Bitcoin Vs Ethereum: Which One Is Better?

Bitcoin and Ethereum are systems, whereas BTC and ETH are the cryptocurrencies used by those systems. When comparing the two ecosystems, we need to be clear whether we’re comparing the technology, the assets the technology produces or both.

Bitcoin and Ethereum are fundamentally different because the former was designed to act as the first decentralised, borderless peer-to-peer currency while the latter enables the use of smart contracts and decentralised applications. 

While Ethereum does enable payments using its internal ETH cryptocurrency, its scope is much broader than bitcoin’s—by design.

Both systems use blockchain technology to validate and record transactions, but a change to the way Ethereum works, known as the merge, will mean the way in which they do it is different, with consequences for speed, sustainability and accessibility. The difference lies in what’s known as a ‘consensus mechanism’.

A consensus mechanism is a computer algorithm that makes a blockchain viable. It does this by solving what’s known as the ‘double spend’ problem.

A $10 note, once spent, no longer belongs to you, so you can’t spend it again. A BTC is a string of computer code, and could be copied infinitely. In theory, this means you could make yourself as rich as you liked by simply making copies of your BTC and spending it over and over again.

However, when you send someone a BTC, the transaction is recorded on the blockchain, and the BTC is transferred from your account to the recipient’s account. The record shows that you no longer own the BTC, preventing you from spending it again.

This is all recorded on a distributed ledger for the world to see. Since everyone can see on their copies of the ledger that you’ve spent your BTC, any attempt to spend the same BTC again would be invalidated by the network. The consensus mechanism ensures that all participants agree on the validity of transactions.

Doctoring one transaction is hard enough, but you’d actually also have to change every subsequent transaction since each one references its forerunners.

This would take an incredible amount of computing power and effort. Additionally, to succeed in such an attack, you’d need to control at least 51% of the network’s computing power to alter the blockchain and rewrite the transaction history in your favour.

Bitcoin and Ethereum use different consensus mechanisms. Bitcoin uses a consensus mechanism called proof of work, which requires miners to solve complex mathematical problems to validate transactions and secure the network. Ethereum has transitioned to a consensus mechanism called proof of stake, where users ‘stake’ a certain amount of ether to become a validator of new transactions.

This consensus mechanism requires participants to carry out complex computations for the chance to become the user who gets to validate a block of transactions and add them to the blockchain – earning a set amount of crypto in the process.

The ‘work’ involves finding a unique, alphanumeric string called a hash that meets specific criteria.

There are trillions of possible combinations to these hashes, so those with the most powerful computer hardware can make the most guesses per second within the 10-minute window of opportunity, and have the best chance of being the chosen validator.

To get a doctored copy of the ledger validated and added to the blockchain, you’d need to control at least 51% of the network’s computing power, which is extremely difficult and expensive. This high level of security prevents fraud and maintains the integrity of the blockchain.

While this work used to be done by hobbyists at home, the increasing processing power needed has made mining more suitable for companies and specialist organisations that can afford the necessary hardware and power.

Proof of work systems, such as bitcoin, have drawn a lot of criticism for the amount of energy expended by the computer hardware involved. However, bitcoin pundits point out that bitcoin mining is the only global industry that derives the majority of its power from renewable sources. This is in contrast to industries like banking and mining, which derive most of their power from non-renewable sources.

This consensus mechanism asks participants to stake their own cryptocurrency for the chance to validate transactions and add a block to a blockchain, rather than carry out complex computations.

The more crypto someone stakes, the greater their chances of being chosen to validate a block of transactions to a blockchain and earning rewards. The system also discourages bad actors with financial penalties  for malicious behaviour.

Proof of stake tends to favour participants with more cryptocurrency, but it protects against fraudulent activity because attackers would need to control at least 51% of the total staked cryptocurrency to manipulate the blockchain, which is highly impractical.

Without the need for powerful computer hardware, proof of stake consensus uses significantly less power than proof of work.

Bitcoin was developed solely to facilitate decentralised payments, allowing people to send and receive payments without an intermediary such as a bank. Ethereum, on the other hand, was designed to do more than just send and receive ETH.

Using blockchain, which provides an immutable record of transactions, Ethereum was designed to facilitate decentralised software such as smart contracts and decentralised apps (dApps).

A smart contract is a self-executing digital agreement between two or more parties that automatically enforces the terms once certain conditions are met. For example, Account A will release Asset X once it has received Asset Y from Account B. This can be used to make transactions, such as property sales, faster and less prone to fraud.

A dApp is an application that isn’t controlled by a central authority. X (formerly Twitter) is an example of a centralised app, with users relying on it as an intermediary to send and receive messages. As such, users play by the rules it enforces and the algorithm it uses to control content.

Conversely, a dApp is distributed on a blockchain, with users able to send and receive data directly without the need for an intermediary. This enables peer-to-peer transactions such as lending, borrowing and trading in a completely trustless manner, unlocking access to financial products for anyone with an internet access. While bitcoin is primarily focused on peer-to-peer payments and Ethereum on decentralised applications, the two aren’t strictly in competition with each other because they are designed for different purposes.

BTC is priced higher than ETH, reaching almost $US73,000 in March 2024. ETH, on the other hand, peaked at around $US4800 in November 2021 and is currently trading at around $US3,800.

Despite the difference in their price, the value of the two cryptocurrencies have historically shown strong positive correlation to each other, trending between 0.7 and 0.8 for much of that time (with 1.0 representing the strongest possible correlation), according to coinmetrics.io data.

Regardless, and as is the case with all cryptocurrencies, BTC and ETH are both volatile. Prices are unpredictable and prone to crashes, as we saw in May of this 2022 when the market capitalisation of crypto assets fell to around $US900 billion — down from $US3 trillion.

The cryptocurrency market is largely unregulated in Australia, although the federal government has promised to introduce legislation this year to protect consumers. For now, the Australian Securities and Investments Commission (ASIC), through its Moneysmart website, advises crypto investors to be exceedingly cautious when dealing in this volatile asset.

This article is not an endorsement of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency or CFDs as an investment class.  Cryptocurrency is unregulated in Australia and your capital is at risk. Trading in contracts for difference (CFDs) is riskier than conventional share trading, not suitable for the majority of investors, and includes the potential for partial or total loss of capital. You should always consider whether you can afford to lose your money before deciding to trade in CFDs or cryptocurrency, and seek advice from an authorised financial advisor . 

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