What’s behind the cryptocurrencies Bitcoin and Ethereum?
Bitcoin and Ethereum are the most well-known cryptocurrencies and have revolutionised financial markets. Both are tradable on nearly every major crypto exchange, demonstrating their high liquidity and widespread acceptance among investors. Their prices are dynamically determined by supply and demand across global exchanges.
Both cryptocurrencies are built on blockchain technology, a decentralised, tamper-proof digital ledger that records transactions transparently without central control. Despite this shared foundation, Bitcoin and Ethereum pursue different goals and use cases.
Bitcoin (BTC) was developed in 2009 as a decentralised alternative to traditional money. It serves as a digital store of value and is often compared to gold because its maximum supply is capped at 21 million BTC. This scarcity makes Bitcoin a stable asset, as its limited supply prevents excessive inflation. Many investors see Bitcoin as a hedge against inflation, similar to gold, which is also often valued in US dollars.
The Bitcoin blockchain operates on a Proof of Work (PoW) mechanism, where miners solve complex mathematical problems to verify transactions and add new blocks to the blockchain. This system ensures high security but requires significant energy consumption.
Ethereum (ETH) was launched in 2015, introducing major advancements in blockchain technology. While Bitcoin is primarily used for payments, Ethereum enables smart contracts, automated payments, and digital identities, forming the foundation for decentralised applications (dApps). This flexibility has made Ethereum the backbone of the DeFi (Decentralised Finance) sector.
Since the upgrade to Ethereum 2.0, the network has transitioned to Proof of Stake (PoS), where users stake their Ether (ETH) as collateral to validate transactions. This reduces energy consumption significantly and enables faster transactions.
The differences between Bitcoin and Ethereum
Bitcoin and Ethereum are the largest cryptocurrencies but differ in their technology, purpose, and development. Despite their differences, Bitcoin and Ethereum also complement each other within the crypto sector.
Bitcoin offers security and stability, while Ethereum provides innovation and flexibility. Both have established positions in financial markets and continue to evolve. Here are the key differences between them:
Popularity in society
Bitcoin and Ethereum are the most recognised cryptocurrencies and have become an integral part of the financial world. However, their perception and use in society differ.
Bitcoin (BTC) – the symbol of cryptocurrency
The first and most well-known cryptocurrency, often considered synonymous with the entire crypto market
Perceived as digital gold and a hedge against inflation
Highly attractive for long-term investors
Increasing use as a store of value and payment method
Strong media presence and growing adoption by businesses and institutions have boosted Bitcoin’s trading activity on exchanges
Access for investors facilitated by Bitcoin ETFs (investors own ETF shares, not actual BTC)
Ethereum (ETH) – the innovation driver in crypto
Widely used within the crypto industry and among developers
The foundation for smart contracts, DeFi applications, and NFTs
Focused on technological innovation and blockchain development
ETH usage is growing with an increasing number of decentralised applications (dApps)
Plays a crucial role in the digital financial system
Although Bitcoin and Ethereum are perceived differently, both have become essential to financial markets and continue to drive blockchain technology forward.
The technology behind them
Both Bitcoin and Ethereum rely on blockchain technology, but they differ in their technical implementation.
Bitcoin uses the Proof of Work (PoW) mechanism, where miners solve complex calculations to validate transactions and add new blocks to the blockchain. This ensures high security and decentralisation but requires significant energy and limits scalability. The Bitcoin blockchain was intentionally designed to be simple and stable, focusing on being a secure payment system.
Ethereum initially used PoW but transitioned to Proof of Stake (PoS) with Ethereum 2.0. In PoS, validators stake ETH as collateral to process transactions. This method reduces energy consumption and enables faster transactions.
Ethereum’s defining feature is smart contracts, which automate transactions without intermediaries and serve as the foundation for dApps. Many DeFi applications on Ethereum rely on stablecoins pegged to the US dollar to minimise price volatility.
Ethereum is not just a cryptocurrency but a platform for diverse blockchain-based projects.
Scalability
Scalability is a major challenge in the crypto industry, referring to a network’s ability to process a high number of transactions efficiently. Both Bitcoin and Ethereum face scalability challenges but use different solutions to improve performance and transaction speeds.
Bitcoin – limited scalability, focus on security
Block size and time: 1MB blocks, ~10-minute block time
Transaction speed: ~7 transactions per second (TPS)
Challenge: Limited capacity can lead to slow and expensive transactions during high network demand
Solution: Lightning Network – a Layer-2 solution enabling fast, low-cost off-chain transactions
Ethereum – faster transactions, Layer-2 solutions
Block time: ~12 seconds, allowing more transactions than Bitcoin
Transaction speed: Significantly improved after PoS transition
Challenge: High demand leads to rising gas fees
Solution: Layer-2 technologies like Rollups, which bundle multiple transactions off-chain before adding them to the main blockchain, reducing costs and increasing speed
While Bitcoin prioritises stability and security, Ethereum focuses on greater scalability and faster transactions. Both networks are continuously evolving to improve efficiency and user experience.
What is a Layer-2 solution?
A Layer-2 solution extends the main blockchain, processing transactions off-chain before bundling them into a single transaction on Layer-1. This increases speed and lowers costs while maintaining security.
Use cases of cryptocurrencies
Bitcoin and Ethereum have established themselves in financial markets but serve different purposes. While Bitcoin is primarily seen as a digital store of value, Ethereum powers a wide range of decentralised applications. Each has its own strengths and applications.
Bitcoin (BTC)
Store of value: Often called digital gold, Bitcoin serves as protection against inflation and currency devaluation.
Payment method: Used globally for transactions, by both individuals and businesses.
International transfers: Low fees and fast transactions make Bitcoin a popular alternative to traditional bank transfers, increasingly integrated into crypto payment systems.
Financial instruments: The basis for Bitcoin ETFs and institutional investments.
Reserve asset: Some companies and even countries hold BTC as part of their financial reserves.
Ethereum (ETH)
Smart contracts: Automated contracts that execute without intermediaries.
DeFi (Decentralised Finance): Ethereum enables lending, staking, and token trading without banks.
NFTs (Non-Fungible Tokens): The Ethereum blockchain powers digital ownership for art, music, and virtual assets.
dApps (Decentralised Applications): A platform for blockchain-based applications, from games to social networks.
Tokenisation: Assets like real estate and stocks can be digitised on Ethereum, making them tradeable on the blockchain.
Both Bitcoin and Ethereum play essential roles in financial markets, offering unique benefits and opportunities. Their continued development will shape the future of blockchain technology.
