This complete guide will teach you everything about Bitcoin and Ethereum in order to make the best choice for your short and long term investment strategy.
At the core level the main difference between Bitcoin and Ethereum is; Bitcoin is a store of value and Ethereum is a network that runs applications and smart contracts. Both are fundamentally different from each other and hence it’s very important to know how they work. Let’s see what all the fuss is about.
Bitcoin vs. Ethereum – Understanding both technologies
Some naysayers and talking heads will claim that cryptocurrencies are risky and volatile. In a way they are right. It’s always risky to invest in what you don’t understand. While we can’t ( yet ) tame the volatility, we can certainly mitigate the risk. The best way to do it is by learning how Bitcoin and Ethereum work. After reading this article, not only will you be able to make the right decision for your investment strategy, but you will also become a pro that can provide the best response to your friends and family at the dinner table when the topic inevitably shifts towards cryptocurrencies.
People’s snarky remarks ( mostly formed by the pre-historic mainstream media ) will bounce off your armor plated kevlar of pure unadulterated knowledge and expertise. You will be more confident with your investment and trading strategies and you will rekindle that passion for discovery that your high school teachers tried so hard to hammer into submission and conformity. Be advised! Learning about cryptocurrencies will be an eye opening experience and you will most definitely want to learn more. It’s a black hole of knowledge and we’re diving head first into the abyss. So let’s turn on the lights, grab a sharp scalpel and throw Bitcoin and Ethereum on the dissecting table.
What is Bitcoin?
A better question to start with would be; Why is Bitcoin here? Back in 2007 the latest financial debauchery of big banks and governments have turned the housing market into a global casino, causing a huge worldwide financial crisis and a subsequent depression lasting more than a decade. Of course none of the big players ( Banks, Central Banks and Governments ) have admitted any fault in their shenanigans and they simply printed endless piles of fiat currency in order to bail themselves out. And as expected the regular people got stuck with the bill for this exquisite banquet of financial debauchery. Needless to say nothing has changed since then and the same financial time bombs ( depicted brilliantly in the film; The Big Short ) are still ticking away today waiting to explode at any moment, making 2008 look like a picnic. And until this day we have communism for the elites and crony capitalism for everyone else. During the insane money printing of 2008 people got pissed! So did the cypherpunks and programmers. In fact they got pissed to the point that they unleashed Bitcoin as a countermeasure to this chaos and the world has never been the same since.
Bitcoin was created in response to the blatant theft of purchasing power by the global elites. An anonymous person ( or a group of people ) by the alias of Satoshi Nakamoto launched Bitcoin in 2009. For the sake of decentralisation Satoshi took care to disappear, never to be heard from again. In summary we’re talking about a fully open, borderless and decentralised form of money that cannot be corrupted by central banks and big governments. It cannot be stopped or shut down. It lives on the internet, text messaging services and even on satellites orbiting the earth. Perhaps the most fascinating thing about Bitcoin, is that it’s limited to only 21 million coins ( last one to be “minted” by 2140 ) and that every 4 years the amount of new Bitcoin that can be produced is actually being mathematically cut in half. Just like an ancient seal, the halving method is solidly built into Bitcoin’s code and cannot be changed. Last halving event was in 2020 and the subsequent price action is most likely the reason why you’re reading this article in the first place.
This is what makes Bitcoin the most scarce asset in the world. Even more valuable than gold. Contrary to popular belief ( and off course propaganda about how cryptocurrencies are being used for financing the most heinous crimes ) Bitcoin is fully open to the public. All the transactions are fully transparent, auditable by anyone and recorded permanently. That poses a threat to the people who like their tax havens to be as opaque as possible and their “financial contributions” hidden from the people who elected them. Finally let’s wipe the eternal price argument off the table once and for all! You see one USD, GPB or EURO can be divided into 100 cents. Bitcoin on the other hand can be divided into 100 million tiny Bitcoins ( called Satoshi’s ). So you can boldly tell your grandma Claire that she can even hold 1 usd or less in Bitcoin if she chooses to. Let’s see how this amazing tech actually works.
How does Bitcoin Work?
Contrary to the classic banking system where all the financial transactions go through the bank’s servers, Bitcoin works in a very different way. It’s a P2P system whereby the value is transferred directly from person A to person B without borders, intermediaries or permissions from any authorities for that matter. All that is done with an incredibly sophisticated encryption standard. While the normal centralised fiat currencies can be weaponized and used to sanction whole countries, Bitcoin does the exact opposite. It unites people and countries in ways that our old school analog brain doesn’t fully understand.
Just imagine that a kickass 3D designer from Iran can directly work with a US based client and get paid in Bitcoin even though there are trade restrictions between these two countries. Most people don’t want to wage war. Most people want to do business and improve the lives of their children in the process. Bitcoin solves this problem brilliantly and simply kicks the sanctions and weaponised fiat currencies off the table.
In the immortal words of a gifted kid from the Matrix ( “There is no spoon!” ) we can say the same about Bitcoin, namely “There are NO coins in Bitcoin”. When we see the balance in our bitcoin wallet, all we see is the sum of inputs ( transactions that we received ) that are controlled by our private key. It’s a mouthful, but actually it’s not difficult to understand. A private key is your secret code that can sign your transactions, generates public addresses and proves to one and all that you and you alone are the sole owner of a set amount of Bitcoin. A private key is like a Swiss Bank and your public address is your bank account number. This way you can literally have the equivalent of a Swiss Bank in your pocket. This is how powerful Bitcoin is.
Of course this huge spider web of global transactions and the whole Bitcoin network has to be made as safe as possible. This is done by the “Proof of work” mechanism; called mining. A miner is a computer that processes transactions and some of them even have the whole history of all the transactions ever made stored on their hard drives. We call these computers: Full nodes. There is much more to learn about mining, but the most important thing to remember is that ALL the computers on the Bitcoin network have to agree that a certain transaction took place and register that transaction permanently. This takes about 10 minutes and it can be summarised as the “Absolute truth”. Every transaction is permanent and irreversible, neatly packaged into a “block” of about 1mb in size that’s attached chronologically into the “blockchain” and even notarized by a process called hashing.
We have to remember that the possibility of shenanigans is 100% eliminated, because in case an attacker tries to modify even a tiny snippet of information anywhere in the blockchain ( for example in order to send himself 1 million Bitcoin ) the miners will sniff out the bullshit immediately and will promptly dispatch this malevolent attempt on the sanctity of the holy blockchain.
How does Bitcoin work? It works like an AK-47. It’s a rock solid, reliable and decentralised network of computers buzzing away in pretty much every country of the world and helping to connect people from every corner of the globe in order to make truly international trade and transaction of value possible. Bitcoin doesn’t discriminate and it doesn’t care what leader is running the show during this political term. It’s a transfer mechanism and perhaps since 2017 also one of the best means for storing value. I hope by now you understand the importance of holding at least some Bitcoin.
What is ethereum?
Now we know how Bitcoin works, it’s important to keep in mind that the Bitcoin community is adamant on keeping the network as original as possible for the sake of keeping the narrative of Digital Gold and store of value alive. This was one of the frustrations of Vitalik Buterin back in the days. While being a contributor to the Bitcoin community, he wanted to explore all the possibilities that the blockchain tech has to offer. And just like magic, Ethereum finally saw the light of day in 2014.
Remember the miners? Those computers that help to secure the Bitcoin network? Well in Ethereum those computers do a hell of a lot more than just that confirming transactions and securing the network. In fact Ethereum is a collaboration of all the computing power that these miners collectively possess. Simply put Ethereum is a huge decentralised supercomputer, or how the Ethereum fans also call it; an EVM ( Ethereum Virtual Machine ). Now that we have all that computational power at our disposal, what can we do with it? The short answer is: Everything!
Slowly but surely Ethereum started to gain traction and became the main course where hungry and ambitious programmers could live out their wildest ideas and projects. The new programming language ( Solidity ) has become the playground for new financial innovation. Let’s see a simple example of what you can do with Ethereum.
Imagine your son is having a hard time getting good grades at school. Coincidently he’s planning to take a trip to Wacken Open air Heavy Metal festival next year. Being a smart parent, you make a deal that if his total grades exceed 75 out of a 100, he will get the festival ticket paid by you as a well deserved reward. You program what’s called a “smart contract” on Ethereum that will automatically do 2 things. After this smart contract fetches the school data and receives your son’s grades it will 1. Confirm that the grades are higher than 75/100 and will send a set amount of cryptocurrency to your son’s wallet and pay for his headbanging adventure, or 2. it will confirm that the grades are lower than 75/100 and the contracts will simply self terminate, returning the locked up capital back to you.
Is your head spinning yet? Well this example is actually less than 1% of the total capabilities of Ethereum, because aside from that, Ethereum network is also being used extensively for launching decentralised applications ( DAPPS ), other cryptocurrencies ( ERC20 tokens ) and much much more. Let’s look under the hood to see how it all works.
How does Ethereum work?
Just like in Bitcoin, Ethereum ( for now ) uses a “proof of work” consensus in order to process transactions and instead of 10 minutes, it takes only a few seconds to produce one block. But here’s where the similarities end. You see, Ethereum currently has no maximum supply of coins. This is programmed in the code, because in order to use this decentralised supercomputer for crunching all of your smart contract needs, you will have to pay what’s called a “Gas Fee” to the network. If you find this strange, just head over to Google and ask them to use their quantum computer for free during the day and try to keep a straight face while being laughed out of their offices.
The Gas Fees are the lifeblood ( and a fuel ) of the network. They are also a blessing and a curse. During peak days when the Ethereum network is stretched to its limits, these fees become simply gargantuan, since all the network participants are trying to “bribe” the miners into processing their transactions first by setting the network fees ever higher. Those deliciously high transaction fees are irresistible to miners and they always process them first. There’s a whole ecosystem that’s currently being built in order to alleviate this phenomenon. So just like DJ Khaled, Ethereum is suffering from success. Fortunately however, this year the Ethereum network is migrating to a Proof of stake method of processing transactions. In short this will ( hopefully ) eliminate the high transaction fees and will ensure a better scalability of the entire network. That means the swarm of programmers will receive a bigger sandbox to play in without having to fight over every square meter of space.
Back in 2017 the Ethereum network was working harder than belts, zippers and buttons during an all you can eat buffet, because Ether was used for what’s called: Initial coin offerings ( ICO’s ). People created endless ERC20 tokens ( cryptocurrency built on the Ethereum network ) and simply found ways of crowdfunding their projects by selling these tokens to eager investors and speculators alike. Needless to say after this financial debauchery and subsequent hangover from endless scams the ICO craze has largely died out. Nowadays people use Ethereum for funding mostly legitimate projects with fully functional products that try to bring value to the users, like the Tycoon platform, Decentralised exchanges and much more. This means Ethereum has finally passed puberty and started to grow some rough facial hair. Soon it will start pumping iron and run marathons.
While Bitcoin can be seen as digital gold, Ethereum is more like digital oil. The Ether ( ETH ) cryptocurrency serves a purpose of fueling all the action that happens on the Ethereum network. Coincidently seeing where the innovation is going, people have begun to see Ether as a store of value on its own. It’s also worth mentioning that the programmers who are playing with these digital lego’s are much more passionate than pretty much any cryptocurrency project out there and the ranks of developers are quickly swelling up with new recruits daily. When it comes to the new proof of stake model, they are literally building the plane while flying it at the same time. To say that it’s a gargantuan task would be an understatement. Yet somehow with their monstrous effort they will surely pull it off, however just like with every huge project, delays are inevitable and even expected.
Which one is better?
Now that you finally have something to reply at the dinner table when your family calls you nuts for investing in cryptocurrency, it’s important to look at things more objectively. In general this cryptocurrency cycle is way bigger than in 2017 due to the arrival of the big dogs like hedge fonds, banks and investment firms. Bitcoin is the nr.1 “Big daddy” cryptocurrency with a finite supply and ever decreasing inflation rate. It’s no doubt worth holding and even passing on to your son ( after he’s finally done headbanging to Heavy Metal and starts his investing path off course ). Bitcoin still has a long way to go and the road ahead looks very promising, especially in the period of endless fiat money printing that we’re heading into. In the times of a “Great Reset” we will see many changes. The only thing that will remain, is the limited total supply of 21 million bitcoin and the 4-yearly halving of the newly produced coins.
When it comes to innovation, Ethereum is off course the obvious choice. Even banks are using it these days. The value of Ethereum lies in its functionality and daily use. It would take a whole book just to scratch the surface of all the amazing tech that’s being built and used on Ethereum today. It’s a quiet revolution, a whole galaxy that’s being built under our noses. It’s literally 1992 again and people still can’t see the development of the Word Wide Web that’s happening right in front of them.
When it comes to investment, it’s a personal matter for everyone of us depending on our risk profile. And in the open spirit of decentralisation it is simply foolish to be biassed towards just one of these 2 amazing cryptocurrencies, therefore the question you should be asking yourself is not “which one is better?” but rather “What percentage of each should I be holding?” Because Bitcoin is the armour that protects your capital from predatory financial institutions, while Ethereum is the big ass 135mm smooth bore cannon that attacks this decaying financial juggernaut and pokes holes in its inefficiencies and exclusivity.