5 Key Differences Between Bitcoin and Ethereum

As far as the two largest cryptocurrencies by market capitalization, every investor should know something about how Bitcoin and Etherum compare and how they differ. This article explores some of the most significant differences between these two blockchain heavyweights.

1.  Use Cases

Perhaps the biggest difference between Bitcoin and Ethereum is what they're intended to be used for. Bitcoin is primarily thought of as a cryptocurrency par excellence--a tool for transferring value in a decentralized, trustless way, with a predictable issuance scheme and no need for central coordination or intermediaries. While Ethereum has many of the same properties as Bitcoin, its intended use is much broader. The core feature of Ethereum is the ability to write computer programs called smart contracts. Smart contracts can be used in many of the same situations as traditional legal contracts, but they are self-enforcing, unlike traditional contracts. Because the conditions of a smart contract are executed automatically, it is impossible for any of the parties involved to deviate from the terms of their agreement. One of the most well-known uses of smart contracts so far is for initial coin offerings or ICOs.

2.  Issuance Rate

The issuance of new bitcoins famously halves approximately every four years and will eventually cease completely. This kind of stable, predictable issuance scheme ensures that a bitcoin's value will remain roughly the same over the long term rather than losing value, as might be the case if the supply of bitcoin were to increase indefinitely. Ethereum, on the other hand, is designed to issue coins indefinitely based on an adjustable inflation rate. Among other things, the system ensures that miners--the people who compete to create new ether and secure the network in the process--always have an incentive to continue mining. It also keeps the circulating supply of ether large enough for developers and users to use it in decentralized applications. Ethereum's rate of inflation is expected to decrease over time.

3.  Mining

Currently, both Bitcoin and Ethereum blocks are mined via an algorithm called Proof of Work. Miners compete with computing power to produce the next block of transactions and are rewarded for their efforts with newly minted coins. While Ethereum currently uses the same system, plans are in motion to switch to an algorithm called Proof of Stake, possibly as early as this year. Proof of Stake supporters cites among its advantages a drastically reduced environmental impact (a tremendous amount of power is required to keep Bitcoin running) and less risk of centralization. In contrast, advocates for Proof of Work believe their system is more secure, battle-tested, and reliable.

4.  History

One of the more obvious differences between Bitcoin and Ethereum is simply in how long they have been around. As the first cryptocurrency in history, Bitcoin beats out Ethereum in a long way here. Bitcoin mined its first block in 2008, while the Ethereum network was introduced in 2015. Bitcoin supporters often point to its long track record of stable uptime and strong security as an advantage over Ethereum.

5.  Transaction Time

A new Bitcoin block is mined approximately every ten minutes, while a new Ethereum block is usually mined in under 20 seconds. However, Bitcoin's longer block time may not matter much if the Lightning Network, which aims to enable instant payments for Bitcoin, is successful. While some think of them as competitors, it's important to keep in mind that Bitcoin and Ethereum are different blockchains with different strengths and use cases. There's plenty of room for both cryptocurrencies in your portfolio.