Bitcoin vs. Ethereum: A Guide for Newbies and Experienced Investors Alike

Intro To Bitcoin vs. Ethereum

Today, we are going to look at Bitcoin vs. Ethereum, comparing the two most popular cryptocurrencies of all time. At the time of this writing, there are over 2,200 cryptocurrencies available on the open market. The collective worth of these currencies is over $336 billion CAD. Bitcoin (BTC) gave birth to the industry itself back in 2008. It currently holds more than 55% (or $186 billion-plus) of the entire industry’s market value. Nearly 11 years since its inception, Bitcoin is still the most valuable cryptocurrency in the world today.

The second most valuable cryptocurrency in the world is Ethereum (ETH). Valued at over $34.5 billion CAD, the Ethereum blockchain is worth just less than one-fifth the price of Bitcoin. While the two currencies account for a substantial chunk of the overall cryptocurrency pie, both projects provide unique value propositions that challenge both the fundamentals of the traditional banking system and the long-standing client-server model that dominates the technology industry.

This post explains the beginnings of both projects, the different reasons investors and crypto enthusiasts alike support them and how the two aim to disrupt the world of finance and technology in ways humanity is only now witnessing for the very first time.

The Birth of Bitcoin and a Decentralized Democratic Financial System

In the original white paper published back in 2008, an anonymous person (or group of people) named Satoshi Nakamoto outlined both the philosophy and the technology behind Bitcoin, a peer-to-peer electronic cash system that allows users to send payments from one party to another without a traditional financial institution facilitating transactions. Instead, computer processing power “hashes” transaction records onto an ongoing chain using what is known as a proof-of-work consensus algorithm to verify the validity of those transactions.

The users on the network provide the computing power to maintain the records on this chain (known as a blockchain). This means the network requires minimal maintenance. Those who provide the computing power necessary to validate transactions and record them on the blockchain are called miners. They receive newly “mined” bitcoins as a reward for validating transactions.

This basic process plays a big role in stimulating a supply and demand economy that drives the price of bitcoin up and down.

Enter the Ethereum Blockchain

Unlike the founder (or founders) of Bitcoin, the identity of Ethereum’s founders is no secret. Vitalik Buterin , Gavin Wood and Joseph Lubin are credited with launching the project in 2015, with Buterin leading the charge. Three years later his name would be published on Forbes list of the richest people in cryptocurrency. While his desire to build Ethereum clearly matches that of Bitcoin’s founder, Buterin’s vision is to continue building a decentralized application development platform, not just a payment system.

It’s this desire that inspires Buterin and fellow programmers contributing to the Ethereum community.

Disrupting the Client-Server Model

A handful of the world’s largest technology companies own large amounts of our personal data. Google, Apple, Amazon or Facebook ring a bell? These companies use what’s known as the client-server model for storing data.

In this model, the company acts as a centralized node and publisher of different applications. The publisher curates the apps available for download and stores the personal information it collects from users in exchange for allowing them to interact with the apps at little or no cost.

The client-server model makes it easy for companies to monitor, store and secure the transfer of data. They also sell that data to advertisers, which is the fuel driving these companies to trillion dollar market valuations.

The downside of this model is that it effectively turns these technology titans into attractive, data-rich honey pots that hackers love attacking. It also means users don’t receive any of the monetary gains realized from the sale of their personal information.

The Ethereum network focuses on putting the real world value of computing power, app development and the data that transfers along with it back into the hands of the user. So while the basic principle mechanisms of the blockchain described in the original Bitcoin whitepaper are also evident within the Ethereum Network, Bitcoin decentralizes wealth while Ethereum aims to decentralize computing power.

Building a World Computer

If the Bitcoin network is an app, the Ethereum network is an app store. It allows for developers to build fully decentralized applications on a blockchain supported by nodes (computers owned by other users). The nodes allow for the creation of a global network responsible for storing data in a decentralized fashion, keeping it out of the hands of the all-powerful technology conglomerates dominating the last 25-plus years.

This “world computer” concept not only empowers both the consumers and developers of decentralized applications (also known as Dapps). Consumers get to protect their personal information. Developers get to raise funds and see their ideas become reality without requiring a stamp of approval from Silicon Valley’s dominant powerhouses.

Ethereum also provides another means of forgoing stamps of approval between individual users entering an agreement. That comes by way of the smart contract.

Smart Contracts: Ethereum’s Most Innovative Discovery

Of the thousands of cryptocurrency projects drawing attention from investors and enthusiasts today, few provide a necessary use case or truly ground-breaking innovation. Ethereum’s is undoubtedly the creation of the smart contract.

So what is a smart contract? It’s a self-executing agreement between two parties that guarantees the terms and conditions of a deal without the need for a third party to oversee the transaction. This maintains a greater level of privacy between the parties involved. The terms are embedded in the programming code making them unalterable and nearly impossible to hack.

The best example of the use case for a smart contract transaction would be a simple buy and sell agreement between two people.

Picture for a moment that a user selling a product on an auction website like pays a 10% fee just to list that product on eBay and then pays a 4% fee on top of that to a third-party payment provider (Paypal) just for guaranteeing the transaction. The fees add up.

Using a smart contract in this example saves at least the 4% fee and allows parties to exchange and keep all of the value being traded in the transaction.

In the above example, the smart contract guarantees the shipment of a product. There are several other clear uses for this innovative kind of contract.

  • Real estate and land registration
  • The legal industry (contracts, negotiations, settlements etc…)
  • Intellectual property and digital rights management
  • Financial services and banking

The above use cases certainly deal with their unique set of nuances but the goal is always the same. To cut out the middleman allowing individual users democratic authority over their own transactions with nobody watching over their collective shoulders.

As much as the concept of a world computer is promising, it remains to be seen whether smart contracts and decentralized applications will be truly scalable among the masses in terms of development and distribution. Whether or not the apps programmers are creating on Ethereum’s blockchain are ever going to be more useful or easier to use than the apps consumers use today is also uncertain.

It’s this uncertainty that is fuelling an extremely volatile up-and-down market cycle that’s being compared to the dot-com bubble of the late 1990s and the tulip mania that swept through the Dutch Golden Age in the 1600’s.

Bitcoin Bubble

The price of Bitcoin peaked at around $19,500 USD in December of 2017 at the end of a six-month run that saw the price increase nearly ten-fold. A number of occurrences were responsible for this trend.

Firstly, Bitcoin’s algorithim makes it more difficult to mine new coins into the market as time goes on and more transactions get added on to the blockchain, so supply shrinks and demand increases.

Secondly, Bitcoin began receiving mass media attention on a scale no cryptocurrency has ever seen before, leading to a whole slew of new investors entering the market at the same time with little to no idea of when the hype would run out.

Finally, rumours began to circulate at a fever pitch that institutional investment from major banks and the world’s wealthiest individuals would drive bitcoin prices to astronomical levels. A parabolic price increase would drive prices so high, the average retail investor would be buying Satoshis (fractions of a bitcoin), rather than full bitcoins. This whole idea triggered FOMO, the fear of missing out.

Each of these events led to a sudden price spike followed by a major crash that saw investors leaving the industry with their collective tails between their legs and yet another new group of investors hungry to buy low.

The ICO Boom

While Bitcoin’s rise and fall took the entire cryptocurrency market along with it, Ethereum’s 2017 boom did the same thing to alternative coins built on its very own platform for a different reason. Initial coin offerings.

Initial coin offerings are to the cryptocurrency world what initial public offerings are to the stock market. They are a chance for investors to get in on the ground floor of new projects and benefit from any potential gains in their market value.

Initially the boom paid dividends for many crypto investors. Projects like Golem and OmiseGO skyrocketed up the ranks to stand among the world’s top cryptocurrency projects in a matter of months.

Then the calendar turned to 2018. Major online advertising platforms including Facebook and Google banned the promotion of ICOs while governments began to emphasize greater regulation in the industry as a means of protecting retail investors. A large number of projects proved of little value or use and several ICOs grew more concerned with the execution of short-term exit scams rather than fulfilling milestones depicted in roadmaps.

Today, the market value of both Bitcoin and Ethereum are somewhat stable, but neither bitcoins nor ethers are anywhere near as valuable as they were in 2017.

Round Silver and Gold Coins
Bitcoin vs Ethereum

The Flippening and the Future

2017 didn’t just bring mainstream attention to cryptocurrencies and the blockchain industry. It also forced both early adopters and crypto rookies to take sides in the Bitcoin versus Ethereum debate. Cryptocurrency’s pundits and profiteers quipped back and forth about how a blockchain built to host decentralized applications was just as valuable to society as a payment system designed to take control away from central banks.

The idea that Ethereum is destined to someday soon be the most valuable cyptocurrency in the world nearly became reality in 2017, but today Bitcoin still leads the pack.

A changing of the guard in this respect is referred to as “The Flippening”. The enthusiasm around this whole idea is not just about anointing a new top dog in town. It represents some philosophical differences about what makes a cryptocurrency or blockchain necessary.

Many Bitcoins purists maintain that all other cryptocurrencies are completely useless. That the average person won’t use them and that blockchain investors and programmers are only investing and in and building projects as a means of turning a quick profit without any intention of creating long-term value.

Ethereum’s most avid supporters on the other hand say that a decentralized payment system is only one use case for cryptocurrencies and that democratizing technology is just as important as taking control of the money supply away from big banks.

Bitcoin vs. Ethereum Conclusion

Only time will tell which cryptocurrency will win the Bitcoin vs. Ethereum battle.

At the end of the day though, it can be said both are waging a war against the same enemy anyway. That the war is really a fight against institutions that centralize power as means of oppressing society at large, keeping money and power in the hands of the few. That libertarians must stand together in fighting for the rights of the individual in a world where conglomerates control all sides of the ledger.

That’s what Satoshi’s whitepaper is really about. The fact that several innovators in blockchain have put their own philosophical spin on the original blueprint in the name of making something better is technology evolving. Its how society went from flip phones to smartphones, and its how society will move to a brighter future where individuals truly control their own money and personal data. And of course, if you are looking to Buy Bitcoin/Ethereum in Canada, look no further than Bitbuy.