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Ethereum vs Bitcoin: which project has the upper hand in 2020?

By A.G.

12:10, 11 September 2020

Ethereum vs Bitcoin

Ethereum vs Bitcoin: summary and key differences

Bitcoin and Ethereum need no introduction. Bitcoin, founded in 2009 by Satoshi Nakamoto, was the first successful cryptocurrency when it launched. While not the first attempt at a decentralised currency, Bitcoin was the only one, at the time, to gain significant traction and adoption.

Through its success, it inspired the development of many other crypto projects, including Ethereum. Initially proposed in 2013 by Vitalik Buterin, the project went live in 2015. Ethereum took one of the key innovations behind Bitcoin, the blockchain, and repurposed it to support a broader range of functions.

So, is Ethereum better than Bitcoin? That’s a tricky question. Realistically, they should not be in direct competition, even though they do share a few similarities. Both are decentralised with no central issuer or authority, have a native token powering the network and utilise the distributed ledger technology known as the blockchain.

Despite these similarities, however, there’s a long list of differences between the two projects. And passionate communities on both sides inevitably pit Ethereum against Bitcoin.

Ethereum vs Bitcoin

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Cryptocurrency fit for purpose

Before comparing the technical details of Ethereum vs Bitcoin, let’s discuss the purpose of each project.

The original vision for Bitcoin was the creation of a digital currency, independent from governments and banks around the world. Introduced right after the global financial crisis, Bitcoin was promising a censorship-resistant, decentralised financial system at the time when the trust in the traditional financial system was at an all-time low.

While Bitcoin aims to create a new financial system, Ethereum expands on that vision. The Ethereum network, through its Virtual Machine and smart contract functionality, allows for the development of real-world applications on top of it. You can think of it as the decentralised app store.

Сonsensus matters

At the moment, both Bitcoin and Ethereum networks are using proof-of-work (PoW) consensus algorithms. PoW networks are very secure but tend to be relatively slow and resource-intensive.

The Ethereum network, however, is in the process of migrating to a proof-of-stake (PoS) consensus. The transition is meant to address the scalability issues that have plagued Ethereum for many years. In PoS, miners are replaced with validators, who stake their coins to secure the network. The Ethereum community chose to go with the Casper PoS protocol, which has a punishment mechanism to prevent malicious behaviour.

Cryptocurrency supply

Arguably, supply is the key difference between Bitcoin and Ethereum networks. Bitcoin has a limited supply, with only 21 million coins set to be mined. This adds a scarcity element to the bitcoin economics. Furthermore, the new supply of BTC is reduced roughly every four years, through a process called halving.

Ethereum, on the other hand, has no hard cap on the amount of ETH that can be created. As it attempts to be a decentralised app store, supporting an entire ecosystem of applications, capping the supply would be counterintuitive.

Transaction fees

The concept of transaction fees is another differentiating feature in the Ethereum versus Bitcoin comparison.

On the Bitcoin network, transaction fees are paid for each and every transaction. These fees go to the miners who then validate transactions and place them into a block.

Ethereum network uses the concept of gas, priced in ETH, instead of transaction fees. Every interaction with the Ethereum blockchain requires a certain amount of computational effort. Gas is used to pay for that computation. Simple send orders, for example, require little effort. Complex interactions with smart contracts, on the other hand, are very gas-intensive. So the cost of an Ethereum transaction depends on its complexity and the gas price, which is set by the miners.

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Block size

Block size is important in comparing Bitcoin vs Ethereum. It plays a key role in determining the transaction costs, confirmation times and scalability of a blockchain.

Blocks on the Bitcoin network are currently 1 MB. Disagreements over the block size eventually led to the creation of Bitcoin Cash as the fork of Bitcoin. Bitcoin Cash increased the block size to 8 MB, while Bitcoin maintained its block size at 1 MB and implemented the Segregated Witness (SegWit) soft fork to increase the number of transactions that can fit into a block.

On the Ethereum network, the block size is measured in gas and each block is limited to 12.5 million gas. The gas limit was increased as recently as June 2020, from 10 million, to alleviate the stress on the network, increase processing capacity and reduce fees.

Latest performance highlights and news

So far, 2020 has been a good year for cryptocurrencies, including BTC and ETH. BTC reached $12,000 on August 18, up from close to $7,500 at the end of 2019. ETH has had an even more impressive run, rallying from $140 to a high of $475 on September 2.

Over the past week, cryptocurrencies have experienced a short but relatively steep sell-off, with ETH dropping back to $330 in a matter of a few days and BTC testing the $10,000 level. The sell-off coincided with a broad decline in asset prices, from stocks to gold, partially attributed to a rally in the US dollar.

So, what are some of the recent news and developments related to Ethereum and Bitcoin? For quite some time, the main focus of the Ethereum community has been on the PoS migration. It should be able to address the scalability concerns and high transaction fees of the network. The most recent estimates put the launch of the Beacon Chain at the end of 2020 or beginning of 2021.

More recently, the emergence of decentralised finance (DeFi) applications have pushed transactions and fees on Ethereum to all-time highs. Not only that, but the total amount of gas used on Ethereum is more than double the peak of 2018 level, while the price of gas is almost five times higher.

Another exciting development has been the introduction of tokenised Bitcoin on the Ethereum network. Remember, the two projects operate on different blockchains that are not compatible. To date, almost $500m (£388m, €425m) worth of BTC has been tokenised on Ethereum. This represents just 0.3 per cent of the total BTC market cap, with the space poised to grow.

Bitcoin on Ethereum

Ethereum vs Bitcoin: investment thoughts

As always, predicting asset prices is a thankless task. Instead, we can look at the fundamentals of both networks to assess their future potential. BTC, for instance, is underpinned by strong institutional interest and limited supply acts as an inflation hedge, ever more valuable in the world of easy monetary policies. ETH, on the other hand, supports a growing ecosystem of decentralised applications and the transition to PoS will further cement its position as the only meaningful smart contracts platform. On fundamentals, both cryptocurrencies are well-positioned for future growth.

Fundamentals aside, there are plenty of optimistic price predictions for both ETH and BTC. According to a stock-to-flow price model, BTC is closely following the trend of the previous two halvings. The model suggests that BTC could reach $288,000 during this four-year halving cycle. Similarly, data analysis firm Ecoinometrics recently issued a price target of $41,000 by the end of 2020 for BTC.

So, which coin should you invest in right now, Ethereum or Bitcoin? Overall, both cryptocurrencies could be attractive investment opportunities and have a place in an investment portfolio. But as always, investors should exercise caution and do their research before investing in any crypto project.

 

Read more: Ethereum vs Ripple: which one should be in your portfolio in 2020?

Markets in this article

BTC/USD
Bitcoin / USD
68500.00 USD
1025.75 +1.520%
ETH/USD
Ethereum / USD
3780.32 USD
24.29 +0.650%
Gold
Gold
2346.61 USD
7.88 +0.340%

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