Yes, Dogecoin, the cryptocurrency that started as a joke and is now worth $90 billion, merits attention. But for those just beginning to take the field seriously, the two big names in the $2.2 trillion cryptocurrency market remain Bitcoin and Ether, the coin that fuels the Ethereum network. Bitcoin, the pioneer, has been on a tear, its value up about 500% in the past year. Yet it’s Ether that has been showing its older brother a thing or two, with a price jump of around 1,500% over the same period. While the top two digital coins share some attributes, they are different in many ways. Here’s the breakdown.
1. What’s Bitcoin?
Bitcoin was the first digital currency to successfully create a way to transfer value between two people anywhere in the world. Many had previously tried — think DigiCash or Beenz. But the pseudonymous and still-unknown creator, or creators, of Bitcoin, Satoshi Nakamoto, made a crucial breakthrough by creating a digital, time-ordered ledger, called a blockchain, to record every Bitcoin transaction. This solved the “double-spend problem” — it ensured that people couldn’t send fake Bitcoin or Bitcoin that had already been sent to someone else. It also meant Bitcoin transactions take place independently from involvement — or interference by — typical financial intermediaries like governments, banks or corporations. Bitcoin was worth virtually nothing when it was first activated in January 2009. In April 2021, it reached a price of almost $65,000, its record at the time.
Bitcoin Booming? Ether Says Hold My Beer
Percentage change in price https://www.bloomberg.com/toaster/v2/charts/61ba6ef92d584c75afb9d5d260d0c6bd.html?brand=technology&webTheme=technology&web=true&hideTitles=true
2. What’s Ethereum?
Ethereum was invented by Vitalik Buterin, a Russian-Canadian teenager who released his white paper on the subject in late 2013. Buterin first fell in love with Bitcoin and the wild group of adherents it attracted, but soon became disaffected with its limits. Nineteen at the time, Buterin set out to craft a system that could do more than record static quantities. His vision was of a blockchain that could host what came to be known as smart contracts, self-executing agreements in which a chain of actions could flow from defined conditions and contingencies. The only limit to the transactions that can run on Ethereum is the imagination of the developers who build Ethereum applications.
3. What did Ethereum borrow from Bitcoin?
The idea of operating through a decentralized network of computers that shared an accumulating record of transactions — the blockchain. Both systems are publicly viewable and are built on open source software, so developers can jump in and try to make improvements. Both networks also rely on members known as miners who race to perform the complex calculations used to verify the transactions and are rewarded with newly issued digital currency. This kind of verification system is called proof of work, and it has come under increasing criticism for the energy it consumes and the pollution that energy creates. While comparisons are contentious, by one estimate the Bitcoin network uses more electricity than Sweden in a year.
4. How have they developed?
You can buy things with Bitcoin and use it to send and receive payments, but those original purposes are not important factors in why Bitcoin has grown in value. After spending much of its early years on the seedier side of the internet, as a tool for anonymous online transactions including drug purchases, Bitcoin has gained respectability as a form of “digital gold.” That is, as an asset prized for its ability to be a store of value like the precious metal. Of course, Bitcoin is famously volatile and has seen enormous price drops over its history. But it interests some investors as a hedge against inflation, since its supply is limited by its founding algorithm, and others as an asset that’s useful for diversification because it’s not correlated to stocks and bonds. Many others, of course, are buying because they think others will buy.
5. How about Ethereum?
It, too, has gone through an evolution, but the changes stem from how its network can deploy new ways of doing traditional things in finance and other industries:
- The first boom came in 2017 when initial coin offerings, or ICOs, became all the rage. Since many of the new coins were sold for Ether, and they all made use of the Ethereum blockchain, the price of Ether jumped to its then highpoint of about $1,200. Many ICOs were scams, and regulators soon quashed their proliferation. Yet they proved that Ethereum could be used to raise money for startup development without a bank or venture capital firm being involved. It was peer-to-peer fundraising and a new way of creating capital.
- The next boom for Ethereum came in the summer of 2020 when decentralized finance, or DeFi, projects flourished. These were startups that offered to pay interest on Bitcoin or Ether deposits, that offered collateralized lending, or that would allow users to swap one of the thousands of new cryptocurrencies for another on what are called Dexes, or decentralized exchanges. Here Ethereum was being used for another pillar of traditional finance, lending and collateral management, all again without banks or brokers being involved.
- The latest and maybe wildest Ethereum development has been non-fungible tokens, or NFTs. They’ve been around since about 2017, and are usually a digital representation of an image or work of art that is linked to the Ethereum blockchain in a way that can be used to prove their uniqueness. That in turn can make them valuable to collectors, because unlike a song in an MP3 format, they aren’t able to be copied infinitely. With one NFT of a collection of digital images selling for $69.3 million, few doubt there is froth in the NFT market at present, yet again it is paving the way for a broader set of new functionalities.
6. What’s going on with their prices?
The prices of both Bitcoin and Ether were relatively flat for a long stretch from early 2018 to the fall of 2020, a period known as the “crypto winter” by oldtimers. There are different reasons for each to have broken out of their doldrums so spectacularly, though both have benefited from the floods of money governments and central banks have pushed into markets in response to the coronavirus pandemic.
- Bitcoin has been gaining mainstream adherents who have been very public about their embrace of the digital currency. MicroStrategy Inc., a software and consulting company, had amassed about $2.2 billion of Bitcoin as of late February. Tesla Inc. earlier that month disclosed it had bought $1.5 billion in Bitcoin; its chief executive, Elon Musk, a Bitcoin booster, added the title of “techno king” and dubbed his chief financial officer “master of coin.” Wall Street and other financial institutions are becoming more comfortable with Bitcoin as well, with Morgan Stanley offering its customers a Bitcoin fund that tracks the coin’s performance. JPMorgan Chase & Co. is working on a similar fund for its clients.
- Ether has been propelled by the flurry of activity that is occurring on the world’s most-used blockchain, as well as from a planned switch to how its network operates. Under the plan, set to go into place later this year, some of the Ether that must be used to complete every transaction on Ethereum would be destroyed during that interaction. This could cut the overall supply of Ether, putting upward pressure on its price. Ethereum is also working toward changing its architecture to stop using proof of work as its verification mechanism. The change here could enable the network to increase the speed of transactions per minute by a factor of 10 or more while significantly cutting its energy use.
7. Does it matter which one is bigger?
Not really, except for bragging rights. Ethereum is already more used than Bitcoin and has more developers working on it. Yet that’s to be expected from a network that offers so many possibilities. The overall share of the market claimed by Bitcoin has been falling recently as Ether has made larger price gains. Bitcoin now accounts for about 46% of total crypto market value, down from roughly 70% at the start of the year, and Ether makes up 15%, according to tracker CoinGecko.
8. What are their risks?
In many parts of the world regulators are only now catching up with the innovations created by Bitcoin and Ethereum. The risk is that overly onerous financial or tax rules could shift development and energy away from certain countries. In the U.S., the new head of the Securities and Exchange Commission, Gary Gensler, is a crypto fan, having taught a class at the Massachusetts Institute of Technology on the topic. Yet the Internal Revenue Service views cryptocurrency as property that’s subject to capital gains taxes, which is a big disincentive for people to spend their crypto. There is also the risk of having your crypto stolen by scammers or that you misplace or screw up the private key needed to secure your digital assets.
9. Is this a bubble?
Some market observers certainly think so. They see the recent boom as a combination of reach-for-yield risk-taking and the kind of retail investor enthusiasm that pushed little-known stocks like GameStop Corp. to stratospheric heights. Then there is the fact that a small group of users, known as whales, own significant portions of Bitcoin and Ether and have the potential to move prices at their whim. Even crypto supporters acknowledge that the sector’s volatility can be extreme. But they point out that the major cryptocurrencies like Bitcoin and Ether have rebounded from their downtrends over the years to rise to new highs over several cycles.
The Reference Shelf
Bloomberg QuickTakes on Bitcoin and blockchain, on Bitcoin halving, crypto jargon and on the 2017-18 Bitcoin boom and bust.
A Bloomberg QuickTake on decentralized finance.
A history by Matthew Leising, “Out of the Ether: The Amazing Story of Ethereum and the $55 Million Heist that Almost Destroyed It All.”
A book by Nathaniel Popper, “Digital Gold: Bitcoin and the Inside Story of the Misfits and Millionaires Trying to Reinvent Money.”
The original white papers on Bitcoin, by the pseudonymous Satoshi Nakamoto, and on Ethereum, by Vitalik Buterin
Author: Matthew Leising
Read more at: https://www.bloomberg.com/news/articles/2021-05-09/bitcoin-and-ethereum-how-are-they-different-quicktake
