The attention surrounding cryptocurrencies continues to rise as their prices increase and as ordinary investors begin considering them as part of their portfolio. Bitcoin and Ethereum are the two most well-known cryptocurrencies, but there’s often confusion about how they differ from one another. Are they simply two currencies, such as the US dollar and the British pound?
There are of course some core similarities between the two cryptocurrencies. Both are powered by distributed ledgers (blockchains) that rely on secure cryptography to function. Each is available for trading on Coinbase and dozens of other exchanges, and both are attracting a considerable amount of interest from the broader public and financial institutions. This interest is based not only on each currency’s potential, but also due to their massive price gains.
Detailing the Differences
A core difference between the two cryptocurrencies is their intended usage. Bitcoin is structured as an alternative to regular fiat currencies such as the dollar, and is meant to be a transactional currency and a place to store value. It’s helpful to consider Bitcoin as a “digital dollar” to understand its potential role in global currency and commerce markets. Ethereum is more of a platform for conducting peer-to-peer contracts as well as for applications. The ability to run applications on Ethereum’s blockchain is especially attractive for industries such as banking, logistics, and dozens of others because it provides an immutable and transparent record.
Basically, the “smart contracts” using Ethereum are agreements that are enforced through the cryptographic code. They are programs that are set up to execute in precise ways, so that when a certain amount of data is sent, the platform executes a command. A famous example is to consider it as a digital vending machine, where someone inserts data and then receives a real-world item such as a soda. Smart contracts can be used in countless scenarios. For example, they can operate as a way to manage “multi-signature” accounts, where a certain action will only take place when all of the holders are in agreement. They are also useful as recordkeeping tools to hold information about memberships or identities.
Since Bitcoin is mainly viewed as a currency, many supporters view it as a way to avoid the many drawbacks of national fiat currencies. It’s truly global and decentralized, so there’s no chance for manipulation by central banks, governments, or any other single actor. Many feel it provides a more level playing field since all transactions are transparently recorded on the blockchain, and it’s accessible to anyone with an internet connection. The flexibility of Bitcoin has turned it into a viable investing vehicle, including the recent popularity of cryptocurrency-based IRAs and the development of Bitcoin futures markets.