Introduction to Cryptocurrency
When I started studying at university around a decade ago now, cryptocurrencies where not spoken about, now, I can imagine they get discussed in every single finance class! The world of cryptocurrencies is ever-evolving, with countless digital assets available for investors and enthusiasts alike. In this guide, we’ll delve deep into two of the most prominent cryptocurrencies: Bitcoin and Ethereum, comparing their core technologies, applications, and market performance. This is important for investors, even those that want to steer clear of cryptocurrencies as they are having an impact on many different industries!
Basics of Crypto Including Bitcoin & Ethereum
Back in the early days of the internet, one of the first problems was how to move money, peer-to-peer, without a central intermediary. When I started learning about cryptocurrencies, lots of sources give the example of the guy who bought two pizzas for 10,000 bitcoins Meet the crypto developer who spent $3.7 billion in fledgling Bitcoin on pizza | The Independent.
The technology has the premise of solving this payment riddle but has moved on much further from this. In simple terms, a cryptocurrency is a digital or virtual currency that is secured with cryptography and something that operates independently of a central bank or government (which is something seen to be a positive by some and what makes it risky by others), the fact that its not ran by a government or banks means it is decentralised. Cryptocurrencies employ blockchain technology, which is a public digital ledger that records all network transactions. This decentralised ledger is managed by a network of individuals and companies with computers that collaborate to validate and record transactions. Blockchain technology is now being used in many different industries – see the below https://www.forbes.com/sites/forbestechcouncil/2022/06/10/15-industries-that-could-significantly-benefit-from-blockchain-technology/?sh=25128c8b7af2
What is Bitcoin?
Bitcoin, created in 2009, is the first and most well-known cryptocurrency. It was designed as a decentralised digital currency that enables peer-to-peer electronic transactions without the need for an intermediary. Bitcoin employs blockchain technology, serving as both a store of value and a means of peer-to-peer money transfer without the use of a bank.
Its ticker symbol is BTC and is seen by some investors as digital gold. It is different from stocks as no physical item is produced, just digital, so price increases currently depend on speculative trading by investors. Bitcoin is not without controversy, Bitcoin is banned in a number of countries, but is also being used in other countries to overcome difficult situations, for example, Ukraine have accepted bitcoin payments.
Is bitcoin worthless?
Is bitcoin really worthless? Several high ranking economists denounce bitcoin as an economic bubble – https://finance.yahoo.com/news/good-drug-dealers-nobel-prize-winners-snub-bitcoin-184903784.html. Additionally, the environmental impact of bitcoin is substantial, as its proof-of-work algorithm for mining necessitates increasing amounts of electricity, contributing to global climate change. The University of Cambridge estimates that since its inception, bitcoin has generated around 200 million tonnes of carbon dioxide, accounting for roughly 0.04% of all carbon dioxide emissions since 2009.
What is Ethereum?
One of the next big players in the cryptocurrency market is Ethereum, launched in only 2015, just eight years ago at the time of writing, is a blockchain platform for developing decentralised applications (dApps) and smart contracts. While it also employs blockchain technology, Ethereum’s blockchain is said by many to be more flexible than Bitcoin’s.
Ethereum enables the creation of self-executing smart contracts (which have been used heavily with NFT’s) with the agreement terms written directly into code, making it a powerful tool for developing decentralised finance (DeFi) platforms, prediction markets, and other decentralised applications. Its native cryptocurrency, Ether (abbreviated as ETH), holds the second-largest market capitalisation among cryptocurrencies, surpassed only by bitcoin. Ethereum operates as an open-source software and was conceived in 2013 by programmer Vitalik Buterin, alongside co-founders Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin. Development began in 2014 following a crowdfunding effort, and the network officially launched shortly after on July 30, 2015.
Bitcoin Vs Ethereum – The Key Differences
So what are the key differences in the Bitcoin vs Ethereum debate?
Purpose: Bitcoin primarily serves as a digital currency and store of value, while Ethereum is designed as a platform for dApps and smart contracts. Both very different technologies!
Supply: Bitcoin has a maximum supply of 21 million coins, whereas Ethereum does not have a capped supply, scarcity in terms of traditional currencies is a big issue, so something to understand further!
Consensus Mechanism: Bitcoin uses Proof of Work (PoW) for transaction validation, while Ethereum is transitioning from PoW to Proof of Stake (PoS).
Transaction Speed: Bitcoin’s block time is approximately 10 minutes, while Ethereum’s is around 12-15 seconds.
Smart Contracts: Ethereum’s platform supports smart contracts, whereas Bitcoin does not have native support for them.
Applications and Use Cases
Bitcoin is widely used for transactions and as a store of value. Ethereum, on the other hand, enables the development of dApps and decentralised platforms using smart contracts. The Ethereum network is also used to create and trade tokens, which are digital assets that can represent anything from physical assets like gold to virtual assets like video game items.
Market Performance and Volatility
When discussing Bitcoin vs Ethereum it’s important to discuss volatility. Both Bitcoin and Ethereum are known for their high volatility, with values fluctuating significantly over short periods, this is something which has caused some investors and businesses to not invest in the assets, for example, Amazon said that due to the volatility, it would be difficult to accept such assets for payments as some of their sellers run on small margins, but years later, rumours circulated that Amazon will soon accept crytpos as payments Amazon: Amazon may soon allow users to pay in cryptocurrencies like Bitcoin – The Economic Times (indiatimes.com). As the cryptocurrency market is still in its early stages, there is considerable uncertainty about the future use and adoption of these digital assets. Investors must conduct thorough research and understand the risks associated with cryptocurrency investments. Using monthly closing price data for BTC and ETH, average monthly returns between January 2019 and January 2023 has been 3.5% and 5.2% respectively. These kinds of returns are unfathomable compared to what we could expect in stock markets, which is often around 10% per year in the US stock market.
Conclusion
When it comes to the debate, Bitcoin Vs Ethereum, both cryptocurrencies serve different purposes and have unique features that investors need to carefully consider. Bitcoin is ideal for transactions and as a store of value, seen by some as digital gold, while Ethereum excels as a platform for developing decentralized applications and smart contracts and is likely to be a leader in NFTs or non-fungible tokens (*LINK to out page*). The choice between these leading cryptocurrencies ultimately depends on individual requirements and investment strategies, for investors looking for exposure to cryptocurrencies, there are now cryptocurrency ETFs, these kinds of assets can help investors get a little bit of exposure to the assets without being overwhelmed by the huge differences between the currencies. An example of such an ETF would be Bitwise 10 Crypto Index Fund (OTC:BITW)Â $499.0 million (A means of easily investing in the top 10 largest cryptocurrencies.).
For those considering investing in cryptocurrencies, remember that it’s essential to do your own research and understand the risks involved. To gain key strategies and insights for successful investing, read our previous post, “5 Reasons Why Bitcoin is Here to Stay,”.
It’s important to note that both of these cryptocurrencies are highly volatile and the value of Bitcoin and Ethereum can fluctuate greatly in short periods of time. It’s also worth noting that the technology behind these cryptocurrencies is still in its early stages, and there’s still a lot of uncertainty about how they will be used in the future.
Investing in cryptocurrency is considered a high-risk investment and it is essential to do your own research and understand the risks before investing and speak to a financial advisor!
