dollars, pounds, and euros. Much like gold, which everyone agrees has a value, but not anyone will accept in trade.
However, unlike gold, the existence of cryptocurrency is limited to the digital world. So, how can we believe it is real?
Well, primarily, cryptocurrencies store value using mathematics. Simply put, each cryptocurrency, over 1,000 of them, is a very sophisticated algorithm. The output of each algorithm reveals who owns each unit of that particular cryptocurrency. This algorithm is generally referred to as a blockchain.
Bitcoin was the first success at developing a blockchain-based asset which solved the double-spend challenge common to digital assets. Digital data can be indefinitely replicated and distributed – so how do you stop people just “copy and pasting” more money for themselves?
It overcame this problem in two ways – distribution and encryption. The use of public and private key encryption implies that even though every transaction on the network is public, only people with authorization can edit the data on the section of the blockchain where they are permitted to do so.
Concurrently, its distributed nature implies that consensus must be secured before updates to the blockchain are allowed across the more extensive network. This is made possible by the fact that the blockchain algorithm is running on not just one, but potentially millions of computers all over the world.
Simply put, if anyone takes the data of their five bitcoins and copy and paste it to give themselves ten bitcoins, it won’t work. Reason being that the changes they have made to their local blockchain will be rejected by the network consensus which recognizes that such individual doesn’t have ownership of those five extra bitcoins, as they don’t have the correct private keys.
How are Bitcoin and Ethereum different?
Bitcoin is often referred to as the “Grandfather of cryptocurrencies” as it was the first real cryptocurrency and has been in distribution since 2009. Ethereum is a far more recent innovation, starting operation in 2015. There is a vast difference between bitcoin and ethereum.
In the period between Ethereum and Bitcoin’s release, many other cryptocurrencies appeared. Mostly, however, they were confined to trying to improve on some features of Bitcoin’s performance – for instance, increasing the speed of transactions or enhancing the security or anonymity of transactions.
Slating bitcoin vs Ehereum, Ethereum is unquestionably faster than bitcoin, as transactions are typically settled in seconds, rather than minutes in the case of Bitcoin. But Ethereum also takes things a little further. While still based on the blockchain, and working as a store of value, its evangelists and enthusiasts see it as a platform for disseminated computing, which comes with its built-in currency, called Ether.
While the Bitcoin blockchain can simply be visualized as a database of wallets with a specific amount of currency stored in each, the blockchain which contains the Ethereum network is a more complicated system, capable of saving computer code (applications) that can utilize the CPU power going into the network to execute.
Ether, the Ethereum currency, designates this CPU power – so the notion is that businesses, governments or individuals will purchase and sell Ether to let them tap into the enormous, disseminated resources of the Ethereum network to run their applications.
The first of these applications are known “smart contracts.” The “smart contract” is a way of automating contracts and agreements so they will execute when consensus states that conditions have been filled. Though simple, their uses are widespread – such as authorizing payment systems which will release funds on completion of work or allowing the transfer of ownership of good after making payment.
The main difference between ethereum and bitcoin is that the Ethereum network also supports the creation of other tokens, or digital currencies, utilizing the same protocol as Ether but disseminated on several blockchains, which can either be private or public. Which means organizations can create these tokens to designate shares, voting rights or as a way of verifying identity or authorization credentials.
Should I invest in Bitcoin or Ethereum?
Here, we are going to suggest some important things that you need to bear in mind, if you are interested in making speculative investments in cryptocurrency. Ultimately, the long-term growth of any business, as well as cryptocurrency, depends on valuable applications being found for its assets.
If Bitcoin goes on to become a generally accepted medium of exchange, or the Ethereum network grows into an established standard for distributed programming, then the value of these assets is likely to continue to increase.
One thing common in technology, however, is that there is always something closing in at the heels of the front-runners. Newer and more effective algorithms could overtake either Bitcoin or Ethereum.
Additionally, both are faced with the constant threat of government regulation. The value of many digital assets, including Bitcoin and Ethereum have been in the reds since the beginning of the year, which has been connected to threats of their trade being regulated by the Chinese and Korean government.
The fact remains that the enormous increases in value we have seen over the last five years has been mainly due to speculative trading – people purchasing these assets in the hope that they will be able to sell them at a far higher price to someone else in the future.
This is often a standard procedure for inflated prices and an imminent crash back down to earth, which many believe could take place at any time and may have started already.
Overall, realizing sustainable growth will be determined by the useful applications, such as more businesses and corporations accepting Bitcoin as a payment method, and more apps becoming widely used and supported on the Ethereum network.